Reviewed by Sep 30, 2020| Updated on
A customer's loan consent is a contract which is executed between a brokerage customer and broker cum dealer, which permits the latter to lend securities and assets in the margin account held by the customer.
If the brokerage customer has given his or her consent to the contract, then the broker-dealer gets the legal rights to lend securities or assets in that customer's margin account to another customer who is willing to borrow the same for a while as a part of a short-selling transaction.
On signing the customer's loan consent form, it authorises the broker-dealer to lend assets from the customer's account up to the customer's debit balance.
A customer's loan consent form is one of the few initial documentation work when a customer wants to open a margin account with his or her broker cum dealer. The margin agreement will contain the details of the terms and conditions on which the broker cum dealer would provide credit to the customer to purchase securities or assets.
The customer's loan consent contract is not mandatory, and the clients are not necessarily needed to accept it. Nevertheless, if the customer cum trader is not willing to sign the contract, then the broker cum dealer may not provide the customer with a margin account. That indirectly means forcing customers to seek to open a margin account with another broker-dealer where there is no need for executing the customer's loan consent agreement.
For a broker-dealer, a customer's loan consent would give them a greater degree of flexibility in handling the margin accounts of customers. The broker-dealer is allowed to borrow assets from numerous account holders to get sufficient shares in order to facilitate the short sale transactions of other customers.