Topic 4: Regulatory framework I

Administrative actions

ASIC can make orders against Australian financial services licensees and their representatives. This is known as an administrative action as it is an internal administrative decision. Such decisions include revoking, suspending or imposing conditions on a licence and banning participants from providing financial services, whether as a licensee or as a representative of a licensee. The grounds on which these sorts of actions can be taken include: • a contravention of a financial services law • ASIC has reason to believe that the person will in future contravene a financial services law • failure to comply with a licensee's obligations • failure to act honestly, efficiently and fairly • ASIC has reason to believe that the person will in future fail to act honestly, efficiently and fairly. For most of these decisions, ASIC must hold a hearing in private and give the person affected a right to be heard before making any decision. Most administrative decisions of this nature made by ASIC can be appealed to the Administrative Appeals Tribunal.

Criminal proceedings

ASIC may instigate the prosecution of a person as a result of an investigation, or if, from a record of an examination, ASIC believes that the person may have committed an offence against the corporations legislation and should be prosecuted for that offence (section 49, ASIC Act). When ASIC considers that it has the evidence for prosecution for an offence, it will provide a brief of evidence to the Commonwealth Director of Public Prosecutions (CDPP), who must approve the laying of any charges. When charges are laid, the prosecution is run by the CDPP. ASIC continues to have a role as the investigating agency, providing the evidence for the prosecution. Each year, ASIC also summarily prosecutes a large number of less serious breaches (e.g. failure of an officer to assist a liquidator, or failing to lodge reports) without referring them to the CDPP. ASIC and the CDPP have a memorandum of understanding (MOU) which sets out the operational arrangements for the two organisations to work together. The MOU provides procedures, for example, the CDPP's prosecution of matters and ongoing liaison between the organisations. Section 1317P of the Corporations Act allows ASIC to commence criminal proceedings even though ASIC has already achieved a civil outcome in relation to the same, or substantially similar, conduct.

ASIC's priorities

ASIC's priorities are to ensure: • confident and informed investors and financial consumers — achieved through investor education, holding gatekeepers to account and gaining an understanding of investor behaviour (i.e. how investors and consumers make decisions) • fair and efficient financial markets — achieved through ASIC's role in market supervision and competition, and corporate governance • efficient registration and licensing — achieved with a focus on small business.

Infringement notices

ASIC, and the Markets Disciplinary Panel established by ASIC, can issue infringement notices in lieu of commencing civil penalty action for contravention of the ASIC Act and for credit matters, or for breaches of continuous disclosure or market integrity breaches. Their use is discussed in ASIC Information Sheet 151. The intended use of infringement notices for breaches of the ASIC Act and for credit matters is to 'facilitate payment of relatively small financial penalties in relation to relatively minor contraventions'. Infringement notices for markets matters are also intended to be issued for 'less serious' offences, however the notices can impose higher financial penalties than for notices issued in respect of ASIC Act or credit matters. Markets notices can only be issued after the recipient has had a chance to formally present a case in reply.

AUSTRAC Enforcement powers

AUSTRAC has a very wide range of enforcement powers, including: • prosecution of criminal offences • civil penalties • infringement notices • remedial directions • injunctions • enforceable undertakings • notices to undertake risk assessments or external audits.

Anti-money laundering/counter-terrorism financing regime

AUSTRAC is the regulatory authority which supervises the operation of the federal Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act). In its intelligence role, AUSTRAC provides financial transaction reports information to law enforcement bodies, security agencies, social services and revenue departments. The AML/CTF Act is principles-based legislation which sets out broad obligations and a great deal of the detailed requirements on meeting those broad obligations is provided by AML/CTF Rules issued by AUSTRAC. A new anti-money laundering/counter-terrorism financing regime was introduced with the commencement of the AML/CTF Act in December 2006 and December 2007. The regime is being introduced in two tranches (stages). The first tranche was implemented over a two-year period from December 2006 to December 2008 and is discussed below. It is intended that the second tranche will specify additional designated services to which the regime will apply. As at mid-2018 the second tranche (intended to bring real estate agents, accountants, lawyers, trust and company service providers, and high value dealers under the regime) has still not been implemented, despite consultations and feasibility studies for nearly a decade since 2008 and as recently as 2017. The government has flagged a possible reform of the whole AML/CTF regime in 2018-19. Under the current legislation, any business is required to comply with the AML/CTF Act where that business provides 'designated services', including: • opening an account • accepting money on deposit • making a loan • issuing a debit card • issuing traveller's cheques • leasing goods or services • issuing or selling a security or derivative. The regime does not generally cover the provision of financial advice in itself. However, it will affect the holder of an Australian financial services licence where the holder moves to the next stage of acting on the recommendations (e.g. providing a financial product). Some of the principal obligations under the new regime include: • customer identification and verification of identity • expanded record keeping • establishing and maintaining an AML/CTF program • ongoing customer due diligence • reporting of 'suspicious matters', threshold transactions ($10,000) and international funds transfer instructions.

