Australia has vibrant, professional and well-regulated capital markets that are increasingly open to foreign issuers.2 Australia ranked fifth in the world’s leading financial systems and capital markets in the 2012 Financial Development Report published by the World Economic Forum.3
The recent ‘Why Australia: Benchmark Report 2019’ from the Australian Trade Commission indicates that Australia’s capital markets comprise, inter alia:
- the third-largest stock market, by market capitalisation of freely floating stocks, in the Asian region, and the ninth-largest globally;
- the third-largest debt capital market in the Asian region; and
- the fourth-largest superannuation (retirement savings) industry in the world.4
i Structure and regulation
Australia is a federation with three different levels of government: commonwealth (or federal), state and territory, and local (or municipal). As a general rule, commonwealth legislation governs access to, and the operation and supervision of, Australia’s capital markets. Under the Constitution, the commonwealth has power to legislate in relation to, among other matters, corporations, interstate and international trade and commerce, taxation, banking and insurance. Australia has an independent judicial system that reflects the constitutional division of powers between the commonwealth government and the state and territory governments.
The broad framework for the regulation of the financial sector, including capital markets, is determined by the commonwealth government. The issuance and trading of debt and equity securities, derivatives, securitisation and other financial products is primarily governed by Chapters 6D and 7 of the Corporations Act 2001 of Australia (Corporations Act) (which applies throughout the country), as well as by the common law and principles of equity.
Under the Corporations Act, the term financial product is defined in general terms, and there are specific inclusions and exclusions. Broadly, a financial product is any facility through which a person makes a financial investment, manages financial risk or makes non-cash payments, even if the facility is used for some other purpose. The specific inclusions illustrate the wide scope of the concept, and include equity and debt securities, interests in managed investment schemes (i.e., unit trusts and other collective investments), derivatives, foreign exchange contracts, most insurance contracts, most superannuation (retirement savings) products, most deposit-taking facilities provided by Australian banks and other authorised deposit-taking institutions (ADIs), and government debenture and bond issues. The specific exclusions are generally products that are more suitably regulated under some other regime (such as credit facilities and payment systems).
Australia’s framework for the regulation of the financial sector and the issuance of financial products is based on three separate agencies operating on functional lines. These regulatory bodies have primary responsibility for maintaining the safety and soundness of markets and regulated institutions, protecting consumers and promoting systemic stability through implementing and administering the applicable regulatory regimes. Specifically:
- the Australian Securities and Investments Commission (ASIC) is the corporate, markets and financial services regulator responsible for market conduct and investor protection;
- the Australian Prudential Regulation Authority (APRA) is responsible for the prudential regulation and supervision of banks and other ADIs, life and general insurance companies, and most participants in the superannuation industry; and
- the Reserve Bank of Australia (RBA) is responsible for monetary policy, overseeing financial system stability and the payments system.
The Council of Financial Regulators (CFR) is the coordinating body for Australia’s main financial regulatory agencies. It is a non-statutory body whose role is to contribute to the efficiency and effectiveness of financial regulation, to promote the stability of the Australian financial system and to advise the commonwealth government on the adequacy of Australia’s financial regulatory arrangements. Its membership comprises the RBA (which chairs the CFR), APRA, ASIC and the Commonwealth Treasury.
In addition, the Australian Competition and Consumer Commission (ACCC) is responsible for competition policy, with a mandate that extends across the entire economy, including the financial services sector.
The vibrancy of Australia’s capital markets is underpinned by:
- a history, since the mid 1980s, of legislative reform promoting growth and investment;
- a relatively low level of issuance of traditional government and semi-government fixed-interest securities (owing to budget surpluses), although the volume of issuance has increased in recent years;
- an increasing demand by investors for a wide range of financial products (because of, in part, increased savings as a result of Australia’s compulsory superannuation system);
- a highly educated, skilled, multilingual and computer-literate labour market, particularly in the financial sector;
- a strategic location in the Asia-Pacific region; and
- increasing integration with global capital markets.
In addition to participating in the domestic capital markets, the commonwealth, state and territory governments, semi-government authorities and companies have regularly issued securities and other financial products in international capital markets and the domestic capital markets of a number of foreign countries (most commonly, the United Kingdom, the United States and Japan).
ii Prudential regulation and supervision
APRA’s core mission is to establish and enforce prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by the institutions APRA supervises are met within a stable, efficient and competitive financial system. The framework for prudential regulation includes requirements regarding capital adequacy, credit risk, market risk, covered bonds, securitisation, liquidity, credit quality, large exposures, associations with related entities, outsourcing, business continuity management, risk management of credit card activities, audit and related arrangements for prudential reporting, governance, and fit and proper management.6
In the prudential standards for ADIs, APRA formally introduced the Basel III definition of regulatory capital, the minimum requirements for the different tiers of capital and stricter eligibility criteria for capital instruments with effect from 1 January 2013. In some instances, similar requirements have been introduced for life and general insurance companies.
There are three main elements in APRA’s approach to the Basel III capital reforms, as follows:
- the Basel III definition of regulatory capital, the Basel III minimum requirements and eligibility criteria for regulatory capital instruments, and the Basel III regulatory adjustments to capital each specify minimum requirements, with only minor exceptions;
- for in-principle reasons, APRA did not adopt the concessional treatment available for certain items in calculating regulatory capital, a discretion that was available under the Basel III reforms. These items are deferred tax assets relating to temporary (timing) differences, significant investments in the common shares of non-consolidated financial institutions and mortgage servicing rights. APRA has never recognised these items in calculating regulatory capital, and in APRA’s view, to do so would not be consistent with the objective of raising the quality and quantity of regulatory capital in Australia; and
- APRA has adopted an accelerated Basel III timetable in some areas.
The chair of APRA has commented that APRA’s approach to the Basel III capital reforms ‘reflects its firmly held view that conservatism has served Australia well before and during the crisis, that the milestones are not demanding, and that the impact of higher capital requirements on the overall funding costs of ADIs is likely to be small’.7
On 1 January 2015, a liquidity coverage ratio (LCR) regime commenced, consistent with the Basel III liquidity framework. ADIs subject to the LCR8 must at all times be able to demonstrate their ability to withstand a minimum of 30 days of severe liquidity stress. ADIs subject to the LCR are able to apply for a committed liquidity facility (CLF) made available by the RBA. The CLF is sufficient in size to cover any shortfall between ADIs’ holdings of high-quality liquid assets (presently limited to commonwealth and state government securities) and the requirement to hold such assets under the LCR.
Capital conservation and countercyclical buffers for ADIs were introduced on 1 January 2016. ADIs are now required to meet a minimum common equity capital requirement of 7 per cent of risk-weighted assets, including the capital conservation buffer. Dividends and other discretionary payments will be constrained if levels of common equity capital fall below that percentage. The countercyclical buffer will be deployed by APRA in periods when excess aggregate credit growth is adjudged to be associated with a build-up of system-wide risk to ensure the banking system has a buffer of capital to protect it against future potential losses. As at January 2019, the countercyclical buffer has remained unchanged at zero per cent since its introduction.9 However, it may be varied over time between zero and 2.5 per cent depending on market conditions.
