Australia By Paul Rubenstein and Leigh De Jong

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1 Arnold Bloch Leibler Lawyers and Advisers Level Collins Street Melbourne VIC 3000 Australia Telephone Facsimile Level 36 Chifley Tower 2 Chifley Square Sydney NSW 2000 Australia Telephone Facsimile Australia By Paul Rubenstein and Leigh De Jong This article appeared in Issue 1 of the Global Financial Services Regulators Asia Pacific, Australia Introduction Australia s marketplace for financial services is one of the largest and most highly developed in the Asia-Pacific and enjoys a global reputation for sophisticated and innovative financial services and products. The financial services industry in Australia consists of essentially three sectors; banking (which includes funds management and asset management), insurance and capital markets. Australia s open and competitive banking sector is regarded as one of the soundest in the world. Regulation is characterised predominantly by governmental supervisory authorities, which have regulatory powers rather than self-regulation by market participants. Industry structure 1.1 Banking Industry The Australian financial services sector consists of many players including the Reserve Bank of Australia (RBA) (Australia s central bank that is banker and financial agent of the Australian Federal Government), commercial banks, merchant/investment banks (including branches and subsidiaries of foreign banks) and other financial intermediaries (including finance and leasing companies, credit unions and building societies). Certain specialist banks also provide assistance in areas such as resource and industry development. Of the commercial banks, banking in Australia is dominated by national banking groups, which have extensive nationwide branch networks. Banks provide a full range of services including consumer loans and credit, corporate and institutional finance and securities, investment management, risk management, underwriting and private placement. All of the major Australian banks are public companies limited by shares. Merchant banks typically service the wholesale market with corporate and high value personal clients rather than the domestic market. Merchant banks offer an extensive range of financial services such as corporate lending, investment management, securities trading, broking dealing in foreign exchange, underwriting and corporate advisory work including swaps and derivatives, venture capital, project finance and structuring.

2 Foreign banks are relatively recent participants in Australian domestic retail and wholesale banking. Prior to deregulation of the banking industry in Australia in the 1980s, foreign entrants were required to operate as a subsidiary of an Australian company and not as a branch of an overseas bank. Foreign banks may now open branches in Australia provided they limit their activities to wholesale banking and do not conduct business in the domestic retail market. Finance companies, credit unions and building societies provide a range of consumer and small business facilities, typically for personal loans and plant and equipment leases as well as second tier funding arrangements to customers who may be unable to meet bank lending requirements or do not want to offer the security required by banks. Within the banking industry there is also a growing funds management sector. This sector is dominated mainly by superannuation funds, however, specialised investment managers are being increasingly used. The large pool of assets created by a Federal superannuation guarantee scheme and other fund-based savings have attracted, and continues to attract, foreign asset management companies to Australia. The activities of these firms have led to growth in related sectors such as custody, asset consulting, risk management and information technology. Several global providers have established regional asset management headquarters in Australia. 1.2 Insurance Industry The Australian insurance industry comprises many firms across general, life and reinsurance businesses. Australia's insurance industry is a major and critical element of the financial services sector. The Australian general insurance industry has a global reputation for innovation in areas such as customer service, product development and financial and regulatory reform. Insurers based in Australia are leaders in alternative risk transfer processes, natural disaster risk modelling and insurance systems development. In recent times, the life insurance industry in Australia has become increasingly involved in the provision of superannuation products and services. 1.3 Capital Markets Australia has a national stock exchange, the Australian Stock Exchange Limited (ASX). The ASX operates Australia s primary national stock exchange for equities, derivatives and fixed interest securities. It also provides market data and information to a range of users. All of the ASX s operations are underpinned by quality information technology systems. The Stock Exchange of Newcastle Limited (NSX) is Australia s second official stock exchange. The NSX has a unique set of listing rules developed to assist small, medium and regional or national businesses to list their securities on an approved stock exchange. Australia also has a financial futures and options exchange called the Sydney Futures Exchange (SFE). The SFE provides futures and options on interest rates, equities, currencies and commodities. With a 24-hour a day trading capability, products traded on the SFE are accessed via a global electronic communications network and futures brokers. Related to the exchanges are the ASX s clearing houses, the Securities Clearing House (SCH) and the Options Clearing House (OCH), which operate the electronic settlement and transfer systems known as CHESS (Clearing House Electronic Subregister System) and the DCS (Derivatives Clearing System). There is also Austraclear, Australia's answer to CEDEL and Euroclear, a computerised cash and securities settlement system for the money market. Various other entities are active in the Australian capital markets sector providing services relating to the securities and derivatives markets. Foreign enterprises, including foreign governments, their agencies and international organisations, can also access the Australian capital markets in the same way as local participants.