Financial markets — licensing framework

All persons who operate a financial market in Australia must hold an Australian market licence (unless they qualify for an exemption). ASIC has the responsibility to ensure the proper workings of licensed financial markets in Australia. In particular, section 794C of the Corporations Act 2001 (Cth) provides that ASIC must do an assessment of each market licensee at least once a year. This licence gives ASIC a positive obligation to supervise the ASX and ASX 24 (previously SFE) markets, and other licensed markets. ASIC also has a number of other powers relating to the operation of licensed markets. Section 794D of the Corporations Act gives ASIC the power to give notice to a licensed financial market requesting it to prohibit trading in certain products or to direct the market to do so if it fails to act. Further, ASIC gives advice to the minister on the decision of whether to grant a financial markets licence, the conditions on the licence and the content of the operating rules of the market. ASIC also has input into any changes to the rules of existing licensees. Licensed financial markets have self-regulatory obligations in relation to their own markets. For instance, under section 792A of the Corporations Act, they are required to ensure that the market is a fair, orderly and transparent market, that they have arrangements in place to operate the market and that they have sufficient resources to operate the market. In addition, the market licensee must give assistance to ASIC as required and must notify ASIC of certain matters, such as when it takes disciplinary action or suspects a contravention of the Corporations Act. The way in which these obligations are carried out in relation to the ASX and ASX 24 markets is discussed below. There is a similar framework for licensed clearing and settlement facilities, which clear and settle transactions in financial products. ASIC's powers in relation to clearing and settlement facilities, which are set out in Part 7.3 of the Corporations Act, are similar to its powers in relation to financial markets described above. On 1 August 2010 the function of supervising financial markets was transferred from licensed markets to ASIC. This was a precondition to the introduction of competition in exchange markets. Section 798G of the Corporations Act gives ASIC the power to make market integrity rules that deal with the activities and conduct of licensed markets and participants of those markets.

Enforceable undertakings

An enforceable undertaking is in effect a promise made by the person that can be enforced by ASIC if it is broken. ASIC may accept written enforceable undertakings as an alternative to pursuing other remedies. However, ASIC will not accept an enforceable undertaking in lieu of commencing criminal proceedings against a party. When deciding whether an enforceable undertaking is appropriate in the circumstances of the case, ASIC will consider the following factors (this list is not exhaustive): • Is the person prepared to publicly acknowledge ASIC's concerns about the conduct and the necessity for protective or corrective action? • Was the misconduct that ASIC considers to be a breach inadvertent? • Was the conduct that ASIC considers to be a breach a result of the conduct of one or more individual officers or employees of the company? • What was the seniority and level of experience of the individual(s) involved in the breach? • Has the person co-operated with ASIC, including providing us with complete information about the underlying breaches and any remedial efforts? • Will it achieve an effective outcome for those who have been adversely affected by the conduct or compliance failure? • Is the person likely to comply with the enforceable undertaking? • Has the person been the subject of complaints or previous ASIC enforcement action? • What are the prospects for a speedy resolution of the matter? If the company breaches the terms of the undertaking, ASIC may apply to the court for an order that the company comply with the undertaking. In any such proceedings, ASIC will not have to prove that the company has breached its licence obligations. It will only have to prove that the company has breached the undertaking. The court may also make other orders, including an order directing the person to disgorge any profits made resulting from the breach or to pay compensation for any loss caused.

Markets Disciplinary Panel

As a result of the recent changes to market supervision and surveillance arrangements, a new Markets Disciplinary Panel has been established by ASIC to serve as the main forum for disciplinary action for breaches of the Market Integrity Rules. The Markets Disciplinary Panel is a peer review body consisting of part-time members with relevant market or professional experience. It is administered by ASIC. For an overview of the operation of the Markets Disciplinary Panel, see RG 216 'Markets Disciplinary Panel'. ASIC also has power to give directions to an entity to suspend dealings in financial products or give some other direction where necessary to protect people dealing in those products (Corporations Act section 798J). ASIC regulatory guides are available on the ASIC website.

Financial Action Task Force

As discussed earlier, the Australian Transaction Reports and Analysis Centre is the regulator that supervises the anti-money laundering and counter-terrorism regime in Australia. On an international level, efforts against money laundering are coordinated by the Financial Action Task Force (FATF). FATF is an inter-governmental body founded in 1989 to formulate policies to combat money laundering and terrorist financing. It currently has over 30 member countries (including Australia) and two member regional organisations. Australia had the Presidency of FATF for the 2014-15 year. The 2017-18 presidency of FATF is with Argentina, and the presidency cycle has been extended to a two year period. The main policies released by the FATF are the 'Forty Recommendations' on money laundering which include requirements that members: • criminalise money laundering and confiscate the proceeds of money laundering • implement customer due diligence, record keeping and suspicious matter transaction reporting • establish a financial intelligence unit. Special recommendations on terrorist financing - These recommendations were made following the 9/11 terrorist attacks on the United States. Basically, they extend the Forty Recommendations to include terrorist financing.

Corporate governance principles

Corporate governance is the system by which organisations are directed and managed. Corporate governance influences: • how objectives of an organisation are set • how risk is monitored • how performance is optimised. The ASX Corporate Governance Council was formed in 2002 to develop and deliver an industry-wide framework for corporate governance in the form of best practice principles. These principles were first released in 2003. As a consequence, Listing Rule 4.10.3 was amended to provide that a company must now state in its annual report the extent to which it has followed the principles during a reporting period. If a company has not followed a recommendation, it must give reasons why it has not done so. In summary, the Australian corporate governance principles are: • Principle 1 — Lay solid foundations for management and oversight Companies should establish and disclose the respective roles and responsibilities of board and management. • Principle 2 — Structure the board to add value Companies should have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties. • Principle 3 — Act ethically and responsibly Companies should actively promote ethical and responsible decision-making. • Principle 4 — Safeguard integrity in financial reporting Companies should have a structure to independently verify and safeguard the integrity of their financial reporting. • Principle 5 — Make timely and balanced disclosure Companies should promote timely and balanced disclosure of all material matters concerning the company. • Principle 6 — Respect the rights of security holders Companies should respect the rights of shareholders and facilitate the effective exercise of those rights. • Principle 7 — Recognise and manage risk Companies should establish a sound system of risk oversight and management and internal control. • Principle 8 — Remunerate fairly and responsibly Companies should ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear.