APRA has also developed a framework for dealing with domestic systemically important banks, which came into effect on 1 January 2016. Its work on capital strength, liquidity management, securitisation, resolution planning, conglomerate groups and shadow banking is ongoing.
iii Access, authorisation and licensing
An Australian entity is not required to obtain any general government authorisations or consents prior to issuing securities in Australia. In most cases, the only authorisations and consents required are those prescribed by the issuer’s constitutional documents or governing statute.
Foreign companies are also not subject to any direct government controls in issuing securities in Australia10 and, since April 1991, foreign governments, their agencies and international organisations have also been permitted to raise funds in the Australian domestic debt capital markets, subject to some limited restrictions (e.g., the debt securities must be in registered, not bearer, form). However, the issuance of other types of financial products, and the trading of both securities and other financial products, may require the issuer or trader to hold an Australian financial services licence (AFSL) from ASIC under Chapter 7 of the Corporations Act (or be exempt from the requirement to do so).
A person who carries on a financial services business in Australia (including a person who engages in conduct that is intended, or likely, to induce people in Australia to use his or her financial services)11 is required to hold an AFSL (or be exempt from the requirement to do so). A person provides a financial service if he or she engages in certain activities, in particular:
- providing financial product advice;
- issuing or otherwise dealing in a financial product;
- making a market for a financial product;
- operating a registered managed investment scheme; or
- providing a custodial or depository service (i.e., holding financial products on behalf of others).12
Although numerous exemptions are available for particular financial services or financial products (e.g., an entity issuing its own securities, or the acquisition and disposal of a financial product if a party is dealing on its own behalf provided that it is not the issuer of that financial product),13 there are few exemptions of general application. ASIC currently provides a number of limited class order exemptions for certain regulated foreign financial institutions that operate in foreign jurisdictions that have a similar level of investor protection to Australia.14 However, such relief is due to expire on 31 March 2020, and ASIC is consulting on a new licensing framework for foreign financial service providers with wholesale clients in Australia and a proposal to replace its limited connection exemption with a new funds management exemption for a limited range of funds management or portfolio management services.15
APRA has clarified its policy expectations with respect to business conducted in Australia, or with Australian customers, by foreign banks that are not authorised to carry on banking business in Australia as a foreign ADI (i.e., through a local branch).16 APRA generally takes the position that foreign banks soliciting and operating an active business in Australia should be subject to Australian prudential regulation and supervision, regardless of where the business is booked. However, APRA does not object to a foreign bank conducting limited business with Australian counterparties from its offshore offices, provided certain conditions are satisfied.
There is no requirement that financial products issued in Australia be governed by Australian law, although investors are generally more familiar with Australian law, and there may be investment restrictions precluding a particular investor from purchasing financial products governed by foreign law. In certain cases, there is an expectation that financial products will be governed by Australian law – for example, issues of many financial products to retail clients (see below) and the issue of debt securities in the kangaroo bond market.17
Securities issued by Australian financial institutions that are intended to qualify as regulatory capital are required to have provisions relevant to loss absorption governed by Australian law.18
A person who undertakes the business of providing financial product advice (e.g., recommending the purchase of securities) requires a licence.19 Since 1 July 2013, advisers have been subject to a duty for financial advisers to act in the best interests of their clients (subject to a reasonable steps qualification) and place the best interests of their clients ahead of their own when providing personal advice to retail clients; and a ban on conflicted remuneration structures (including commissions and volume-based payments) in relation to the distribution of, and advice about, a range of retail investment products. 20
An institution that wishes to conduct banking business must be granted an ADI licence by APRA prior to conducting business as an ADI. As at 31 March 2019, there were 145 ADIs operating in Australia.21 Australian ADIs are major issuers in the domestic and international capital markets, with APRA’s July 2019 statistics showing nearly A$1 trillion in combined total short-term and long-term borrowings for selected ADIs.22 In May 2018, APRA announced a new restricted ADI framework. The framework allows eligible entities to seek a restricted ADI licence to conduct a limited range of business activities for two years while they build their capabilities. It establishes the eligibility criteria, minimum initial and continuing requirements, and the application of the prudential and reporting standards during the restricted phase of operation.23
In March 2018, the Treasury Laws Amendment (Banking Measures No. 1) Bill 2017 was passed into law to further regulate non-ADI lenders, including non-ADI mortgage originators.24 The new law extends APRA’s powers to allow APRA to make rules and issue directions relating to the lending activities of non-ADI lenders where it has identified material risks of instability in the Australian financial system. Directions, powers and penalties will also be introduced for non-ADI lenders who contravene a direction from APRA. This will give APRA further control over entities that provide finance in Australia but that are not considered to be conducting banking business under the Banking Act 1959 as they do not take deposits. However, these powers do not extend to the continuing prudential regulation and supervision of non-ADI lenders that APRA currently has over ADIs. The new law also requires certain non-ADI lenders to register under the Financial Sector (Collection of Data) Act 2001 to allow APRA to gain access to their lending data.
iv Offers of securities and other financial products
Offers for the issue and (in certain cases) the sale or purchase of equity and debt securities25 in Australia are regulated by Part 6D.2 of the Corporations Act, whereas the issue of other financial products is regulated by Part 7.9 of the Corporations Act. The provisions of the Corporations Act relating to offers of securities, and other financial products for issue or sale, do not apply to offers received outside Australia.26
As a general matter, a person must not offer or invite applications for the issue, sale or purchase of securities in Australia (including an offer or invitation that is received by a person in Australia) unless a prospectus or other disclosure document that complies with the form and content requirements of the Corporations Act has been lodged with ASIC. A similar requirement in relation to the lodgement with ASIC of a product disclosure statement (PDS) is set out in Part 7.9 of the Corporations Act in relation to offers for the issue and (in certain cases) the sale or purchase of other financial products.
The basic regulatory approach is based on disclosure. There is no general requirement for a prospectus, PDS or other disclosure document to be vetted or reviewed by ASIC or any other regulator before lodgement and publication. However, ASIC has signalled that there should be a shift away from overreliance on disclosure for consumer protection with the introduction of ASIC’s product intervention powers to target consumer detriment for financial and credit products.27
At a high level, a prospectus or other disclosure document in relation to securities must contain all information that investors and their professional advisers would reasonably require to make an informed assessment of specific matters, including the rights and liabilities attaching to the securities offered, and the assets and liabilities, financial position and performance, profits and losses, and prospects of the issuer.28
The information must be presented in a clear, concise and effective manner. Similar requirements apply to a PDS or other disclosure document in relation to other financial products, although the precise content requirements vary depending on the financial product. ASIC has published regulatory guidance concerning the main disclosure requirements of Chapter 6D of the Corporations Act, including:
- how to word and present a prospectus in a clear, concise and effective manner, including guidance on communication tools and the use of an investment overview to highlight key information;
- the content required to satisfy the general disclosure test of the Corporations Act, as well as guidance on business models, risks, financial information and management; and
- the specific disclosure required by the Corporations Act, including details of the offer and the interests of persons involved in the offer.29
Simple corporate bonds
The Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 significantly changed the legal processes, documentation and liability for simple corporate bonds offered by an Australian listed company to retail investors. This Act was a welcomed development to assist the development of the retail corporate bond market in Australia.30
Essentially, the legislation removed an anomaly in the previous law that required a full prospectus, satisfying equity disclosure standards, for a retail offer of simple corporate bonds by a listed company. Previously, an Australian listed company could issue additional equity to its shareholders with an investor presentation and a ‘cleansing statement’ released on the Australian Securities Exchange (ASX), or raise debt from the wholesale market with a simple offering memorandum and term sheet. Accordingly, the reform aimed to reduce the disparity between requirements for retail debt offers, retail rights issues of additional equity and wholesale debt offers. The key changes are as follows:
- defining the debt securities that qualify as simple corporate bonds;31
- the introduction of a streamlined two-part disclosure regime for offers of simple corporate bonds (a base prospectus with a life of up to three years and a short form offer specific prospectus). The content requirements for a prospectus for a simple corporate bond are set out in regulations;32
- the removal of deemed civil liability for a director of a company making an offer under the prospectus (underwriters and others named in a prospectus, and anyone involved in a contravention, remain subject to the deemed liability); and
- changes to the criminal liability for misleading and deceptive statements in relation to a prospectus.