3 Regulatory structure Until 1998, financial institutions were regulated and supervised on the basis of their status rather than the functions they performed. From 1 July 1998, in response to the recommendations of the Financial System Inquiry (the Wallis Committee), Australia s regulatory and supervisory structure became based on functional models, with one agency responsible for each of the main kinds of regulation. Australia s current financial regulatory framework consists of three main agencies: 1. The Australian Prudential Regulation Authority (APRA), a single prudential supervisor responsible for the prudential supervision of banks, life and general insurance companies and superannuation funds. APRA also supervises other deposit-taking institutions (such as building societies, credit unions and friendly societies); 2. The Australian Securities and Investments Commission (ASIC), with responsibility for market integrity and consumer protection across the financial system, including for investment, insurance and superannuation products; and 3. The Reserve Bank of Australia (RBA), which is responsible for monetary policy, overall financial system stability and regulation of the payments system. A fourth body, the Australian Competition and Consumer Commission (ACCC), while not directly involved in the regulation of the financial services industry, has various powers to protect competition in the financial system. The regulatory framework is supported by a coordinating body called the Council of Financial Regulators which co-ordinates arrangements between the main regulatory agencies. A separate Payments Systems Board also exists within the RBA to ensure the safety and competition of the payments system. In addition, while the RBA has no responsibility for the supervision of any individual financial institution, it remains the only agency that is able to provide emergency liquidity support in the event of any threats on the stability of the financial system. Main Regulatory Bodies 1.4 Australian Prudential Regulation Authority (APRA) APRA was created as a result of the recommendation of the Wallis Committee that a single agency be established to focus on the prudential regulation of financial institutions. APRA commenced operations on 1 July APRA is a federal statutory authority which derives its power from two Commonwealth Acts of Parliament, the Australian Prudential Authority Act 1998 and the Commonwealth Authorities and Companies Act It is largely funded by industry levies and is headed by a full-time executive group comprising between three and five members including a Chair and Deputy Chair. Members are appointed by the Governor General for terms of up to five years. APRA is organized into five major divisions: 1. diversified institutions; 2. specialised institutions; 3. policy; 4. research and consulting; and 5. corporate services.

4 APRA is responsible for the prudential regulation of Authorised Deposit-taking Institutions (ADI s) (banks, building societies and credit unions) as well as friendly societies, life and general insurance companies and superannuation funds. It is APRA s role to develop prudential policies that balance financial safety, efficiency and competition issues. ADI s are regulated by APRA under a single licensing regime and are subject to the depositor protection provisions contained in the Banking Act 1959 (Cth) (Banking Act). The Banking Act gives APRA powers to act in the interests of depositors, including the power to revoke licences, to make prudential standards or issue enforceable directions, to appoint an investigator or statutory manager to an ADI in difficulty or take control of the institution itself. In extreme circumstances, APRA can apply to the courts to wind-up an ADI. Under the Banking Act, depositors have first claim to the assets of an ADI in a windingup. For depositor protection, all ADIs are required to hold assets in Australia at least equal to their deposit liabilities in Australia. These requirements, however, do not confer any form of guarantee of depositors funds, and depositors have no recourse to APRA or the Government. As in the case of ADIs, where the financial weakness of a life insurance company, general insurer, friendly society or superannuation fund could have a detrimental effect on the interests of members and policyholders, APRA may, in certain circumstances, intervene in the management of the troubled entity. Prior to the establishment of APRA, supervision of banks was previously conducted by the RBA, supervision of life and general insurance companies and superannuation funds was formerly conducted by the Insurance and Superannuation Commission and supervision of non-bank financial institutions such as building societies and credit unions was formerly regulated by the Australian Institutions Commission. APRA regulates the compliance of superannuation funds with the prudential regulation and retirement income provisions of the Superannuation Industry (Supervision) Act 1993 (Cth), while ASIC has responsibility for the other provisions. The Australian Taxation Office has responsibility for the regulation of excluded funds (which have less than five members). 1.5 Australian Securities and Investments Commission (ASIC) ASIC is Australia s chief corporate and financial regulator. Commencing operations in January 1991 and established by an act of the Commonwealth Parliament, ASIC is an independent Commonwealth Government body operating under the direction of three full time Commissioners appointed by the Governor General on the nomination of the Federal Treasurer. In addition, there are regional commissioners in charge of each regional office in each State and Territory and a number of executive directors in offices created by ASIC. ASIC is fully funded by, and responsible to, the Federal Government, reporting annually to Parliament, the Treasurer and the Parliamentary Secretary to the Treasurer. Prior to 1991, ASIC operated as the Australian Securities Commission (ASC), which was responsible for the administration of the Corporations Law (now the Corporations Act 2001 (Cth) (Corporations Act)) which applied to corporations and securities. From 1998, ASIC has been given additional responsibility to regulate financial market products and services and the behaviour of market participants in relation to those products and services. ASIC administers and enforces a range of legislative provisions relating to financial markets, financial sector intermediaries and financial products, including investments, insurance, superannuation and deposit-taking activities (but not lending). In addition to its regulatory role, ASIC develops policy and guidance about the laws that it administers, licenses and monitors compliance by participants in the financial system and provides comprehensive and accurate information on companies and corporate activity.