Market Integrity Rules

Effective from 7 May 2018 (except for NXSA which will transition in stages throughout 2017 to 2019), the Market Integrity Rules are contained in four 'rule books': • The ASIC Market Integrity Rules (Securities Markets) 2017 (Securities Markets rules) set out obligations and prohibitions applying to activities and conduct on the ASX, Chi-X, NSXA, SSX, IR Plus securities markets as well as competition between securities markets • The ASIC Market Integrity Rules (Futures Markets) 2017 (Futures Markets rules) apply to activities and conduct on the ASX 24 and FEX futures markets • The ASIC Market Integrity Rules (Securities Markets - Capital) 2017 (Securities Capital rules) set out capital and reporting requirements for participants of the securities markets • The ASIC Market Integrity Rules (Futures Markets - Capital) 2017 (Futures Capital rules) set out capital and reporting requirements for participants of the futures markets. These four sets of rules consolidated the previous fourteen rule books, and were issued on 17 November 2017. Historically, ASIC made market integrity rules for the supervision of each market individually. Accordingly, rules for the ASX, SSX (formerly APX), NSXA and IR Plus (formerly SIM VSE) markets were released on 1 August 2010, and for Chi-X which were released on 29 April 2011. The rules were based on the previous rules of each market dealing with supervisory matters. These have been consolidated into the Securities Markets Rules, which impose obligations on market participants in relation to: • management, insurance, responsible executives and accreditation of retail advisers • client relationships • records (e.g. trading records) • trading, including client order priority, manipulative trading and fair and orderly markets • takeovers.

Clearing and settlement (CHESS)

If you buy or sell financial products such as shares in a listed company, you must exchange the title or legal ownership of those financial products for money. This exchange is called settlement. For financial products traded on the Australian Securities Exchange, settlement is effected by a world-class computer system called CHESS, which stands for the Clearing House Electronic Subregister System. CHESS is operated by the ASX Settlement Pty Limited (ASX Settlement), a wholly owned subsidiary of the ASX. ASX Settlement authorises participants such as brokers, custodians, institutional investors, settlement agents and so on to access CHESS and settle trades made by themselves or on behalf of their clients. Usually, two business days after a buyer and seller agree to a trade, CHESS effects the settlement of that trade. It does this by transferring the title or legal ownership of the shares while simultaneously facilitating the transfer of money for those shares between participants via their respective banks. This type of settlement is called Delivery versus Payment (DvP). It is irrevocable. In addition to performing settlement, CHESS electronically registers the title (ownership) of shares on its subregister. This registration is secure and is an efficient means for holders to register title of their shares if they intend to trade them. ASX Clear acts as the central counterparty to all ASX market transactions. Through the ASX Clear Operating Rules an ASX trade is 'novated' to ASX Clear. This is because for each buyer, ASX Clear becomes the seller and for each seller, ASX Clear becomes the buyer. This means that ASX stockbrokers and their clients do not have to consider the counterparty of their buy-sell transaction.

Minimum requirements for listing on ASX

In comparison, the minimum requirements for a company listing on the National Stock Exchange of Australia (NSXA) are 50 investors at $2,000, with 25% unrelated party shareholding, and market capitalisation of $500,000. Companies on the Sydney Stock Exchange (SSX) must have a minimum of 50 investors with $2,000 holding each, a 25% unrelated party shareholding, net tangible assets or market capitalisation of $2 million, and working capital of $300,000.

Foreign Investment Review Board

In contrast to the other bodies mentioned in this topic, the Foreign Investment Review Board (FIRB) can only make policy recommendations to the Treasury about proposed foreign investments. It has no independent power to impose sanctions under any legislation. It is, however, influential in what it does, and is measured according to the Government's Regulator Performance Framework. FIRB's functions are to: • examine proposed investments in Australia that are subject to the Policy, the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the FA&T Act) and supporting legislation, and to make recommendations to the Treasurer and other Treasury portfolio ministers on these proposals; • advise the Treasurer on the operation of the Policy and the FA&T Act; • foster an awareness and understanding, both in Australia and abroad, of the Policy and the FA&T Act; • provide guidance to foreign persons and their representatives or agents on the Policy and the FA&T Act; • monitor and ensure compliance with the Policy and the FA&T Act; and • provide advice to the Treasurer on the Policy and related matters. It also investigates allegations of suspected breaches of the legislation as part of its compliance mandate. Other agencies, such as the Australian Taxation Office, take on enforcement roles in matters such as forcing sales of property illegally purchased by foreign interests and maintaining the Agricultural Land Register.