The first issue of a simple corporate bond took place in November 2015 by Australian Unity, and the second in June 2016 by Peet Limited. In April 2017, Villa World Limited became the third company to offer a listed simple corporate bond in Australia. In June 2017, Peet Limited issued another round of simple corporate bonds. In July 2018, Axsesstoday Ltd became the fourth company to successfully launch a simple corporate bond offer in Australia. However, the company was subsequently placed into administration in April 2019.
There remain many other commercial and market forces that need to align for the Australian domestic retail corporate bond market to develop significantly. These include the linking of the retail and corporate trading platforms, the comparative costs of accessing the wholesale and retail markets and further education for investors about this asset class.
Exempt wholesale offers
The requirement to issue a prospectus or other disclosure document for an offer of securities does not apply where the relevant securities are issued for a consideration of at least A$500,000 per offeree (disregarding amounts lent by the offeror and its associates). In addition, a prospectus or other disclosure document is not required if potential subscribers and buyers are restricted to professional investors (as defined in the Corporations Act)33 or the requirements of another exemption are satisfied,34 allowing an issue for a lesser consideration to occur without disclosure in accordance with the Corporations Act. Similar restrictions can apply to the offering of securities for sale or purchase in the secondary market in certain cases.
Regarding other financial products, similar (but subtly different) exemptions apply: the requirement to issue a PDS or other disclosure document only applies to an offer to a retail client (defined as a person who is not a wholesale client). In summary, a person is a wholesale client if at least one of the following four tests applies (all other persons are retail clients):
- the consideration payable for the product is at least A$500,000;
- the product is provided in connection with a business that is not a small business (this normally means at least 20 employees);
- the client’s net assets are at least A$2.5 million, or income for each of the past two years is at least A$250,000; or
- the client is a professional investor.
The vast majority of offers of debt securities and other financial products by foreign issuers or offerors are structured so as not to require the issue of a prospectus, PDS or other disclosure document in compliance with the form and content requirements of either Part 6D.2 or 7.9 of the Corporations Act.
A person must not offer securities or other financial products under a prospectus, PDS or other disclosure document that is misleading or deceptive, or omits material required to be included by either Part 6D.2 or 7.9 of the Corporations Act. Those who may be liable include the issuer, directors of the issuer, other persons named in the disclosure document and persons otherwise involved in the contravention of the disclosure requirements. There is a range of defences to liability for a disclosure document; these are broadly based on the concepts of reasonable enquiry and reasonable reliance (i.e., due diligence defences).35
Irrespective of whether the offering of securities or other financial products requires disclosure to investors in accordance with either Part 6D.2 or 7.9 of the Corporations Act, an issuer or offeror may incur liability under various provisions that prohibit:
- offering financial products under a document that contains a misleading or deceptive statement, or a statement likely to mislead or deceive;
- creating an artificial price for trading in financial products on a financial market operated in Australia;
- creating a false or misleading appearance about the market or price for financial products;
- spreading misleading or false information;
- otherwise engaging in misleading or deceptive conduct, or conduct that is likely to mislead or deceive (including by omission and, in certain circumstances, by remaining silent); or
- conduct that is unconscionable.36
In general terms, these prohibitions are unlikely to impose any greater restrictions on an issuer or offeror than would be encountered in many segments of the international capital markets.
Debentures and embedded derivatives
As noted above, offers for the issue of debt securities (i.e., debentures) in Australia are regulated by Part 6D.2 of the Corporations Act, whereas the issue of derivatives is regulated by Part 7.9 of the Corporations Act. Where structured notes are offered, in light of two decisions of the Federal Court of Australia, consideration needs to be given as to whether the note is properly classified as a debenture or a derivative, as this may affect who is licensed to distribute or invest in the note and other duties in respect of the offer.
In the first decision,37 the Court found that certain complex collateralised debt obligations were properly characterised as ‘undertaking[s] by the [issuer] to repay as a debt money deposited with or lent to the [issuer]’ (i.e., they could have been debentures (although they were not in the particular facts of the case)). In the second decision,38 the Court found that certain constant proportion debt obligations (CPDOs) in the form of notes were derivatives. It is difficult to reconcile aspects of the reasoning applied in the two decisions.
Liability of rating agencies
The second Federal Court decision mentioned above is also notable for the finding that Standard and Poor’s (S&P) was liable for misleading and deceptive conduct, and negligence, by assigning an AAA rating to the CPDOs. The Court held that the rating conveyed the representation that S&P had reached this opinion based on reasonable grounds and as a result of an exercise of reasonable care. In this case, the representation was misleading and there was a breach of the duty to take reasonable care.
v Some other features of Australia’s capital markets39
The ASX was created through the merger of the Australian Stock Exchange and the Sydney Futures Exchange, and is operated by ASX Limited. Previously, the ASX was in charge of supervising and enforcing all market and trading rules in respect of its markets. However, ASIC has now assumed the supervision of trading activities by market participants.
All listed entities must prepare and lodge an annual audited financial report, and an audited or audit-reviewed half-year financial report, complying with Australian accounting standards (which are based on International Financial Reporting Standards). Listed entities must also describe their corporate governance practices in detail in their annual reports. In addition, listed entities and the responsible entities of listed managed investment schemes must comply with the continuous disclosure requirements of the Corporations Act and the ASX Listing Rules,40 and must immediately disclose (via announcements made to the ASX) any information concerning itself that a reasonable person would expect to have a material effect on the price or value of its securities.41
Chi-X Australia Pty Ltd (Chi-X) has, since November 2011, operated as an alternative securities exchange, boosting competition in Australia’s financial markets.42 Chi-X has ASIC approval to trade in all S&P/ASX 200 component stocks and ASX-listed exchange traded funds. However, it operates only as an execution forum through which securities quoted on the ASX can be traded.
Many Australian financial institutions and corporates raise finance in capital markets by way of hybrid securities, being securities that combine elements of both debt securities and equity securities. The current market for such securities is dominated by financial institution issuers offering regulatory capital meeting APRA’s prudential standards with Additional Tier 1 (AT1) capital being issued principally in the retail market and Tier 2 capital principally in the wholesale market. Australia’s taxation system has made AT1 securities attractive to retail investors, as the securities are generally traded as equity for tax purposes and distributions carry an imputation credit that may be offset against other income. Some AT1 securities have distributions carrying an imputation credit while also giving rise to a deduction against the issuer’s income outside Australia.