5 In general terms, ASIC has the following responsibilities and powers in relation to the financial services industry: 1. it is responsible for the registration of companies, company auditors and liquidators; 2. it has powers to receive, process and make available to the public information about companies and other investment vehicles; 3. it has statutory discretions to relieve a person or company from compliance with certain regulatory provisions, particularly those contained in the Corporations Act; 4. it is responsible for regulation of the securities industry, including licensing participants, monitoring securities exchanges and policing provisions of the Corporations Act concerned with the conduct of securities transactions; 5. supervising arrangements for the creation of futures contracts and the market for trading in futures contracts; 6. exercising market integrity and consumer protection powers in relation to financial institutions (a role previously undertaken by the Insurance and Superannuation Commission and the ACCC); and 7. ensuring compliance with, and investigating suspected contraventions of, regulatory legislation relating to companies generally and the financial sector. As part of its consumer protection role, ASIC monitors and assesses compliance with the Code of Banking Practice, the Credit Union Code of Practice, the Building Society Code of Practice and the Electronic Funds Transfer Code of Practice and supervises a number of industry-based alternative dispute resolution schemes. ASIC also implements the provisions of the Financial Services Reform Act 2001 (Cth) (FSRA), which introduced a streamlined regulatory regime for market integrity and consumer protection across the financial services industry into the Corporations Act. ASIC is empowered to advise the relevant Minister on licensing matters and is also required to undertake assessments of the compliance of market and facility licensees with their legislative obligations, and to take enforcement action where necessary. 1.6 Reserve Bank of Australia (RBA) The RBA is responsible for monetary policy, overall financial system stability and regulation of the payments system. The RBA is a statutory authority, established by the Reserve Bank Act 1959 (Cth), which gives it specific powers and obligations. The RBA has two boards with complementary responsibilities: 1. the Reserve Bank Board, which is responsible for monetary policy and overall financial system stability; and 2. the Payments System Board, which has specific responsibility for the safety and efficiency of the payments system and has the backing of strong regulatory powers. The Reserve Bank Board comprises nine members: three ex officio members the Governor (Chairman), the Deputy Governor (Deputy Chairman) and the Secretary to the Department of the Treasury - and six external members, who are appointed by the Treasurer. The Governor and Deputy Governor are appointed for terms of up to seven years, and are eligible for reappointment. The external members are appointed for terms of up to five years. The Payments System Board has a maximum of eight members comprising the Governor (Chairman), a representative of the RBA appointed by the Governor (Deputy Chairman), a representative of APRA appointed by its Chief Executive Officer and up to five other members appointed by the Governor-General in the same

6 manner and for the same maximum term (five years) as members of the Reserve Bank Board. The RBA s policy and administrative functions are located in its head office in Sydney. Regional offices in other State capitals conduct liaison and analysis of economic conditions in different parts of Australia, and a branch in Canberra conducts government banking business. The RBA also has representative offices in London and New York. As well as being a policy-making body, the RBA is an active participant in financial markets, manages Australia's foreign reserves, issues Australian currency notes and serves as banker to the Commonwealth Government. The RBA also provides selected banking and registry services to Federal Government agencies and to a number of overseas central banks and official institutions. It also conducts exchange settlement accounts for Australian financial institutions and for central banks and similar organisations in other countries. The RBA maintains and operates a registry system for recording ownership of Commonwealth Treasury Notes and Bonds and provides other registry services to various domestic and foreign institutions. The RBA is wholly owned by the Australian Federal Government, to which its profits accrue and is accountable to the Commonwealth Parliament, including through the annual report of the Reserve Bank Board. While the RBA has responsibility for monetary policy and for overall financial system stability, strictly speaking, it has no obligation to protect the interests of bank depositors or other creditors of banks. In the event of threats to financial stability, the RBA has a discretionary role of lender of last resort for emergency liquidity support. Under FSRA, the RBA now also has responsibility for ensuring that clearing and settlement facilities conduct their affairs in a way that is consistent with overall financial system stability. As part of this role, the RBA has the power to set and monitor compliance with financial stability standards for clearing and settlement facilities. ASIC has responsibility for all other matters relating to these facilities, such as those covering corporate governance, market integrity and investor protection, and for enforcing compliance with the RBA s standards if necessary. 1.7 Australian Competition and Consumer Commission (ACCC) The ACCC is an independent Commonwealth statutory authority formed in 1995 to administer Australia s competition, fair-trading and consumer protection laws. While the ACCC is not directly involved in the regulation of the financial services industry, it has various regulatory powers to protect competition in the financial system. The main piece of legislation administered by the ACCC that relates to regulation of the financial services industry is the Trade Practices Act 1974 (Cth) (TPA). The TPA s purpose is to promote competition and fair-trading and provide for consumer protection. The TPA deals with almost all aspects of the marketplace and covers, amongst other things, unfair market practices, mergers and acquisitions of companies and price monitoring. 1.8 Council of Financial Regulators The Council of Financial Regulators is the co-ordinating body for Australia s main financial regulatory agencies. The Council s main role is to ensure appropriate arrangements exist between members for co-ordinating their activities. It operates as an informal body and members can share information and views, discuss regulatory reforms or issues where responsibilities overlap and, if the need arises, co-ordinate responses to potential threats to financial stability. The Council comprises representatives from the RBA (which chairs the Council), APRA, ASIC and Treasury, however, the Council is nonstatutory and has no regulatory functions separate from those of its members.