FSI recommendation

In the FSI's final report a recommendation was made that bank capital levels need to be 'unquestionably strong'. In response, APRA reported on major bank capital levels in July 2015, finding that Australian banks are well capitalised, but recommended a 200 basis point increase in capital levels to meet the recommendation. It increased the mortgage risk weights in July 2016, from 16% to 25%, to improve the resilience of the banking system to crises, and improve competition. The risk weight relates to the amount of capital banks need to hold to guard against insolvency should the loans go bad. APRA has also curtailed the growth of residential property investment loans by the banks to 10% annually, though this has its roots in addressing property price rises rather than providing a buffer against non-performing loans Going forward, proposed Basel IV requirements may lift the risk weight for mortgages higher. It is noted that a higher risk weight applied to mortgages could leave the banks with serious capital shortfalls (Frost, 2017). APRA has been proactive in ensuring that the Australian banking system complies with all Basel reforms.

Legislative Instruments

Legislative instruments are orders made by ASIC which apply to a particular class of persons. They were previously known as 'class orders'. ASIC has a power delegated to it by Parliament to make rules, which have the effect of legislation. They can be used to exempt those persons from certain provisions of the Corporations Act, to modify or clarify the operation of certain provisions of that Act, or to make declarations about persons who are subject to a particular provision. Class orders remain in force until they expire or are 'sunsetted' after ten years, are superseded or repealed. Note that Market Integrity Rules are not subject to sunsetting.

Listing Rule 7.1

Listing Rule 7.1 states that a company listed on the ASX, subject to certain exceptions (e.g. a pro rata issue to all shareholders), is restricted to issuing a maximum of 15% of its issued capital in any 12-month period unless it obtains shareholders' approval for the issue. The purpose of this Listing Rule is to provide greater protection to smaller shareholders against dilution of their interests in a company.

Topic learning outcomes

On completing this topic, students should be able to: • examine the main functions and powers of each of Australia's main regulators • explain how ASX monitors market participants and listed entities • explain the self-regulation by industry bodies • describe the main regulators in other countries that are relevant to Australia • explain the roles of the principal international financial regulatory bodies • explain the role of the Basel framework in Australia.

Civil proceedings

Section 50 of the ASIC Act provides that if it appears to ASIC to be in the public interest for a person to begin and carry on a proceeding for: • the recovery of damages for fraud, negligence, default, breach of duty, or other misconduct, committed in connection with a matter to which the investigation or examination related, or • the recovery of property of the person. ASIC may cause such a proceeding to begin and be carried on in the person's name. Where that person is an individual, ASIC must have his or her written consent. In determining whether bringing such an action on behalf of a shareholder is in the 'public interest', ASIC will consider: • the regulatory effect of successfully bringing an action • strength of cause of action and ability to identify plaintiffs and obtain consent to bring proceedings • whether shareholders are able to bring an action • the ability of the defendants to pay the damages sought • the prospects of winning. ASIC has only undertaken a small number of these section 50 actions in its history. ASIC also has power to impose civil penalties in relation to certain provisions of the Corporations Act (known as 'civil penalty provisions'). ASIC may seek declarations of contravention, pecuniary penalty orders and/or compensation orders (section 1317DA to 1317S, Corporations Act). ASIC may take this type of enforcement action where a person has contravened a 'corporation/scheme civil penalty provision' (e.g. breach of duty of officers of a corporation, insolvent trading, breach of continuous disclosure obligations) or a 'financial services civil penalty provision (e.g. market manipulation, insider trading).

Consumer credit

Since 1 July 2010 ASIC has also been the national regulator for consumer credit. Under the National Consumer Credit Protection Act 2009 (rather than the previous state and territory legislation), ASIC regulates products and services such as home loans, personal loans, credit cards, consumer leases, pre-arranged overdrafts and line of credit accounts.

Anti-competitive practices

Some of the anti-competitive practices that are prohibited by the Competition and Consumer Act include: • anti-competitive agreements — for example agreements that substantially lessen competition, market sharing, price fixing • misuse of market power • exclusive dealing • resale price maintenance • some mergers and acquisitions. Unconscionable conduct is also prohibited in commercial transactions.

The role of the ACCC

The ACCC is an independent statutory authority. As the Commission's name suggests, it has two main roles: • Anti-competitive practices — including enforcing prohibited business to business anti-competitive practices (also known as restrictive trade practices). • Consumer protection — including enforcing prohibitions against misleading or deceptive conduct and unconscionable conduct in dealings with consumers. Particular attention has to be paid to this area because it affects virtually every business in Australia and because of the extremely heavy penalties which can be, and have been, imposed for breaches of the law. As ASIC is tasked with consumer protection in the financial services sector, with nearly identical provisions to those in the Competition and Consumer Act in the financial services law, the ACCC generally has a limited role to play. Nonetheless, it may still investigate anti-competitive behaviour in the financial services industry, and regulates debt collection activity in co-operation with ASIC. There are a large number of consumer protection provisions in The Australian Consumer Law (which is Schedule 2 to the Competition and Consumer Act). Two of the most relevant in the present context are the prohibitions on: • Misleading or deceptive conduct — this is conduct which is misleading or deceptive, or which is even likely to mislead or deceive. This kind of conduct includes actions such as misrepresentations, misleading advertising or failing to disclose important relevant information. • Unconscionable conduct — this involves taking advantage of a stronger bargaining position in a harsh or oppressive way. To enforce the consumer protection provisions, the ACCC can take legal proceedings seeking: • injunctions (restraining orders) • damages • adverse publicity orders • corrective advertising. Breaches of some of the consumer protection provisions carry penalties of up to $1.1 million for companies and $220,000 for individuals.

