#7362 - How Do We Regulate Licensing - Securities and Financial Services Regulation

The licensing regime for market providers under Pt 7.2 is directed to protecting market users and enhancing market integrity and stability in the financial system

There have been a number of recent developments in the regulation of market providers

• The announcement of transferring responsibility of supervising trading on licensed financial markets to ASIC

• The announcement by the government for market competition and the approval of Chi-X – this is said to reduce transaction costs and increase liquidity (but may also fragment liquidity and lead to volatility)

A person may only (/hold out that it) operate a financial market in the jurisdiction if it has an AU market license that authorises it to operate a market in the jurisdiction (or it is exempt under Pt 7.2 – s 791A).

A person is prohibited from holding it out that

• It has such a license, or

• That the operation of the FM by that person is authorised by such a license

• That the FM is exempt by Pt 7.2

• That the person is a participant in a licensed market

  • If this isn't the case (s 791B)

“A facility through which offers” to acquire or dispose of financial products are regularly made or accepted OR

“Offers or invitations” are regularly made to acquire or dispose of financial products that are intended to (/may be reasonably expected to) result, directly or indirectly, in the making of offers to acquire or dispose of FPs or the acceptance of such offers (s 767A(1))

It is not statutorily defined

Carragreen Currency v CAC: An integrated infrastructure on which the relevant offers or invitations are made would constitute such a facility

• [Integrated facilities] can constitute an FM even if its component parts don’t when considered in isolation. Relevant factors include: control by the same entity, membership of the same corporate group, that the components together enable making/acceptance of offers or invitations and no component

• [Through which] To be a ‘financial market’ a facility must be one through which offers are made or accepted.

  • General communication services are not to be regulated as FMS

  • ASIC RG 172: The phrase must be interpreted narrowly and a facility is only an FM if the offers or invitations are made or accepted by means of that facility in the sense that the offers/invitations are actually made on that facility

[Something that isn't] An internet portal which hosts advertisements of licensed advisers/brokers/fund managers/market operators where the portal contains

• A prominent disclaimer indicating that it doesn’t endorse the services/markets that can be accessed through the site

• That the portal is clearly separated from linked websites and the operator of the portal doesn’t exercise control over content/material other than removal of information considered to be illegal/defamatory

• [Reason] Offers or invitations aren’t made through the facility operated by that operator but instead on the FMs that may be accessed through it

[Something that is] IF a person operates an internet site where

• Licensed dealers indicate their willingness to deal in FPs or provide prices for FPs, and

  • The site permits investors to submit price inquiries concerning FPs listed on the site forwarded to those dealers, or

  • permits investors to indicate interest in a dealer’s firm price posted on the site, which is then notified to the dealer) then that person is operating an FM

• This is so even if the relevant contracts are negotiated directly between the investor and dealer

[Incidental services] Additional licenses aren’t required to provide FS incidental to market operation (s 911A(2))

But to operate a CS facility or provide FS not incidental to market operation, a CS facility license or an AFSL is required

“in this jurisdiction” means a body corporate registered under Ch 2A – even if they are registered here and have their base of operations overseas.

A financial market will also be operated in AU if

• located in AU in the sense of having its trading floor or

• All or a significant part of the market infrastructure in AU,

• Or if it has one or more participants in AU and is targeted at AU investors (ASIC RG 172(

A person’s making/accepting offers or invitations to acquire/dispose of FPs on their own behalf or on behalf of one party to the transaction only, this is not a financial market unless the regulations specify otherwise (s 767A(2)(a)):

• This is intended to exclude offers or invitations made/accepted through direct negotiation of parties (e.g. OTC)

Also exempt are (s 767A(2):

• (b) A person conducting treasury operations b/w RBCs,

• (a) A licensed auctioneer conducting an auction of forfeited shares

• Any other conduct proscribed by the regulation

A body corporate may apply for an AML by lodging an application with ASIC including all the appropriate matters. The minister will grant it if satisfied of certain matters (that they will comply with obligations, adequate arrangements for operating the market and monitoring compliance, clearing and settlement arrangements et.c)

• The Minister also has to have regard to other matters in s 795B (s 798A(1)) including the structure of the market, the nature of activities, its size, the nature of FPs, the proposed participants etc and the public interest (e.g. increases in competition, product innovation etc.)

There is alternative criteria for those who operate FM in overseas countries which are intended to prevent duplicity (See 356t)

The intent of the licensing regime is to secure the adequacy of capitalisation of providers of FS, excluding untrained and unqualified persons from the FS industry and enforcing compliance with ethical standards (Cairnsmore Holdings v Barsden)

Part 7.6 requires a person who carries on a financial services business in the jurisdiction to obtain an AFSL (e.g. securities dealers, investment advisers, futures brokers, LI and GI companies, deposit-taking institutions, FX dealers, underwriters etc.)

The holder of an AFSL must satisfy financial requirements and conduct requirements including those as to compliance, training etc.

A person who carries on a FS business (FSB) in the jurisdiction must hold an AFSL covering the provision of the FS (s 911A(1))

The requirement applies to someone carrying on a financial services business

• Financial services business – a business of providing financial services (s 761A)

• Financial service – providing

  • Financial product advice (s 766B)

  • Dealing in a financial product or making a market for a financial product (s 766C-D)

  • Operating a registered scheme (s 766D)

  • Providing a custodial or depository service (s 766E)

  • Engaging in conduct prescribed by the regs

• [Clerks/Cashiers] A person doesn’t provide a ‘financial service’ where his or her conduct is done in the course of work of a kind ordinarily done by clerks or cashiers (s 766A(3)) - that is purely administrative or mechanical functions which don’t involve the exercise of independent judgment

[Accountants] A qualified accountant is taken not to provide a financial service within s 766A(1)(a) in circumstances such as:

• Advising irt preparation/auditing of financial statements;

• Advising on acquiring assets that aren’t FPS

• Advising on tax issues (including tax implications of FPs), risk management (including through financial products), business planning (like DD or asset valuations{

[Application] This exclusion applies only if a service does not involve that accountant making a recommendation, providing a statement of opinion, or giving a report thereof that is intended to influence a person in making a decision irt a particular FP or class thereof or an interest in them (or could be reasonably regarded as intended to do so)

[Exclusions: Regulations] Reg 7.1.30-7.1.33B:

• Advice as to voting rights/securities/interests in MIS

• Passing on/publishing/distributing/disseminating a document containing financial advice (in certain circs)

• Providing advice relating only to structuring of remuneration packages for another’s employees

• Providing a recommendation or opinion in handling/settling (/potential) claims

[General advice by an issuer] An issuer doesn’t provide FS within the meaning of s 766A(1)(a) by preparing general advice irt its own products, where a TP licensee will give that advice to its recipients and, in that case, the licensee which gives that advice is taken to provide the relevant FS (reg 7.1.33B)

[Definition – FP advice] S 766B(1): A recommendation or statement of opinion (or report thereof) that is intended to influence a person(/s) in making a decision irt a particular (/class of) FP or could be reasonably regarded as having intended to have such an influence

• [‘Intended to influence’ or reasonably regarded] This is a question of fact:

  • Communications not involving a recommendation or opinion, including purely factual information, aren’t generally FP advice

  • But factual information can...