In December 2016, the Board of Taxation released a report following its review of the application of hybrid mismatch rules to regulatory capital in Australia.43 The Board of Taxation recommended a change in the law to facilitate treatment of AT1 capital instruments as debt for tax purposes. This would have made the securities more attractive to wholesale investors, but it was not taken up. In August 2018, the Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Bill 2018 was passed to implement the OECD hybrid mismatch rules by preventing entities that are liable to income tax in Australia from being able to avoid paying income tax by exploiting differences between the tax treatment of entities and instruments in difference countries. The new law denies imputation benefits on franked distributions made by a corporate tax entity that give rise to a foreign income tax deduction. The measures will apply to returns on AT1 instruments paid on or after 1 January 2019. Transitional rules apply to AT1 capital instruments issued by ADIs, general insurance companies and life insurance companies before 9 May 2017.
Reporting, clearing and execution of derivatives
On 6 December 2012, the commonwealth government passed amendments to the Corporations Act under which regulations may be prescribed to designate one or more of the following as mandatory obligations: the reporting of over-the-counter (OTC) derivatives to trade repositories; the clearing of standardised OTC derivatives through central counterparties; and the execution of standardised OTC derivatives on exchanges or electronic trading platforms.
On 9 July 2013, ASIC published the Derivative Transaction Rules (Reporting) 2013 and the Derivative Trade Repository Rules 2013. These rules establish which entities are required to report, what information is required to be reported to trade repositories, when the reporting obligation commences for each class of reporting entities and type of instrument, and the conditions for electronic databases of records of derivative transactions. The rules also regulate the manner in which repositories provide their services and ASIC’s approach to regulation of overseas-based repositories. ASIC has granted various forms of relief from the application of the rules for specified periods of time.44 From September 2015, single-sided reporting is permitted for entities with low levels of OTC derivative transactions, provided that their counterparty is already required to or has agreed to report.45
Following extensive consultation, the Commonwealth Treasury implemented a mandatory central clearing obligation for OTC interest rate derivatives denominated in Australian dollars and G4 currencies (US dollars, euros, British pounds and Japanese yen), with effect from December 2015.46
To assist with reporting requirements, and following extensive market consultation, the ASX has established a domestic central clearing solution for participants in the Australian OTC market. In many cases, Australian institutions are finding they have to comply with international derivative regulatory requirements without any local market infrastructure to help. The ASX’s OTC clearing service is intended to fill part of this gap, in Australia’s time zone, in Australia’s currency, in Australia’s legal system and with collateral held in Australia. On 13 January 2014, the ASX formally lodged the final form of the Operating Rules with ASIC. The ASX launched the OTC Interest Rate Derivatives Clearing Service on 1 July 2013 for dealer activity, and the Australian Client Clearing Service was launched on 7 April 2014. In mid-2017, ASX commenced use of application programming interface technology for automation of the clearing take-up process and to facilitate pre-clearing client limit checks.
End users do not have to comply with the reporting requirements under the derivative transaction rules.47 An end user is a person who is not an Australian ADI, a clearing and settlement facility licensee, an Australian financial services licensee, or a person who provides financial services relating to derivatives to wholesale clients only and whose activities relating to derivatives are regulated by an overseas regulatory authority.48
Margin and collateral requirements
With effect from 1 June 2016, the Financial System Legislation Amendment (Resilience and Collateral Protection) Act 2016 has strengthened the enforceability of certain financial collateral arrangements and removed restrictions on certain Australian institutions from providing margins to clearing systems.
Non-centrally cleared derivatives: margin requirements
Prudential Standard CPS 226: Margining and risk mitigation for non-centrally cleared derivatives commenced on 1 March 2017. Potentially, it affects certain APRA-regulated entities that transact in non-centrally cleared derivatives. Among other things, CPS 226 requires an APRA-covered entity to have appropriate margining practices in relation to non-centrally cleared derivatives, and to apply risk mitigation practices (such as trading relationship documentation, trade confirmation, valuation processes and dispute resolution processes). Margin requirements apply from differing periods from 1 March 2017 onwards, depending on an entity’s qualifying level under CPS 226.
Financial claims scheme and wholesale funding guarantee
As part of its response to the global financial crisis, the commonwealth government established both the Financial Claims Scheme (FCS) and the Australian Government Guarantee Scheme for Large Deposits and Wholesale Funding.49
The FCS was amended in February 2012 and is now capped at A$250,000 per person per institution. The FCS is designed to protect depositors by providing them with timely access to their deposits in the event that their ADI becomes insolvent, and APRA has promulgated a prudential standard that requires locally incorporated ADIs to establish a ‘single customer view’ for balances in accounts protected under the FCS.50 This cap is estimated to protect in full the savings held in around 99 per cent of Australian deposit accounts.
A claim on the FCS would be met from commonwealth revenue. There is no compensation fund, and plans to establish one have been rejected by the commonwealth.51
The Australian capital markets have high expectations of corporate governance, which continues to evolve.
Directors’ duties are prescribed by legislation, in particular the Corporations Act, and an extensive body of case law (common law). Directors are fiduciaries and owe stringent duties:
- to act honestly;
- to exercise care and diligence;
- to act in good faith in the best interests of a company and for a proper purpose;
- not to improperly use their position or company information; and
- to disclose their material personal interests and avoid conflicts of interest.
Directors have duties regarding financial and other reporting and disclosure, and can be liable under various laws, including for breaches of fundraising, anti-money laundering, environmental, competition and consumer, privacy, and occupational health and safety laws.
Some defences are available to directors, including under a limited business judgment rule in certain circumstances, for reliance on good faith after making an independent assessment and for appropriate delegation. In recent years, there has been a series of important court judgments on directors’ and officers’ duties, including the following:
- Fortescue Metals Group: the continuous disclosure requirements of the Corporations Act and the ASX Listing Rules, and the availability of the defence for a director that all steps were undertaken that were reasonable in the circumstances to ensure that the company complied with its obligations and that the director believed on reasonable grounds that the company was complying;52
- Centro Properties Group and Centro Retail Group: breaches by directors and officers of their duties in connection with deficiencies in annual financial reports, notwithstanding a finding by the Federal Court of Australia that these persons had acted honestly, had not intended to harm the company and had not benefited in any way in inadequately overseeing the financial reports;53
- James Hardie Industries: directors’ duties of diligence and care in approving ASX announcements;54 and
- Cassimatis: an argument that there can be no breach of directors’ duties if the directors are the sole shareholders and the company is solvent was rejected by the Court.55
These proceedings have prompted considerable academic and public debate as to whether there is a case for law reform in relation to the extent of the duties of directors and officers, and the defences available to them, particularly where a director or officer has made a business judgement in good faith for a proper purpose. In addition to the liabilities imposed by the Corporations Act, a wide range of commonwealth, state and territory statutes impose personal criminal or civil liability, or both, on directors and officers for the actions of their companies. On 11 December 2012, the Personal Liability for Corporate Fault Reform Act 2012 of Australia (Reform Act) commenced operation. The Reform Act is intended to harmonise the approach of all Australian jurisdictions to personal criminal liability for corporate fault, and was a direct response by the commonwealth to fulfil commitments under the Council of Australian Governments’ directors’ liability reform project.56 The Reform Act removes certain regulatory burdens on directors and officers for corporate fault where such burdens cannot be justified on public policy grounds. For example, it removes personal criminal liability for corporate fault unless a person is dishonestly involved in the relevant contravention and removes the burden of proof on defendants to establish a defence to a charge.57
The Competition and Consumer Act 2010 is the primary competition and consumer protection legislation in force in Australia.58 The Act is similar to North American and European competition laws, and is administered by the ACCC. The ACCC has an active enforcement policy that may affect capital markets transactions in certain circumstances.