Investigatory powers

The ASIC Act confers on ASIC both general and specific investigative powers (s13, ASIC Act). ASIC has a general power to investigate such matters as it thinks are expedient for the due administration of the Corporations Act where it has reason to believe that the corporations legislation may have been contravened or where the Treasurer considers it is in the public interest to do so. ASIC may also investigate a suspected contravention of any Australian legislation provided it concerns the management or affairs of a company or managed investment scheme, or involves fraud or dishonesty and relates to a company or managed investment scheme or to financial products. ASIC's information gathering powers include the following: • The right to inspect and require the production of books: A book that is required to be kept by the corporations legislation (e.g. register of members or financial records) must be open for inspection by ASIC (section 29, ASIC Act). ASIC can issue a notice requiring the production of certain books (e.g. relating to a company's affairs, financial products or services, section 30 and 31, ASIC Act). Failure to make books available for inspection or to produce books is an offence, which is punishable by a fine of up to $18,000 and/or imprisonment for two years. It is not a reasonable excuse for a person to refuse or fail to make records available on the ground that those records or production of the books might tend to incriminate the person required to produce them or make them liable to a penalty (section 68, ASIC Act). If ASIC suspects on reasonable grounds that books are on certain premises that have not been produced in accordance with a notice to produce them, it can apply to a magistrate to obtain a search warrant to find them (section 35, ASIC Act). The Australian Federal Police, in conjunction with ASIC, can also apply for a search warrant under the federal Crimes Act 1914 in relation to suspected contraventions under the corporations legislation. ASIC is bound to take all reasonable measures to protect from unauthorised use or disclosure, information given to it in the exercise of its functions and powers. However, in certain circumstances, the ASIC chair may authorise the disclosure of such information to government agencies. Section 69 of the ASIC Act entitles a lawyer to refuse to produce a book containing privileged communications made by, on behalf of, or to the lawyer in his or her capacity as a lawyer. The categories of legal professional privilege (LPP) are 'advice privilege' (documents made for the purpose of giving or obtaining legal advice) and litigation privilege (documents made for the provision of legal services in connection with actual or anticipated legal proceedings). A claim for LPP by a lawyer or the privilege holder (i.e. the client) has to be made in writing, describe the privilege claim, and is not absolute; ASIC has a discretion to reject the claim, if it considers LPP is not substantiated by the application, privilege has been waived or if the information would never have attracted LPP. ASIC must then seek a declaration from the court as to whether the LPP claim is legitimate (see ASIC Information Sheet 165). • The right to examine a person: Under section 19 of the ASIC Act, where ASIC suspects or believes on reasonable grounds that a person can give information relevant to a matter under investigation, ASIC can require that person to: - give reasonable assistance to ASIC in connection with an investigation - appear at an examination and answer questions on oath. A person being examined cannot refuse or fail to answer a question on the grounds that the answer may incriminate him or her. However, there are restrictions on ASIC being able to use the answer as evidence in criminal proceedings or proceedings for the imposition of a penalty against that person (section 68, ASIC Act). Examinations take place in private and the person being examined may have legal representation. A failure to attend an examination or answer a question, and the giving of false information, is punishable by a fine of up to $21,000 and/or imprisonment for two years (section 63, ASIC Act). • The power to conduct hearings: In certain circumstances ASIC can conduct hearings. In conducting hearings, which must be within its jurisdiction, ASIC can call on persons to give evidence. ASIC conducts three broad categories of administrative hearings: - licensing hearings - protective hearings - application of security hearings.

Requirements for continued ASX listing

The ASX Listing Rules are more narrowly focused than the Corporations Act. The ASX Listing Rules focus on the obligations of listed companies in relation to the ASX market. The central underlying principle of the ASX Listing Rules is disclosure ensuring that the market that the ASX provides is informed at all times, and that no investor is disadvantaged by a lack of access to material information about an investment decision. Many of the Listing Rules complement provisions of the Corporations Act and/or support shareholder democracy. The matters which must be complied with by entities listed on the ASX on a continuing basis, include: • information must be given to the ASX in a timely manner in order to ensure that the market for a company's securities is fully informed. Listing Rule 3.1 contains the key general disclosure obligation for listed entities. Subject to certain exceptions aimed at protecting some classes of confidential information, a listed company must immediately release to the market any information which a reasonable person would expect to have a material impact on the price or value of its securities • the ASX may require a company to provide information to the market in order to correct or prevent a false market. A false market is a market trading on incorrect or incomplete information, regardless of the source of the information • provision of certain financial reports to the market at regular intervals • procedures to be adopted by listed companies to ensure transactions involving their securities can be settled efficiently • restrictions on the ability of companies to issue new securities in certain circumstances and procedures to be followed when doing so • restrictions on the ability of companies to enter into certain types of transactions, particularly with associated parties • rules regarding voting rights of securities and arrangements with directors • rules relating to the disclosure of directors' interests and transactions in securities of the company • specific reporting requirements for mining companies • matters to be complied with on any reconstruction or alteration of the capital structure (including the buyback of a company's shares) • rules to be complied with when the company is the subject of a takeover offer • rules applicable to a company that is proposing to change the scale or nature of its activities • rules that require entities to provide draft documents to the ASX before they are released to the market (e.g. notices of meetings that contain resolutions pursuant to the Listing Rules, such as for an issue of securities to directors of the entity) • rules regarding employee incentive share schemes • the initial and continuing fees which must be paid to the ASX to gain and maintain admission to the official list and quotation. The ASX has absolute discretion with respect to the admission of an entity to the official list (and its removal) and the quotation of its securities (and their suspension). It also has discretion whether to require compliance with the ASX Listing Rules in a particular case.