7 1.9 The Australian Stock Exchange (ASX) The ASX operates Australia s primary market for securities issued by listed entities. The ASX was formed in 1987 through the amalgamation of six independent stock exchanges that formerly operated in the State capital cities. The ASX was originally a mutual organisation of stockbrokers, like its predecessor State stock exchanges. However, in 1996, its members decided to demutualise and become a listed company. The change of status occurred on 13 October 1998, and shares in the ASX were listed for trading on its own market. The ASX is a profit making company and is funded from the provision of trading, clearing and settlement, market data and listing services to its customers. The ASX is governed by its board of directors and managed by a senior management team responsible for the supervision and coordination of its operating divisions. The operating divisions are based on function and include Market Services (which includes trading activities, business development and client relations), Clearing and Settlement, Production Services and Market Integrity. To protect the integrity of that market, ASX has standards for the behaviour of listed entities through its Listing Rules. The Companies Business Unit within the ASX makes day-to-day decisions about the application of the ASX Listing Rules. Guidance notes are also published to assist listed entities and their advisers to understand how certain listing rules and procedures operate. The Listing Rules are also given statutory force by the Corporations Act. The ASX operates two clearinghouses: the Securities Clearing House (SCH) and the Options Clearing House (OCH). The SCH and the OCH operate the electronic settlement and transfer systems. The system for settling equities trades is known as CHESS (Clearing House Electronic Subregister System) and the settlement system for derivatives is the Derivatives Clearing System (DCS). CHESS and DCS are computerised systems allowing for electronic securities transfer and electronic delivery versus payment settlement where monetary obligations between participants are settled directly between the participant and the relevant financial institution s electronic payments system. CHESS is an electronic subregister that forms part of each Australian listed entity's principal register of securities. Each entity admitted to the official list of ASX is required to participate in CHESS unless the law of a foreign jurisdiction precludes participation. The CHESS register allows securities to be transferred without paper documentation, with the register being automatically updated once a transfer has taken place. The SFE and the NSX have a similar role to the ASX in regulating trading on their exchanges. Co-ordination between regulators Australia s financial regulatory structure includes mechanisms to ensure effective coordination and co-operation between the main regulatory agencies. The co-ordination structure is overseen by the Council of Financial Regulators and involves overlapping Board representation. Both the RBA and ASIC have representation on the APRA Board and APRA has representation on the Payments System Board. Memoranda of Understanding (MOUs) have also been entered into between the RBA and APRA, between APRA and ASIC and, more recently, between the RBA and ASIC. The MOUs set out co-operation arrangements in relation to matters including information-sharing, notification to other agencies of relevant regulatory decisions and consultation arrangements as well as establishing bilateral co-ordination committees to avoid overlaps and gaps in regulatory coverage. ASIC has also negotiated several MOUs with the ASX and the Takeovers Panel (see further below). Since ASIC assumed regulatory responsibility for consumer protection in the financial sector on 1 July 1998, ASIC and the ACCC have entered into a co-operation agreement dealing with, amongst other things, potential overlapping regulation.

