The economic downturn in Australia has shown financial planning and banking practices that have called into question whether gearing and margin lending strategies were appropriate for investors in certain instances.
Gearing and margin lending have often featured in disputes that we have considered. Below is an overview of the general approach followed when considering the merits of disputes involving these types of strategies.
This information is provided as an indication of our general approach. We will continue to consider each dispute about gearing or margin lending on its own merits.
What approach do we follow?
The Investments, Life Insurance & Superannuation Terms of Reference set out a requirement to have regard to amongst other things, the law and good industry practice. Our primary duty, however, is to be fair in all the circumstances.
In addition, we consider the obligation on all Australian Financial Services Licensees to operate their businesses in an efficient, honest and fair manner, as required by s.912A of the Corporations Act.
Further, for AFS licensees that provide personal financial advice, we take into account the more stringent obligations of s.945A of the Act. Given the nature of gearing, this consideration is based on the principle that a financial planner must not recommend a financial product or strategy to a person, who may reasonably be expected to rely on it, if the adviser does not have a reasonable basis for making the recommendation.
This means that an adviser must research the recommended products and then ascertain that the recommendation is appropriate for the investment objectives, financial situation and particular needs of the particular investor. As a general principle, an adviser must match the risk exposure and return potential of the strategy being recommended with the investor’s objectives and tolerance to risk.
Who should be using a gearing strategy?
Whilst exceptions can be made in a variety of circumstances, gearing is usually a strategy for high-income earners who have a reasonable period of their working life remaining and have a suitable tolerance for risk. We will assess the suitability of a recommended gearing strategy with these general circumstances in mind.
Important factors in gearing disputes
Important factors in gearing disputes considered by the Panel have included the following:
aggressive/growth-oriented investor or conservative investor?
Whilst each case is determined on its own particular merits, some broad points can be made based on disputes regarding gearing strategies that have come before the Panel to date:
Other criteria may also make a particular recommendation to adopt a gearing strategy or enter into a margin loan unsuitable for a particular client, and therefore in breach of an obligation under the Corporations Act 2001.
We recommend that financial services providers consider all of the above issues when considering the suitability, or otherwise, of a gearing or margin loan strategy for a particular investor, as well as when assessing its responses in the event of a dispute before the Financial Ombudsman Service.