ASX structure and operations

The ASX group of companies operates a: • financial market/securities exchange referred to colloquially as the 'Australian stockmarket' — operated by ASX Limited • clearing facility — operated by ASX Clear Pty Limited (ASX Clear) • settlement facility — operated by ASX Settlement Pty Limited (ASX Settlement). To obtain access to ASX's facilities, a financial services provider must be a market participant of ASX and either contract with or be a participant of ASX Clear and ASX Settlement. From 1 August 2010 responsibility for direct supervision of Australian financial markets, including the ASX and ASX 24 (previously SFE) financial markets, was transferred to ASIC. Hence, the supervision of participants which was previously conducted by ASX is now the responsibility of ASIC. ASX remains responsible for monitoring and enforcing compliance with its Operating Rules and oversight of listed entities. The transfer of supervision only related to markets, and not to clearing and settlement facilities.

The role of APRA

The Australian Prudential Regulation Authority (APRA) was established by the federal Australian Prudential Regulation Authority Act 1998 (APRA Act). The purposes for establishing APRA are set out in section 8 of that Act as follows: (1) APRA is established for the purpose of regulating bodies in the financial sector in accordance with other laws of the Commonwealth that provide for prudential regulation or for retirement income standards, and for developing the administrative practices and procedures to be applied in performing that regulatory role. (2) In performing and exercising its functions and powers, APRA is to balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality and, in balancing these objectives, is to promote financial system stability in Australia. APRA is the prudential regulator of the Australian financial services industry, overseeing: • authorised deposit-taking institutions (ADIs) — for example banks, building societies, credit unions • life, general and reinsurance companies • friendly societies • most of the superannuation industry. APRA supervises regulated superannuation funds, other than self-managed superannuation funds (supervised by the Australian Taxation Office) and approved deposit funds and pooled superannuation trusts (regulated under the Superannuation Industry (Supervision) Act 1993). Trans-Tasman cooperation Australian banks have a very large presence in New Zealand and this has led to an unusual provision in the APRA Act (section 8A(1)) which provides that: In performing and exercising its functions and powers, APRA must: (i) support the prescribed New Zealand authorities in meeting their statutory responsibilities relating to prudential regulation and financial system stability in New Zealand; and (ii) to the extent reasonably practicable, avoid any action that is likely to have a detrimental effect on financial system stability in New Zealand. APRA has the power to disqualify an individual from holding prudentially significant roles within the Australian authorised deposit-taking, general insurance and superannuation industries. APRA can also issue directions to organisations, accept enforceable undertakings, seek restraining orders and take criminal actions.

Basel II Framework

The Basel II Capital Framework is a major global reform of capital adequacy requirements for banking systems that seeks to incorporate best practices in risk management into the regulatory process. It took effect in Australia on 1 January 2008 with the release of Prudential Standards in relation to capital adequacy and securitisation that implement the Basel II Framework in Australia. APRA has also issued prudential standards in relation to such matters as: • liquidity • credit quality • large exposures • associations with related entities • outsourcing • business continuity management • audit and related matters • governance • fit and proper persons. The major Australian banks are accredited to use the advanced Basel II approaches. In aggregate, these banks would represent a substantial portion of total ADI assets. The Basel II framework comprises three 'pillars'. Pillar One — (the capital adequacy minimum requirements): This prescribes rules relating to how banks should calculate the minimum capital that they are required to hold for credit, market and operational risks. It provides a range of options to allow banks to select the approaches that are appropriate for their operations and risk profiles. Pillar Two — (the supervisory review process): This describes the accompanying supervisory review of a bank's internal capital adequacy assessment. Pillar Three — (market discipline): This prescribes minimum disclosure requirements to facilitate market discipline.

Cartels

The Competition and Consumer Act prohibits 'cartel provisions' within a contract, arrangement or understanding. A cartel provision is defined to include the following varieties of cartel conduct: • price fixing • output restriction • allocating customers, supplies or territories, and/or bid-rigging. At least two of the persons involved in the agreement must be, or be likely to be, in competition with each other. The Competition and Consumer Act includes a criminal cartel offence as well as a civil cartel prohibition. The ACCC can grant a corporation or an individual immunity from legal proceedings and penalty if the corporation or individual involved in a cartel is the first person to disclose its existence.

New Zealand Exchange Limited

The New Zealand Exchange Limited (NZX Limited) operates five markets: • NZSX — the Stockmarket main board • NXT — small-to-mid cap listings • NZAX — the Alternative Market — designed for small to medium companies and non-standard company structures (e.g. cooperatives). Note: With the launch of the NXT, NZX is no longer accepting listings onto the NZAX • NZDX — the debt market — offers a range of investment securities (e.g. corporate and government bonds) • NZX Derivatives. The NZX is both responsible for the regulation of the markets and is itself a company listed on the markets. It regulates the markets through the Listing Rules and the NZX Participant Rules. Supervision of the NZX itself is undertaken by a Special Division which is empowered to exercise the powers and functions of NZX Regulation in respect of NZX as a listed issuer that NZX Regulation exercises in respect of other issuers listed on NZX's markets.