8 ASIC also has a role internationally in assisting foreign regulators. It is authorised to conduct investigations to assist a foreign regulator to determine whether there has been a breach of a foreign securities law. It has also negotiated MOUs with regulators in other countries, such as the United Kingdom, Hong Kong and the United States. Regulation of financial institutions 1.10 Regulation of ADI s Until 1998, as noted above, Australian financial institutions were regulated and supervised on the basis of their status, rather than function. Regulation and supervision depended more on what a particular institution was called rather than what it did. From 1 July 1998, the ADI was created. An ADI is a body corporate with an authority granted by APRA to conduct banking business. Only ADI s can carry out banking business and must be authorised by APRA to do so. Banking business means both taking money on deposit (otherwise than as part-payment for identified goods or services) and making advances of money or other financial activities prescribed by regulations. ADI s are required to hold an Australian Financial Services Licence (AFSL) Banking Act The Banking Act is the primary piece of regulatory legislation under which ADI s operate in Australia. The provisions of the Banking Act, amongst other things, restrict entry into the business of banking, provide for prudential supervision and monitoring of banks by APRA, give APRA powers to protect depositors of ADI s and authorises the RBA to make regulations for the control of interest rates. Carrying on banking business in Australia is prohibited unless conducted in accordance with the Banking Act. A company may only carry on banking business if it has applied to, and obtained authorisation from, APRA under the Banking Act to do so. APRA may grant or refuse a company an authority to conduct banking business and may also grant exemptions from all or part of the Banking Act. If an ADI is a subsidiary of a non-operating holding company (NOHC), the NOHC must be authorised by APRA under the Banking Act. Foreign banks can operate in Australia through a branch or through a locally-incorporated subsidiary. There is no restriction on the number of foreign ADI s that are able to operate in Australia. Locally incorporated subsidiaries of foreign ADI s that conduct banking business in Australia are authorised to conduct banking business in the same way and are subject to the same supervision as Australian-owned ADI s. Foreign bank subsidiaries can engage in a full range of banking business in Australia, however, foreign bank branches must not engage in retail banking, that is, taking deposits of less than A$250,000 from the public. Foreign banks operating as branches in Australia are subject to supervision by their own central bank, although APRA can still impose conditions or restrictions on foreign banks under their Australian banking licences. The Banking Act confers a range of regulatory powers on APRA. Most of these are conferred at large, with the exception of certain powers expressly stated to be directed at depositor protection. APRA has the power to determine matters of prudential compliance by ADI s and authorised NOHC s. APRA may also give directions to ADI s or authorised NOHC s if APRA considers that a prudential standard or direction has been breached. APRA also has the power to obtain information from ADI s, appoint an investigator or administrator to, or to the control of, a troubled ADI or require and receive information from auditors of ADI s and authorised NOHC s Holdings in financial sector companies The Financial Sector (Shareholdings) Act 1998 (Cth) prevents a person (together with his or her associates) from acquiring a stake greater than 15% in a financial sector company without the prior approval of the Federal Treasurer. The Treasurer need only consent if

9 he or she is positively satisfied that it is in the national interest to do so. The Act extends to all ADI s, general insurance companies, life insurance companies and the holding companies for such institutions Banking Ombudsman The Banking Ombudsman is a non-legislative, self-regulatory initiative of the Australian Bankers Association (ABA) established to investigate and adjudicate consumer complaints against banks. The scheme is intended to provide a private dispute resolution procedure for banking customers as an alternative to court or other processes. To ensure impartiality, the Banking Ombudsman may not be a person who has ever been employed by a bank. Initially, members of the scheme are banks that agree to participate. Membership is also open to non-bank financial institutions for electronic funds transfer transactions. Participation is voluntary, but all banks are being strongly encouraged to join. An award by the Banking Ombudsman is binding on participating banks Codes of Practice Banks, building societies and credit unions each have their own voluntary codes of practice. For example, the Code of Banking Practice lays down certain standards of conduct as between a bank and its customers. While lacking the force of legislation, it is incorporated into and forms part of the contract between a bank and its customers in relation to the provision of banking services to individuals for private or domestic use. The Electronic Funds Transfer Code of Conduct (EFT Code) is directed towards electronic transactions and, like the industry codes of practice, apply as a matter of contract between a financial institution and its customers. Product regulation 1.15 Consumer Credit Code The Consumer Credit Code (CCC), generally speaking, regulates the provision of credit to Australian debtors where the credit is provided or intended to be provided, wholly or predominantly for personal, domestic or household purposes (not business or investment purposes). The CCC commenced on 1 November 1996 in all Australian States and Territories except Tasmania (in which it commenced on 1 March 1999, although national credit providers could elect to have the CCC apply to them from 1 November 1996). Where the CCC applies, it governs advertising and pre-contractual conduct, the formation of the credit contract (including the procedure under which the contract was entered into and the substantive terms of the contract itself) and administration of the credit contract, including the way interest is charged, statements of account, default and enforcement. Related mortgages, guarantees and insurance are also regulated, as is the conduct of agents and associated suppliers of the credit provider. The provisions of the CCC are mostly uniform across each of the States and Territories, although administrative arrangements differ between jurisdictions. There are some situations where the CCC will not apply, such as where the credit is provided for a short period of time and the credit fees and charges do not exceed a certain amount or where credit is provided by a trustee of a deceased estate by way of an advance to a beneficiary Credit Licensing There are various types of credit licensing systems for credit providers in Australia. Victoria and the Australian Capital Territory have a registration system under which credit providers must apply for registration before they may engage in the business of providing credit under the CCC. In Western Australia, a person is prohibited from providing credit unless that person is the holder of a credit provider s licence. New South Wales,