The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 established an anti-money laundering regime that is administered by the Australian Transaction Reports and Analysis Centre. The regime covers all entities providing designated services through a permanent establishment in Australia.
Designated services include:
- remittance services;
- electronic funds transfers;
- foreign exchange contracts;
- issuing and selling securities and derivatives;
- providing interests in managed investment schemes;
- lending and allowing loan transactions; and
- finance leasing providing custodial or depositary services, and pensions, annuities and life insurance policies.
The Privacy Act 1988 regulates the handling of personal information about individuals. This includes the collection, use, storage and disclosure of personal information, and access to and correction of that information.
The Privacy Amendment (Enhancing Privacy Protection) Act 2012 became law in December 2012 and introduced a new statutory regime with mandatory privacy principles (Australian Privacy Principles) with which all relevant businesses must comply.59 These principles came into force on 12 March 2014.
The Australian Privacy Principles update and consolidate the privacy principles that previously applied to government agencies (i.e., the Information Privacy Principles) and private sector entities (i.e., the National Privacy Principles), and:
- limit the ability of agencies and organisations to use unsolicited personal information, specifically regulate the use and disclosure of personal information held by an agency or organisation for direct marketing purposes, and introduce new responsibilities for agencies and organisations transferring data overseas;
- introduce a comprehensive scheme for credit reporting that regulates information disclosed to, and by, credit reporting bodies, credit providers and affected information recipients; and
- enhance the powers of the Information Commissioner so that he or she may, inter alia, conduct assessments regarding the Australian Privacy Principles.
Under the Australian Privacy Principles:
- an agency may only solicit and collect personal information that is reasonably necessary for, or directly related to, one or more of its functions or activities;
- an organisation may only solicit and collect personal information that is reasonably necessary for one or more of its functions or activities;
- an agency or organisation may only solicit and collect sensitive information if an individual consents to that information being collected (unless an exception applies); and
- an agency or organisation must only solicit and collect personal information by lawful and fair means, and directly from an individual (unless an exception applies).
An agency or organisation must not use or disclose information collected for a purpose other than that for which it was collected unless an individual has consented to that other use or disclosure, or an exception applies.
Personal property securities reform
The Personal Property Securities Act 2009 (PPSA) commenced operation on 30 January 2012 and introduced a national system for the registration of security interests in personal property, and rules for the creation, priority and enforcement of security interests in personal property. The PPSA partially replaced the existing commonwealth and state-based regimes, including the regime under the Corporations Act for the registration of charges. The PPSA operates with retrospective effect on security interests and security agreements arising prior to the commencement of the legislation.
The PPSA was a very significant change in Australian law that affected corporate finance, bilateral and syndicated lending, leveraged and acquisition finance and project finance more significantly than the capital markets, where issues are mostly unsecured.
A secured party may need to take additional steps under the PPSA to maintain the effectiveness or priority of its existing securities. Further, as a result of the broad definition of security interests under the PPSA, a secured party may need to take steps under the PPSA to maintain the effectiveness or priority of other transactions that, under the previous law, do not constitute security interests (such as retention of title arrangements, certain leases, securitisation transactions and certain subordination arrangements). The system has been substantially modelled on the personal property regimes in New Zealand, Canada and the United States.
In 2014, the commonwealth government conducted a review of the operation and effects of the PPSA. The commonwealth government considered the recommendations of the review and amended the PPSA to implement some of them.60
Commonwealth bank levy
In June 2017, the commonwealth government passed legislation to impose a major bank levy. The levy applies to a limited number of ADIs and is imposed by reference to certain liabilities of the relevant ADI, including corporate bonds, commercial paper, certificates of deposit and Tier 2 capital instruments, at a rate of 0.015 per cent per quarter.
II THE YEAR IN REVIEW
The commonwealth government and regulators have continued their review of the framework for regulation of the financial sector, and for the laws governing access to, and the operation and supervision of, Australia’s capital markets. This process commenced in 2010 in response to the global financial crisis. In particular, the commonwealth government remains committed to the initiatives developed through the G20, the Financial Stability Board, the International Monetary Fund and other multilateral institutions to support financial stability and to foster stronger economic growth. Some of the more important recent developments are outlined below.
i Developments affecting debt and equity offerings
Product intervention powers
On 5 April 2019, the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019 received Royal Assent to introduce a product intervention power available to ASIC where a risk of significant consumer detriment exists, and to introduce design and distribution obligations in relation to financial products. It is important to note that the power may be exercised notwithstanding that a product has otherwise been offered in compliance with disclosure and other applicable laws.
ASIC has sought public input on the proposed administration of its new product intervention power but has not yet released its final regulatory guide. A separate ASIC consultation on its proposed guidance on the design and distribution obligations will commence in late 2019.61 ASIC has recently released a consultation paper on its proposal to exercise its product intervention power to make certain market-wide product intervention orders relating to the issue and distribution of OTC binary options and contracts for difference to retail clients.62
Technology and market infrastructure
In August 2018, the World Bank mandated the Commonwealth Bank of Australia to be the sole arranger of the world’s first blockchain bond, termed ‘bond-i’ (blockchain operated new debt instrument). In May 2019, the World Bank and CBA successfully enabled secondary market trading of this bond-i recorded on blockchain.63 The bond will be created, allocated, transferred and managed through its life cycle using distributed ledger technology.64
Social impact bonds
In recent years, state governments have initiated the development of the social impact bond (SIB) as an innovative approach to financing social service programmes. SIBs are designed to raise private capital for intensive support and preventative programmes, which are suitable to being funded by state governments on an outcomes basis. Australia’s first SIB was the Newpin Social Benefit Bond, initiated by the New South Wales government in collaboration with UnitingCare Burnside and SVA, which opened to investment in April 2013. There are currently around nine SIB initiatives that have been implemented by state governments, and many more are under way for implementation in Australia.65
Australian corporates have also issued green and ‘gender’ bonds to fund relevant social impact programmes. As of July 2018, the Australian market for investments that achieve social or environmental goals as well as financial returns was estimated to be around A$6 billion.
ii Financial sector reforms
Financial system inquiry
In October 2015, the government released its response to the financial system inquiry, which released its final report on 7 December 2014. The response sets out an agenda for improving the financial system that rests on five strategic priorities, including:
- resilience measures that aim to reduce the impact of potential future crises;
- superannuation and retirement income measures that aim to improve the efficiency and operation of the superannuation system;
- innovation measures that will unlock new sources of finance and support competition;
- consumer outcome measures designed to increase consumer confidence to participate in the financial system and their confidence that they are being treated fairly; and
- regulatory system measures that aim to make regulators more accountable and more effective.66
As yet there is no comprehensive legislation to address all the recommendations, but the report and continued public scrutiny of financial institutions have prompted a large number of specific initiatives as well as continuing inquiries.