RBA powers on payment systems

The RBA's powers in relation to clearing and settlement (CS) facility licensees are set out in Part 7.3 of the Corporations Act. Such a licensee must give notice to the RBA as soon as the licensee is aware that it is failing to meet standards or obligations. The RBA may give advice to the Minister about such a matter and the Minister has the power to suspend or cancel a licence. At least once a year, the RBA must do an assessment of how well each CS facility licensee is complying with its obligations. A report on the assessment is given to the Minister and ASIC. The RBA's powers in the payments system are set out in the Payment Systems (Regulation) Act 1998. It may: • 'designate' a particular payment system as being subject to its regulation • determine rules for participation in that system, including rules on access for new participants • set standards for safety and efficiency for that system. These may deal with issues such as technical requirements, procedures, performance benchmarks and pricing • direct participants in a designated payment system to comply with a standard or access regime • arbitrate on disputes in that system over matters relating to access, financial safety, competitiveness and systemic risk, if the parties concerned wish.

Takeovers Panel

The Takeovers Panel (the Panel) describes itself as a 'peer review body that regulates corporate control transactions in widely held Australian entities, primarily by the efficient, effective and speedy resolution of takeover disputes'. It has various roles in the area of mergers and acquisitions, resolving disputes about takeover bids, reviewing ASIC relief decisions, and drafting policy in the form of Guidance Notes for practitioners, companies and investors. The members of the Panel are drawn from active members of the Australia's takeovers and business communities, including bankers, lawyers, accountants and corporate luminaries. A sitting of the Panel hearing an application will involve three Panel members. The Panel is independent of ASIC, despite the connection to it by its founding legislation. Despite the meagre caseload in the decade before 2000, which is considered a 'failure', the CS Panel was not abolished. Amendments were introduced in 2000 to improve the framework for matters going before the CS Panel, under the Corporate Law Economic Reform Program 1999 (CLERP 1999). Part of the changes included making the Panel the main forum for disputes relating to takeover bids (section 659AA of the Corporations Act), and prohibiting litigation in relation to a takeover bid by anyone other than ASIC or a government body (section 659B of the Corporations Act). In comparison, since 2000 the Panel has received approximately 460 applications. The Panel has discretion to decline to hear applications it considers frivolous or inappropriate, and by way of example it conducted proceedings in only 9 of 23 applications in 2016-17, 13 of 20 applications in 2015-16, 5 of 20 applications in 2014-15 and 13 of 26 applications in 2013-14. The Panel's primary role is as the forum for dispute resolution in relation to takeover bids. Persons with standing (e.g. the bidder, the target, ASIC or a shareholder whose rights are affected) can make an application if they believe 'unacceptable circumstances' exist and seek a declaration to this effect. 2) The Panel may only declare circumstances to be unacceptable circumstances if it appears to the Panel that the circumstances: (a) are unacceptable having regard to the effect of the circumstances on: (i) the control, or potential control, of the company or another company; or (ii) the acquisition, or proposed acquisition, by person of a substantial interest in the company or another company; or (b) are unacceptable because they constitute, or give rise to, a contravention of a provision of this Chapter or of Chapter 6A, 6B or 6C.

US Federal Reserve

The United States has a dual banking system. There are state chartered banks which operate under state laws and are supervised by state banking authorities. Other banks are part of the Federal Reserve system, which consists of a Board of Governors in Washington, DC, and 12 regional Reserve Banks. The principal responsibilities of the Board of Governors are the formulation of monetary policy and regulation of banks that are part of the Federal Reserve system. The Board of Governors' decisions on monetary policy in the United States have a 'ripple' effect on financial systems around the world.

ASX enforcement action

The current enforcement process for ASX markets and CS facilities is set out in the ASX Enforcement and Appeals Rulebook (ASX, 2015). The previous processes were modified as of the date of the transfer of supervision to ASIC (1 August 2010), and the ASX maintains the 'Australian Securities Exchange Disciplinary Processes and Appeals Rulebook' for the purposes of pre-August 2010 misconduct (ASX, 2010). An act done by a person (i.e. an officer, employee or agent) on behalf of a market participant that is a breach of the Rules or is prohibited conduct is deemed to be done by the market participant. Sanctions which may be imposed by ASX on a participant or other regulated person ('relevant person') include any one or more of the following: • a censure • a fine not exceeding $250,000 (for breaches of the ASX and ASX 24 Operating Rules) or $1,000,000 (for breaches of other rules) • prohibit the relevant person from trading for up to three months • require the relevant person to institute or upgrade an education and compliance program • where the contravention arose from the conduct of a particular individual involved in the business of the market participant, direct that the market participant is to cease to permit that individual to remain involved, or direct that the market participant change the individual's role in the business in some way. Prior to taking enforcement action, ASX will issue a Submission Notice to the relevant person, setting out the circumstances giving rise to the alleged breach and factors in assessing the proposed sanction and giving the relevant person the opportunity to respond by written submissions. If ASX decides to take enforcement action it will do so by issuing an Alleged Minor Infringement Notice (for minor breaches) or an Enforcement Notice (for other breaches). The Notice will set out the grounds for the contravention and sanction. Appeals to an Appeal Tribunal can be made in a range of matters including where a relevant person is dissatisfied with a determination of ASX to issue an Enforcement Notice or any sanction imposed in the Enforcement Notice, or a decision taken by the ASX to suspend or terminate the admission of a market participant. Apart from the ability of the ASX to enforce its Operating Rules using the enforcement procedures described above, section 793C of the Corporations Act is also relevant to this issue. Where any person who is under an obligation to comply with the ASX Operating Rules fails to do so, the court may give directions about compliance with, or enforcement of, the ASX Operating Rules. This may be done on application by ASIC, the ASX or a person aggrieved by the failure to comply.