10 Queensland, South Australia and the Northern Territory credit providers are not obliged to apply for a licence or register before providing credit under the CCC, however, disciplinary action may be taken by a relevant body in that State against a credit provider. Tasmania has no registration or licensing requirements, nor any formal disciplinary mechanisms in its legislation. Regulation of Financial Markets 1.17 Financial Services In March 2002, the FSRA, introduced amendments to the Corporations Act. The FSRA regulates licensing, conduct and disclosure by financial institutions and establishes a single statutory regime for all financial markets, products and services providers. A financial institution now only requires one licence, an Australian Financial Services Licence (AFSL), determined by the nature of the financial products or services it provides. AFSL s are issued by ASIC and replace the multiple licences and authorities that were previously required, such as dealers and advisers licences and authorities to deal in foreign currency. The new arrangements came into force on 11 March 2002, with a two-year transition period. This has just recently come to an end. The new regime is flexible in its treatment of different financial products (for example, basic deposit products are subject to less intensive regulation than more complex investment products). Anyone who carries on a business of providing financial services in Australia requires an AFSL. A person provides financial services for the purposes of the FSRA if they do any of the following: 1. deal in, make a market for, or advise in relation to financial products; 2. operate a managed investment scheme; or 3. provide a custodial depository service. Each of the terms used above has a specific defined meaning in the FSRA. Lenders are, generally speaking, not covered by this licensing system, but most other types of financial services are covered, such as deposit taking, foreign exchange contracts, derivatives, custody, managed investments, stockbroking, insurance and superannuation. This also includes wholesale over-the-counter treasury and derivative trading. AFSL holders are required to conduct themselves and their affairs fairly, honestly and efficiently and, when dealing with retail customers, licensees need to comply with strict disclosure requirements, provide access to a dispute resolution system and have a compensation regime for retail customers who suffer loss as a result of the misconduct by the licensee. Where financial services are provided to retail clients, there are additional disclosure requirements. The various ways of licensing of securities and futures exchanges and clearing and settlement systems have also been replaced by the new FSRA regime. Operators of clearing and settlement facilities and of financial markets will be required to hold, respectively, an Australian CS Facility Licence or an Australian Markets Licence. Under the new arrangements, licensees have primary responsibility for the operation of markets and of clearing and settlement facilities and the responsible Minister has overall responsibility for licensing such entities. In the case of derivatives, the other sources of regulation in relation to exchange traded products are the rules of operation of the relevant exchange Electronic Payment Systems The RBA, via the Payments System Board, is the main body, which has the responsibility of regulating e-banking and payment systems. The RBA s powers in this area are set out in the Payment Systems (Regulation) Act 1998 (Cth) (PSRA). The PSRA allows the RBA

11 to undertake direct regulation of designated payment systems when it is in the public interest to do so. The RBA has the power to impose an access regime, set standards and resolve disputes in relation to a designated payment system. The PSRA also provides for regulation of purchased payment facilities such as travellers cheques and stored-value cards. E-banking and payment systems may also be subject to regulation form a number of regulators in addition to the RBA. APRA regulates e-banking under the Banking Act, which regulates the carrying on of banking business by ADI s. The ACCC possesses regulatory powers to ensure that the operation of payment systems complies with the provisions of the TPA relating to competition and access. However, while the ACCC is generally the only body responsible only for regulating competition and access, the RBA may, under the PSRA, designate a payment system and set standards, which are then paramount. ASIC also has its general regulatory powers relating to the information that must be disclosed to consumers about financial products, misleading or deceptive conduct and other unfair practices and can prosecute organisations providing financial services in breach of these consumer protection provisions Trading on Exchanges The ASX supervises Australia s primary market for securities issued by listed entities. The ASX has an overall supervisory power with respect to the exchange and trading on the exchange. In particular, the ASX supervises admission of entities to the official list, the quotation of securities and monitors trading on the exchange and settlements. The SFE and the NSX have similar rules and powers for the regulation of trading on their exchanges. All entities listed on ASX are bound by a contractual relationship with ASX. This obliges them to comply with the ASX s Listing Rules (Listing Rules), which have statutory backing in the Corporations Act. The Listing Rules are broad in scope, and include provisions requiring listed entities to: 1. make regular reports and disclosures; 2. undertake certain transactions only after making disclosure or seeking shareholder approval; and 3. ensure that administrative matters and transactions conform to certain requirements and standards. The most important obligation imposed on companies by the Listing Rules are the disclosure requirements. Companies are obliged to make periodic disclosures, such as annual reports, and are also obliged to disclose relevant and material information as soon as the company becomes aware of it. The ASX has a number of regulatory powers, the most important of which are the admission of market participants to exchange trading, the power to call trading halts on a particular security and the power to suspend or remove an entity from quotation on the official list. The responsibility for supervising listed companies compliance with the Listing Rules is shared between ASX and ASIC. ASX focuses on the front end supervision of the market and ASIC investigates potential breaches and prosecutes under the Corporations Act where necessary.