Royal Commission into misconduct in financial services
In November 2017, the commonwealth announced a Royal Commission into alleged misconduct by Australia’s banks and other financial services entities. An interim report was published on 28 September 2018, and a final report was published on 1 February 2019, which made 76 recommendations affecting the provision of financial products to consumers.67 The government has committed to taking action on all of the recommendations.68 There are likely to be further regulatory measures and initiatives that stem from the findings of the Royal Commission. The Terms of Reference of the Royal Commission largely concerned an inquiry into whether conduct by financial services entities (including directors, officers and employees) falls below community standards and expectations, and methods of combating misconduct and redress for consumers. The Terms of Reference did not extend to the prudential regulation and capital structure of financial institutions,69 and matters considered by the Royal Commission did not highlight instances of misconduct in capital markets.
Australian regulators, including ASIC, APRA and ACCC, have signalled greater assertiveness and willingness to pursue enforcement action against misconduct in the financial sector post the findings arising out of the Royal Commission.70
ASIC v. Westpac71
In 2016, ASIC commenced legal proceedings against three of Australia’s major banks for unconscionable conduct and market manipulation in setting the Bank Bill Swap (BBSW) rate. ASIC alleged that Westpac had traded in prime bank bills to influence the setting of the BBSW with a sole or dominant purpose of influencing the setting of the BBSW to be favourable to Westpac without disclosing its practice to relevant counterparties, and that these counterparties consequently suffered loss. The Federal Court found that Westpac had engaged in certain acts amounting to unconscionable conduct in breach of the Australian Securities and Investments Commission Act (ASIC Act),72 as well as contravening its financial services licensee obligations.
In May 2017, the government announced plans to enhance competition in the banking industry, which include:
- a new open banking regime to increase access to banking products and consumer data by consumers and third parties if consumers consent. The Open Banking Review was commissioned in July 2017 and the final report was released in February 2018. The report made 50 recommendations on the regulatory framework, the type of banking data in scope, privacy and security safeguards for banking customers, the data transfer mechanism and implementation issues;73
- reducing regulatory barriers to entry for new and innovative entrants; and
- tasking the Productivity Commissioner and the ACCC to review the state of competition in the financial system. The Productivity Commission’s final report, dated 3 August 2018, has made a number of recommendations to improve consumer outcomes through increasing competition.74
In June 2018, an ACCC investigation also led to criminal cartel charges laid against three major financial institutions – ANZ, Citigroup and Deutsche Bank – relating to trading in ANZ shares held by both Citigroup and Deutsche Bank. The cartel conduct is alleged to have taken place following an ANZ institutional share placement in August 2015. Criminal charges were laid against several senior executives of these financial institutions.75 In September 2018, ASIC also commenced proceedings to pursue ANZ over allegations that it failed to comply with its continuous disclosure obligations under the corporations law in relation to the same placement.76 The outcome of these proceedings and any implications for capital markets may not be known for some time.
In July 2017, the commonwealth government released a consultation paper on a new banking executive accountability regime (BEAR). The Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Act received Royal Assent on 20 February 2018. The new law provides APRA with new and strengthened powers to impose penalties on ADI groups, their directors and senior executives for breaching accountability obligations.77 The accountability regime commenced on 1 July 2018 for large ADIs and on 1 July 2019 for small and medium ADIs. Subordinate legislation is also now in place defining small, medium and large ADIs for the purpose of BEAR.78
The final report of the banking Royal Commission made a number of recommendations on extending BEAR to other financial sectors and all APRA regulated entities, including all entities holding an Australian financial services licence or Australian credit licence, market operators and clearing and settlement facilities. The final report also proposed having APRA and ASIC jointly administer BEAR.
Crisis management of regulated entities
On 5 March 2018, the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2017 was passed to strengthen APRA’s crisis management powers following recommendations from the financial system inquiry.79 The legislation includes clear powers for APRA to set resolution planning requirements and ensure banks and insurers are better prepared for times of financial crisis. The new laws also equip APRA with an expanded set of crisis resolution powers to facilitate the orderly resolution of a distressed bank or insurer. The new laws do not include a formal bail-in regime for debt capital instruments, although APRA does have powers to stop payments by regulated entities in certain circumstances.80
Basel III reforms and other prudential initiatives
On 1 January 2018, a new version of the liquidity standard (APS 210) started to introduce a net stable funding ratio (NSFR) for locally incorporated ADIs that are subject to the LCR regime introduced in 1 January 2015. The NSFR may influence the tenor and type of funding raised by ADIs to which it applies.
Since 1 July 2015, larger ADIs have been required to calculate and disclose a leverage ratio, in addition to risk-weighted capital measures. In February 2018, APRA announced the design and application of a minimum leverage ratio requirement for ADIs as a complement to the revised risk-based capital framework and consistent with the Basel Committee’s final leverage ratio methodology. APRA is proposing a minimum leverage ratio of 4 per cent for internal ratings-based ADIs and 3 per cent for standardised ADIs. APRA is proposing that these revisions to the capital framework will come into effect from 1 January 2022.81
In July 2017, APRA announced new capital benchmarks for the Australian banking system to ensure it has capital ratios that are ‘unquestionably strong’,82 pursuant to recommendations under the 2014 financial system inquiry. These new capital benchmarks will raise the minimum capital requirements by the equivalent of around 150 basis points for ADIs using the internal ratings-based approach to credit risk and around 50 basis points for ADIs using the standardised approach to credit risk, in each case in comparison to the December 2016 levels. The target levels are well in excess of the Basel III minimum requirement for common equity capital. In June 2019, APRA released a suite of draft prudential standards for credit risk.83 APRA expects to conduct one further round of consultation before finalising standards for implementation from 1 January 2021. APRA is also currently consulting on updated prudential standards on credit risk management requirements for ADIs to modernise current standards for more sophisticated analytical techniques and information systems.84
In February 2018, APRA released a discussion paper setting out proposed revisions to risk-based capital requirements for ADIs for credit, market and operational risk. The paper set out indicative risk weights and parameters used to calculate minimum capital requirements across various asset classes. In June 2019, APRA concluded its first round of consultations and released proposals on, inter alia, a standardised approach to credit risk and operational risk and adopting a simplified prudential framework for operational risk, counterparty credit risk, leverage ratio and public disclosures for smaller ADIs. The response paper was accompanied by draft prudential standards. APRA has amended its APS 112 on the standardised and internal ratings-based approaches to credit risk.85 APRA has also revised its APS 115 to reflect a single standardised measurement approach for the capital treatment of operational risks.86 APRA proposes aligning the implementation date of these revised capital standards with the Basel Committee timetable of 1 January 2022, with the revised APS 115 to commence for certain ADIs on 1 January 2021.87 APRA will conduct further consultations on amendments to the internal ratings-based approach and interest rate risk in the banking book framework in late 2019.
In August 2018, APRA announced options to improve the transparency, comparability and flexibility of the ADI capital framework.88 The focus was to amend disclosure requirements and the way in which ADIs would be required to calculate and report capital ratios, without altering the quantum and risk-sensitivity of capital requirements. Consultation on this paper closed on 2 November 2018. APRA intended to consult on draft revised prudential standards incorporating the outcome of the consultation in 2019. APRA made revisions to its APS 310, which deals with audit and related matters, in July 2019; however, the proposals in its consultation were not specifically addressed.