Listing Rules 10.11 and 10.14

These Listing Rules prevent the issue of securities to directors and related parties of the company without shareholder approval. Their purpose is to protect security holders' interests by preventing a related party from obtaining securities on advantageous terms and increasing their holding proportionate to other holdings. These Rules supplement the related-party provisions of the Corporations Act. Listing Rule 10.11 contains the general prohibition relating to issues of securities to related parties. Listing Rule 10.14 prevents related parties from acquiring securities under a company's employee incentive scheme.

Listing Rules 11.1 and 11.2

These Listing Rules require an entity to seek shareholder approval if the entity is proposing to make a significant change in the scale or nature of its activities or is proposing to dispose of its main business. In some instances where the nature of the change is so great that, in essence, the entity will be a different entity after the change, the entity will be required to comply with the ASX admission requirements as if the entity had not been listed on the ASX. If a contemplated change of activities would have the effect of fundamentally changing a shareholder's investment in the company, it is considered reasonable that shareholders should have an opportunity to have their say regarding the proposed change. For example, if a company contemplates changing from a mining exploration company to an internet research company, the shareholders are entitled to know and have a say in such a decision.

APRA enforcement powers

These powers include: • instigate investigations and appoint inspectors • disqualify persons and organisations from participating in management • issue directions • accept enforceable undertakings • commence criminal legal proceedings • seek injunctions.

Listing Rule 10.17

This Listing Rule prohibits an entity from increasing the total amount of directors' fees payable without shareholder approval. In doing so, it enables security holders to review and approve proposed increases in board remuneration. However, Listing Rule 10.17 does not apply to the salary of an executive director.

Injunctions

Under section 1323 of the Corporations Act, ASIC (and other aggrieved persons) can seek an injunction preventing the person against which ASIC has commenced an investigation or against which a prosecution or civil proceeding has commenced from disposing of or transferring assets. Aggrieved persons can also exercise this power themselves. ASIC may also seek injunctions against a person associated with a matter under investigation, where ASIC considers their assets are in some way connected to the misconduct. Similarly, ASIC, or a person whose interest have been, are or would be affected by the conduct, may seek an injunction under section 1324 to prevent a person from continuing to engage or proposing to engage in conduct that constituted, constitutes or would constitute a contravention of the Corporations Act.

ASIC

We regulate Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit. As the consumer credit regulator, we license and regulate people and businesses engaging in consumer credit activities (including banks, credit unions, finance companies, and mortgage and finance brokers). We ensure that licensees meet the standards — including their responsibilities to consumers — that are set out in the National Consumer Credit Protection Act 2009. As the markets regulator, we assess how effectively authorised financial markets are complying with their legal obligations to operate fair, orderly and transparent markets. We also advise the Minister about authorising new markets. On 1 August 2010, we assumed responsibility for the supervision of trading on Australia's domestic licensed equity, derivatives and futures markets. As the financial services regulator, we license and monitor financial services businesses to ensure that they operate efficiently, honestly and fairly. These businesses typically deal in superannuation, managed funds, shares and company securities, derivatives, and insurance.

Consequences of breaching Listing Rules

When a listed entity breaches the ASX Listing Rules, it is open to the ASX to suspend official quotation of the securities or, in the case of a breach of a fundamental matter going to the heart of the question of the suitability of the entity to be listed, to remove the entity from the official list. More often than not, where the ASX believes that there has been a serious contravention or a possible contravention of the ASX Listing Rules or the Corporations Act, the ASX may refer a matter to ASIC for further investigation. ASIC may pursue a variety of remedies in such cases, including possible civil or criminal action, by referral to the Director of Public Prosecutions. Alternatively, it is open to the ASX to take court action itself to enforce the ASX Listing Rules. As with the ASX Market Rules, sections 793C and 1101B of the Corporations Act enable the courts to order compliance with the ASX Listing Rules. However, it must be stressed that the ASX has an absolute discretion with respect to administration of its Listing Rules and is under no legal obligation to take court action. It follows that the ASX may take action under sections 793C or 1101B against a listed company in order to enforce compliance with the ASX Listing Rules — but is under no obligation to do so. Under these sections, action can also be commenced by ASIC or a person aggrieved for an order that the listed company comply with the ASX Listing Rules.

Self-regulation in the financial services industry

code of ethics tends to be a positive and affirming set of broad values and principles that provides the basis for ethical decision-making and conduct. It may be explained as both a 'liberating' and an affirming document with a focus on aspirations. However, sometimes it is expressed as more than just aspirations. Such a code permits those who are subject to its contents to identify the fundamental motivating ideas that underscore good action and right decisions. Importantly, such a code in the financial services industry should be understood against a context of understanding individual discretion and judgment as constant and continuing elements in both individual and corporate decision-making and commitments. A code of conduct is usually more specific and prescriptive in detailing areas of unacceptable conduct and often explains the implications of non-compliance. It can include an enforcement strategy and a disciplinary process for instances of breaches of the code