12 Regulation of securities 1.20 Corporations Act The Corporations Act is the principal piece of legislation governing companies and securities in Australia. As mentioned above, ASIC is responsible for administration of the Corporations Act. The Corporations Act contains many technical and complex provisions and legal advice should be obtained whenever a company or person intends to undertake activities which might come within its operation. The information contained in this article is of a general nature only and should not be considered a comprehensive statement of the law in this area Public fundraising The Corporations Act provides for a regime under which offers of securities (both equity and debt securities) for issue or sale may be made. The provisions of the Corporations Act apply to offers of securities that are received in Australia, regardless of where any resulting issue, sale or transfer occurs. Accordingly, the law is relevant to offers made over the internet which are received in Australia, and by overseas companies to their employees or shareholders in Australia. The primary focus the fundraising provisions is to ensure that investors in newly issued securities of a company have access to the information which a reasonable investor would require for the purposes of making an investment decision. Accordingly, apart from a number of limited exceptions (discussed below), the Corporations Act provides that there must be disclosure where any offer is made for the issue of securities, or for any sale of securities off-market by the controller of the body that issued them. Therefore, unless an exception is available, an offer of securities by a company will require a disclosure document. A disclosure document for the offer of securities is either a prospectus, a profile statement or an offer information statement. Profile statements and offer information statements are used in limited circumstances not generally relevant to the issue of equity and debt securities by major companies. Prospectuses are the most common disclosure document. The Corporations Act imposes few specific requirements for the inclusion of information in a prospectus, instead placing principal reliance on a general reasonable investor disclosure test. This level of disclosure is reduced where the securities on offer are in a class that have been continuously quoted on the ASX for 12 months, and the issuer has complied with its continuous and periodic reporting obligations so that information relevant to the offer is already in the marketplace. The Corporations Act also permits disclosure through a short form prospectus instead of sending out information that is contained in a document that has been lodged with ASIC. A short form prospectus may simply refer to the document and incorporate that information into the prospectus. For an offer for the issue of securities, the disclosure document must be lodged with ASIC, prior to which, the consent of every director is required. An application for, or issue or transfer of non-quoted securities offered under a prospectus cannot be accepted until 7 days (which may be extended to 14 days) after lodgement of the prospectus. The waiting period enables persons, including ASIC, to review the disclosure for any defects in the disclosure for which ASIC can require amendment or aggrieved persons can seek an injunction preventing the fundraising. As a result, most offerors won t print the prospectus until the 7 day period is past in case ASIC requests an amendment. There are specific exceptions to the general requirement of disclosure to investors in securities. A disclosure document need not be produced where a person obtains debt finance from a person who lends in the ordinary course of their business (except for

13 corporate borrowers whose business is borrowing money and providing finance). This means that most corporate borrowers can raise debt finance from banks and other financiers without regard to the Corporations Act regulation. There are also exceptions for certain debt issues by banks and insurance companies and debt issues by a government. Disclosure is not required where disclosure is made in a bidder s statement accompanying a takeover bid offering securities as consideration, or in documentation required for a meeting to approve a scheme of arrangement. In this case it is assumed that the bidder s statement or scheme documentation will provide an appropriate level of disclosure. Further, offers to certain types of investors are not required to comply with the disclosure requirements in the Corporations Act. The most broadly used exemption for both shares and debentures is the exemption for sophisticated investors, that is, where the minimum amount payable for the securities on acceptance of the offer is at least $500,000. There are other exemptions for certain offers through licensed dealers, offers to professional investors, offers of debentures to existing debenture holders, certain small scale offerings, offers to people associated with the issuer, offers of securities to a present holder of securities or offers to employees. Issues of securities by a listed company also need to comply with the ASX Listing Rules. There is a general prohibition contained in the Listing Rules which prevents a company from issuing more than 15% of its issued equity securities in any 12 month period without approval from ordinary shareholders. There are a number of limited exceptions where this general prohibition does not apply, for example, where a company issues securities under a dividend or distribution plan. Furthermore, a company seeking quotation of its securities on admission or after admission must comply with a number of conditions set out in the Listing Rules Change of substantial holdings in listed companies The Corporations Act obliges a person who begins to have a substantial holding in a listed public company or scheme to disclose their interest in the company within 2 business days after acquiring the interest, and to serve a copy of the disclosure on the stock exchange on which the shares are listed. A person has a substantial holding where the total votes attached to voting shares in which the person and the person s associates have a relevant interest is 5% or more of the total number of votes. Once a person reaches the statutory interest, there is an obligation to disclose any variations of 1% or more in that entitlement within 2 business days. Where these provisions are contravened, the court has the power to make a wide range of orders, including the cancellation of contracts or divestment of shares, on the application of ASIC or the company Takeovers The Corporations Act regulates takeovers by prohibiting acquisitions beyond a 20% threshold unless the takeover is one that is specifically allowed by the Corporations Act. Generally speaking, the main (but not the only) means of lawfully making a takeover in excess of the 20% threshold are: 1. by making offers under an off-market bid; 2. by acquiring not more than 3% of the voting shares of the target in a six month period; or 3. by making the acquisition after shareholder approval. The overall regulatory regime is contained in many detailed provisions of the Corporations Act. Generally, the Corporations Act outlines the types of takeover bids that can be made (ie; off-market and market bids) and sets out rules for formulating the takeover offer including rules which require target shareholders to be treated alike, rules which prevent collateral benefits and various rules about conditional offers. There are