APRA has also revised its prudential framework for counterparty credit risk for ADIs to strengthen their frameworks. APRA will adopt an adjusted current exposure method as a simplified approach for ADIs with immaterial counterparty credit risk. Revised standards incorporating this commenced on 1 July 2019.89
In November 2018, APRA commenced consultation on proposals to change the application of the capital adequacy framework for ADIs designed to help facilitate orderly resolution in the event of failure.90 In July 2019, APRA released its response to submissions, stating that domestic systematically important banks will be required to increase total capital requirements by three percentage points of risk-weighted assets by 1 January 2024, with a view to lifting this to four or five percentage points of loss-absorbing capacity over the long term. APRA is consulting on revisions to the capital framework that may result in changes to the calculation of risk-weighted assets or the measurement of capital.91 It is expected that ADIs would primarily issue Tier 2 capital instruments to meet these higher requirements. APRA has not accepted submissions to allow for a new form of ‘senior non-preferred’ bonds.
APRA is also reviewing the levels of exposure that ADIs may have to their related entities.92
Capital frameworks for mutual ADIs
In November 2017, APRA released a response paper and revised Prudential Standard APS 111 Capital Adequacy: Measurement of Capital to allow mutually owned ADIs more flexibility in their capital management. Under the revised standard, APRA’s mutual equity interest framework allows mutually owned ADIs to issue capital instruments that are eligible under Common Equity Tier 1 directly without jeopardising their mutual status. Prudential Standard APS 111 came into effect from 1 January 2018. On 5 April 2019, the Treasury Laws Amendment (Mutual Reforms) Bill 2019 received Royal Assent, providing, among other things, for a new bespoke mutual capital instrument under the Corporations Act 2001 for all eligible mutual entities to raise equity capital.93 As yet, no issues have taken place under the framework.
Benchmark interest rate reform
In October 2016, the government announced it would implement measures to strengthen financial regulation to better protect Australians against the possible manipulation of financial benchmarks. In April 2018, the Treasury Laws Amendment (2017 Measures No. 5) Bill 2017 and the ASIC Supervisory Cost Recovery Levy Amendment Bill 2017 were given Royal Assent to establish a framework for a financial benchmark regulatory regime.94 The new laws give ASIC powers to designate significant financial benchmarks if satisfied that the designated benchmark is systemically important in Australia or there would be a material risk of financial contagion or a material impact on Australian retail or wholesale investors if there was a disruption to the operation or integrity of the benchmark. Administrators of designated significant financial benchmarks will also be required to obtain a new benchmark administrator licence from ASIC, with ASIC being able to impose conditions in granting a licence. On 1 January 2017, ASX took over the role of administrator of BBSW rates.95 In June 2018, ASIC set up the ASIC Financial Benchmark (Administration) Rules 2018, which impose certain key obligations on licensed benchmark administrators and require contributors to licensed benchmarks to cooperate with ASIC.96 The International Swaps and Derivatives Association’s consultation on benchmark fallbacks has identified the cash rate as the fallback rate for BBSW, and while, unlike LIBOR, there is no imminent demise of BBSW, ASX encourages market participants to have robust contractual fallback provisions to address any cessation or material change to the BBSW benchmark. These proposals aim to facilitate equivalence assessments under overseas regimes, including under the European Benchmarks Regulation.
In June 2019, the South Australian Government Financing Authority issued a one-year floating rate note using an adjusted overnight cash rate, AONIA, as the reference rate.
ASIC capital requirements for market participants
ASIC is also consulting on proposed changes to the capital requirements for certain market participants that prescribe the minimum amount of capital a participant must hold to better protect investors and market integrity by strengthening the risk profile of market participants and reducing the risk of a disorderly or non-compliant wind-up. Market participants include all persons allowed to directly participate (other than principal traders or clearing participants) in any licensed financial market (i.e., ASX, ASX 24, Chi-X, SSX NSXA and FEX markets) under the operating rules of the market. The consultation period closed on 15 August 2018.97 As yet, ASIC has not proposed any further changes to such capital requirements.
III OUTLOOK AND CONCLUSIONS
Australia’s capital markets remain accessible to both domestic and international issuers. The regulation of the market is generally sensible and well understood. There have been many reforms to the regulatory framework since the global financial crisis, and further reforms (some of which have been outlined in this chapter) will come into force in the near future.
The financial sector is currently the subject of intense public security. This is likely to generate further regulatory change, some of which may affect practices in the Australian capital market.
Overall, we expect continued growth, and that Australia will continue to be both highly regarded – and ranked – among the world’s leading financial systems and capital markets.
1 Ian Paterson is a senior partner at King & Wood Mallesons. This chapter has been updated with the help of Louise Yun, an associate at King & Wood Mallesons.
2 By way of example, the amount of long-term non-government debt securities issued in Australia by non-residents, which include foreign governments and their agencies, international and supranational organisations, and a range of foreign financial institutions and companies (the ‘kangaroo’ bond market), increased from A$8.9 billion to just under A$200 billion in bonds outstanding during the 13 years to September 2016. In 2017, just under A$35 billion worth of kangaroo bonds were issued. As of late 2018, Austraclear held approximately A$200 billion in kangaroo bonds. In February 2019, McDonald’s and General Motors issued their first ever Australian dollar bonds.
3 The report defines financial development as the factors, policies and institutions that lead to effective financial intermediation and markets, as well as deep and broad access to capital and financial services. Seven measures of financial development are identified in the report, available at www.weforum.org.
5 Takeovers are separately regulated under Chapter 6 of the Corporations Act, industry-specific regulation (in some cases), the Foreign Acquisitions and Takeovers Act 1975 of Australia and the commonwealth government’s foreign investment policy, and are not considered in this chapter.
8 Authorised deposit-taking institutions with larger or more complex operations, which are required by APRA’s prudential standards to conduct scenario analyses of their liquidity needs under different operating circumstances.
10 The Corporations Act requires that foreign companies that carry on business in Australia must apply for registration as a foreign company. The phrase carrying on business imports notions of system, repetition and continuity, and is to be assessed by reference to the activities of the foreign company as a whole.
Registration involves reserving a name, appointing a local agent, establishing a registered office, lodging certain documents with ASIC and the payment of a fee. However, as long as a foreign issuer of securities is not involved in other business in Australia, occasional issues into the debt markets limited to professional investors should not, of themselves, constitute carrying on business in Australia. If a foreign company issuer issues debt securities in circumstances that require a prospectus (broadly, an issue not limited to professional investors), it is taken to carry on business in Australia and must register as a foreign company. Registration or exemption may also be required under other legislation in certain circumstances including, without limitation, the Banking Act 1959 of Australia or the Financial Sector (Collection of Data) Act 2001 of Australia.
11 Section 911D of the Corporations Act provides for an extended jurisdictional reach in relation to the requirement to hold an Australian financial services licence from ASIC.
12 See Section I.i for a discussion of the general definition of a financial product and specific inclusions within, and specific exclusions from, that definition.
13 In the case of derivatives that are not entered into or acquired on a financial market, each party to the derivative is regarded as the issuer.
