The Denial of Debt: Understanding Margin Lending in Australia

Abstract

A substantial body of research exists on the impact of high-risk sub-prime mortgages in the United States (U.S.) and on the 2008/09 global financial crisis. However, very little research has been devoted to other types of high-risk lending – such as margin loans – which allow investors to borrow against holdings in an investment portfolio to purchase additional investments. Therefore the aim of this exploratory study is to analyse the $19 billion Australian margin loan industry and to examine if margin loan investors, when faced with an investment loss situation such as a margin call payment, denied or accepted the threat of debt. Using a quantitative design method, data was collected through an online survey from over 105 Australian financial advisers using margin loans. Results indicated that 55% of financial advisers reported that their margin loan investors as having a concerned response in a loss situation (a margin call), while 45% of financial advisers reported their investors as having a calm response (inferring denial-like behaviours). We further explored different types of denial and found that smaller financial planning practices with less than 20 investors were less likely to have concerned investors in a margin call event. A key limitation is that denial is a very complex concept to measure, therefore the generalizability of the findings cannot be guaranteed. However, the findings provide implications for Australia’s new responsible lending legislation and an original insight, as we believe this is the first study on margin loans and denial of debt in Australia. This is expected to broaden the literature for financial services, banking, marketing and psychology.