14 also rules about variation, withdrawal and suspension of offers and some rules about the acceptance of offers. The Corporations Act also regulates various aspects of the bidder s and the target s conduct during the bid period. Again, ASIC has supervisory and investigative powers in monitoring whether takeover bids comply with the provisions of the Corporations Act. As mentioned previously, ASIC also has power to grant exemptions to or modify the application of provisions of the Corporations Act in relation to the takeover. The Corporations Act also provides for the Takeovers Panel (Takeovers Panel) to make declarations in relation to takeovers. The Takeovers Panel is the primary forum for dispute resolution regarding takeover bids. The Panel is a peer review body with part-time members drawn predominantly from Australia s takeover and business communities. The Panel has a minimum of five members, appointed by the Governor General. The Panel is established under the ASIC Act and it derives its powers from the Corporations Act, although its powers are not judicial in nature. It is funded by a specific appropriation from the Commonwealth Government. The Panel has powers to make orders to protect the rights of persons during a takeover bid. It has two main functions. Firstly, to review decisions by ASIC to grant exemptions from provisions of the Corporations Act or modify the application of those provisions to a person and secondly, to declare, on the application of ASIC or any other interested person and after conducting a hearing, that an acquisition of shares or conduct in relation to shares in or affairs of a company has occurred in unacceptable circumstances. The Panel can make consequential orders and there is a procedure for ASIC or a party to proceedings to apply to the Panel for a review of its decision. Regulation of the insurance industry There are three main pieces of legislation that regulate the Australian insurance industry. The Insurance Act 1973 (Cth) (Insurance Act) regulates the conduct of general insurance businesses through a system of authorisation, the Life Insurance Act 1995 (Cth) (Life Insurance Act) regulates life insurance businesses through a registration system and the Corporations Act (as amended by the FSRA) regulates insurers, brokers and agents as financial services providers. The provisions of the FSRA replace the provisions of the Insurance (Agents and Brokers) Act 1984 (Cth) and, as discussed above, impose disclosure requirements on providers of financial services and their authorised representatives. Companies acting as trustees of superannuation funds can also be subject to regulation under the Superannuation Industry (Supervision) Act 1993 (Cth). It is APRA s responsibility to administer the provisions of the Insurance Act and the Life Insurance Act, however, ASIC has responsibility for some of the non-prudential regulatory aspects of these Acts, such as approval of codes of practice under the Insurance Act. ASIC has approved a code of practice developed by the Insurance Council of Australia, which requires insurers to a Claims Review Panel Scheme and imposes obligations on insurers in respect of, amongst other things, the information that must be provided to an insured. To obtain an authority to carry on insurance business, a company must apply to APRA. APRA may impose conditions on an authorisation and vary or revoke those conditions. It may also, in certain circumstances and if the Federal Treasurer s agrees, revoke an authority. Authorised insurers must comply with prudential standards determined by APRA. APRA has the power to give directions to require compliance with its prudential standards and failure to comply is an offence. APRA also has powers of inspection and may require that an insurer provide it with certain information. Insurers will also, subject to some minor exemptions for certain types of insurance, need to hold an AFSL (for which an insurer must apply to ASIC). One important exemption from the requirement to hold an AFSL is where the insurer provides services only to wholesale clients.

15 Acquisitions and takeovers of general and life insurance companies are regulated by the Insurance Acquisitions and Takeovers Act 1991 (Cth). Proposals for the acquisition or takeover of a general or life insurance company must be notified to the Minister, who has power to make a temporary or permanent restraining order, or a divestment order. Recent and future developments In 2002, ASIC installed a new electronic licensing system enabling organisations to apply for AFSL s on-line. Revised prudential standards for the supervision of ADI conglomerates were released by APRA in November A financial conglomerate is a number of financial institutions under the same ownership or control, but operating in more than one of the main financial sectors of banking, insurance, funds management and securities. The revised standards, effective from 1 July 2003, relate to capital adequacy, large exposures and associations with related entities. Prudential requirements are now applied to the full conglomerate group incorporating all associated entities. This will allow for more sophisticated prudential monitoring methods to be applied to the group. These new requirements will only apply to prescribed conglomerate groups where insurance or other non-banking activities are a large part of their activities, justifying a more complex supervisory treatment. APRA has recently completed a significant overhaul of the prudential standards for the general insurance industry. The reforms include increased capital requirements, stronger reinsurance arrangements and promotion of appropriate risk management strategies and processes. The principal reform is a universal licensing regime, under which all trustees of APRA-regulated superannuation funds, approved deposit funds and pooled superannuation trusts will be required to be licensed by APRA and to comply with the licensing requirements on an ongoing basis. The new licencing requirements are to come into effect on 1 July There is a two-year transition period commencing on 1 July 2004 and ending on 30 June 2006, during which existing trustees must obtain a licence and register their superannuation entity.