Margin lenders facing tough test as market slumps

As global markets slump and the number of margin calls rise, Australia's $10 billion margin lending industry faces one of its toughest tests. One financial planner, Kevin Bailey, says he's been advising clients to wind down their margin loan positions for some time, as the risk associated with it is higher now than at any other time.

At a recent Melbourne conference of the Financial Planning Association, Colonial Margin Lending, Australia's largest margin lender, told delegates that they should prepare their new clients for margin calls. It's like divorce, she said, no-one wants it to happen, but if it does it's better to be prepared.

The Australian industry has grown over the past six years at a rate of 400 per cent, with around 5,000 new clients each quarter, and the average loan has increased to $89,000. Lenders say the growth is due to an increased availability of finance combined with a heightened awareness of products. However, the September 11 terrorist attacks were the catalysts for the Australian industry's worst quarter, with the Reserve Bank recording over $100 million in gross redemptions as many investors exited their loans.