#7355 - Introduction And What Is Regulation - Securities and Financial Services Regulation

Basically notes that the book deals with securities regulation which is an important subset of the broader financial market

The main purpose of securities and market regulation in AU isn't eliminating risk but to ‘promote market confidence and to ensure the development of a transparent and well-informed securities market where every participant has equal access to information and participates on a level playing field.

• The idea being that everyone has access to all financial products but the government steps in to regulate conduct (e.g. through MODC etc.) and disclosure

• Though most regulation is ‘securities regulation’ some of the matters dealt with in the text apply beyond traditional notions of securities regulation – first because of the ‘twin peaks’ nature of the regulatory (ASIC who regulates market integrity and consumer protection) and APRA and secondly because of the functional (rather than formal) approach to securities regulation

It’s noted that most products sold on financial markets are not tangible property but instead future rights or entitlements to an intangible instrument which cannot be assessed by inspection alone (cf. land and goods).

• The impalpable nature of securities and other instruments and their character as property consisting of future entitlements create impediments to effective functioning of markets

[The need for specialist regulation] It’s noted that the Financial System Inquiry concluded that specialist regulation was justified in two areas – financial market integrity (because of sensitivity to information and thereby the risk of abuse) as well as retail consumer protection (because of the complexity of the products and propensity to cause misunderstandings)

The interlocking goals of investor protection, market efficiency and systemic stability

• These are recognized by IOSCO who also adopt 38 principles guiding how regimes should be arranged to achieve these objectives. Failure to do so is said to cause market failure (the hypothesis of market failure calling for corrective action) as well as abuse and exploitation of individuals (the benevolence hypothesis of maximizing social welfare by disinterested regulators)

The fact that these goals are most likely to be realised when market participants act with integrity and there is adequate disclosure to facilitate the making of informed judgments in that market

Market integrity and adequate disclosure wouldn’t be achieved without regulatory intervention, for reasons of market failure

• The need for regulation is accepted but there is still debate on how best to achieve it (e.g. express regulation, self-regulation, quasi-regulation, co-regulation

• Welfare economics takes the view that situations of monopoly, abuse of market power, information asymmetry, the existence of public goods and the impact of externalities all call for market regulation

  • The last three of these exist to a significant extent in financial markets

The current regulator framework is four-pronged:

• The regulation of markets (establishing markets, governance of misconduct)

• The regulation of CS facilities

• The regulation of intermediaries

• The regulation of disclosure of product information

[Institutional arrangements]

• Basically notes the ‘forms’ of law here and the basic structure – the split between making/ administration/dispute resolution, the existence of substantive law (the CA) and the regulation of both wholesale and retail markets at different levels

[Regulating issuers]

• The securities law imposes requirements/restrictions on issuing entities irt the offer and issue of securities and other financial products

• The regulatory system applying to issuers is bifurcated:

  • Certain securities are governed by s 761A are s.t. disclosure and related requirements (shares, debentures)

  • Other products like derivatives, warrants, MIS interestsa are governed by Pt 7.9

• [Offering securities]

  • Chapter 6D regulates offer of securities to retail investors while Pt 6D.2 Div 2 sets out when disclosure is required to investors (depending on the circumstances of the offer it will take the form of a prospectus, SFP, PS or OIS)

  • Pt 6D.2 Div 5 controls the procedure for offering securities

• [Offering other financial products]

  • Pt 7.9 regulates the offer of other financial products

    • Div 2 contains a mandatory disclosure requirement applying in connection with certain offers of financial products for issue/sale [in the latter case only where it amounts to an indirect issue or a direct or indirect off-market sale and in the former case it may involve a PDS]

    • Div 2 Subdiv C contains the requirements of a PDS

• [Wholesale offers] are not subject to the same disclosure requirements but are still subject to general prohibitions on MODC etc.

• [Continuous disclosure] Issuers of securities and other financial products may also be subject to CDO if they are disclosing entities and will be subject to Chapter 6CA of the corps Act and the ASXLR (incl LR 3.1 about material effect on price)

• [Issuer licensing]

  • The CA creates a licensing regime for financial intermediaries – people carrying on businesses of providing financial services must hold an AFSL (except for companies issuing securities in themselves unless they are investment companies)

[Regulating market operators]

• [Financial market operators] must be licensed by the Treasurer under Pt 7.2 and by virtue of this will subject to a number of statutory obligations contained in Pt 7.2 Div 3

  • Div 4 sets out the criteria for granting a market license and lets the Treasurer impose conditions on the license

• [Clearing and settlement facility operators (CS facilities)] are regulated by Pt 7.3

• [Limits on involvements with licenses] The regulatory system also imposes restrictions on who can exercise control over these license (with the unacceptable control/15% requirement and the disallowance of disqualified persons)

[Regulating intermediaries]

• The regulation of financial service providers is an important part of the regulatory regime (includes funds management companies investment banks, brokers, dealers, advisers)

• [The licensing requirement] Persons carrying on a business of providing FS must be licensed. Different classes of licenses apply depending on the type of financial services provided.

  • AFS licensees are subject to a number of statutory obligations as well as obligations at general law (including those governed by contract, agency, fiduciary obligations and a duty to use reasonable care and skill in the discharge of its functions

• [Financial services disclosure] AFS licensees have mandatory disclosure requirements to provide retail clients with information (for e.g. in certain circumstances having to provide a Financial Services Guide)

• [Conduct of business rules] include regulation of how moneys and other property received from clients are to be held/dealt with, reporting requirements (financial records, statements etc.) and prohibitions on unconscionable conduct

• [Exchange operating rules] Financial intermediaries acting in licensed markets are bound as a matter of contract by the operating rules of the market (e.g. the ASX LR)

[Conduct regulation] includes regulation of dishonest and misleading or deceptive conduct, unconscionable conduct, consumer protection, unfair contract terms, market misconduct and insider trading