15 See ASIC consultation papers ‘CP 301 Foreign financial services providers’ and ‘CP 268 Licensing relief for foreign financial services providers with a limited connection to Australia’.
17 The terms and conditions of debt securities issued by foreign issuers need to be governed by an Australian law for the following purposes: acceptance in the Austraclear clearing system; inclusion in the domestic bond indices; eligibility for repurchase transactions with the Reserve Bank of Australia (if available); and qualification as regulatory assets for certain general insurance companies in Australia.
18 APRA Prudential Standard APS 111, Attachment E Paragraph 14 and Attachment H Paragraph 13.
19 Sections 766A(1)(b), 766B and 911A of the Corporations Act.
20 The reforms are contained in two separate but related acts: the Corporations Amendment (Future of Financial Advice) Act 2012 of Australia and the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 of Australia. Further amendments were made in the Corporations Amendment (Financial Advice Measures) Act 2016 of Australia.
23 For more information see ‘Phased licensing for authorised deposit-taking institutions’ at https://www.apra.gov.au/phased-licensing-authorised-deposit-taking-institutions; see also https://www.apra.gov.au/licensing-guidelines-adis.
24 This law was previously introduced as the Treasury Laws Amendment (Non-ADI Lender Rules) Bill 2017.
25 Although most debt securities issued in the domestic capital market would be debentures and regulated by Chapter 6D.2 of the Corporations Act, some structured debt securities may not be debentures, but rather another type of financial product (e.g., a derivative) or, possibly, a combination of a debenture and another type of financial product, and regulated by Chapter 7 of the Corporations Act.
26 However, the licensing requirements of Chapter 7 can apply to foreign financial services providers (see discussion in Section I.iii in relation to the requirement to hold an AFSL or be exempt from the requirement to do so).
27 For more information, see ‘Product intervention powers’ in Section II.i.
28 In the event the offer is of securities (or options over such securities) that are in a class that was continuously quoted on the Australian Securities Exchange (ASX) in the 12 months prior to the issue of the prospectus or other disclosure document, the disclosure requirements are more limited.
29 ASIC, Regulatory Guide 228: Prospectuses: Effective Disclosure for Retail Investors (November 2016).
30 Previously, in 2010, ASIC had provided class order relief to promote the issue of vanilla corporate bonds to retail investors. The relief was intended to simplify the disclosure requirements for certain offers of listed vanilla bonds by allowing offers to be made with reduced disclosure under a short-form prospectus, but very few issues were undertaken pursuant to the class order relief.
31 Among the key requirements are that the securities be debentures, in Australian dollars, for a term not of more than 15 years, not subordinated and not convertible into other classes of securities. Early redemption rights are also regulated.
32 The legislation is now in Sections 713B to 713E of the Corporations Act and Regulation 6D2.04-06 of the Corporations Regulations.
33 See Section 9 of the Corporations Act.
34 See Section 708 of the Corporations Act. In particular, Section 708(19) allows an ADI to issue debentures (including retail bonds and notes) without issuing a prospectus or other disclosure document.
35 It is important to note that these defences are not available for wholesale offers of securities and other financial products that are structured so as not to require the issue of a prospectus, product disclosure statement or other disclosure document under either Part 6D.2 or 7.9 of the Corporations Act. The liability regime has also been modified for simple corporate bonds as described above.
36 Additionally, issuers or offerors may be liable at general law in tort or contract if any disclosure to investors is false, inaccurate, misleading or deceptive (including by omission), or negligent.
37 Wingecarribee Shire Council v. Lehman Brothers Australia Ltd (in liq) (2012) 301 ALR.
38 ABN Amro Bank NV v. Bathurst Regional Council (2014) 224 FCR 1.
40 The interpretation of the Listing Rules is assisted by guidance notes issued by the ASX. Following a period of consultation, a revised guidance note on continuous disclosure (ASX Guidance Note 8) and consequential amendments to the ASX Listing Rules came into effect on 1 May 2013 and was updated on 17 August 2015. Further information on the revised Guidance Note and ASX Listing Rules is available at www.asx.com.au.
41 ASX Listing Rule 3.1. Under ASX Listing Rule 3.1A, there are limited exceptions to this obligation where a reasonable person would not expect the information to be disclosed, and the information is confidential and satisfies one of five specified conditions (including an incomplete proposal). Most listed entities and responsible entities of listed managed investment schemes adopt rigorous monitoring and reporting systems to enable price-sensitive information to be identified and disclosed in a timely fashion. ASIC has been rigorous in the enforcement of the requirement for immediate disclosure of price-sensitive information.
42 In addition to the ASX and Chi-X, there are a number of small regional securities exchanges that operate in Australia.
43 See the report entitled ‘Application of Hybrid Mismatch Rules to Regulatory Capital’ at https://cdn.tspace.gov.au/uploads/sites/70/2017/05/1216_Application_of_Hybrid_Mismatch_.pdf.
44 For a list of exemptions previously and currently granted by ASIC, see https://asic.gov.au/regulatory-
45 These reforms were implemented through the Corporations (Derivatives) Amendment Determination 2015 (No. 1) and the Corporations Amendment (Central Clearing and Single-Sided Reporting) Regulation 2015 of Australia, respectively.
46 These reforms were implemented through ASIC Derivative Transaction Rules (Clearing) 2015.
47 See Corporations Act, Section 901D(a); Corporations Regulations 2001 of Australia, Regulation 7.5A.50(2).
48 See Corporations Regulations 2001 of Australia, Regulation 7.5A.50(3).
49 Access to the Guarantee Scheme for new liabilities was closed in March 2010.
50 Prudential Standard APS 910 Financial Claims Scheme (APS 910), which came into effect on 1 January 2012. In November 2012, APRA released a consultation package comprising a discussion paper, draft amended APS 910 and draft information paper. The package contained proposals in relation to payment, reporting and communications requirements for further implementation of the FCS. In June 2013, APRA released its response to the proposals outlined in the November 2012 package and issued its final APS 910. The final APS 910 took effect from 1 July 2013, and compliance with the new requirements has been required since 1 July 2014.
51 A recommendation from the CFR to establish a fund followed recommendations (Paragraphs 51 and 52) in the Financial System Stability Assessment for Australia prepared by the International Monetary Fund in November 2012 (International Monetary Fund Country Report No. 12/308) and available at www.imf.org. On 1 September 2015, the commonwealth government announced that it will not implement a levy on banks to fund the Financial Stability Fund.
52 Judgment in this proceeding was given in favour of the company and its directors by the High Court of Australia on 2 October 2012 in Forrest v. Australian Securities and Investments Commission; Fortescue Metals Group Ltd v. Australian Securities and Investments Commission (2012) 247 CLR 486, which overruled the judgment in the Federal Court of Appeal in Australian Securities and Investments Commission v. Fortescue Metals Group Ltd (2011) 190 FCR 364. The case of ASIC v Vocation Ltd (in liq)  FCA 807 supports findings in Australian Securities and Investments Commission v. Fortescue Metals Group Ltd (2011) 190 FCR 364 that the business judgment rule is no defence to failing to comply with continuous disclosure obligations as such continuous disclosure decisions are not business judgments (see at ).
53 Australian Securities and Investments Commission v. Healey (2011) 196 FCR 291 and Australian Securities and Investments Commission v. Healey (No. 2) (2011) 196 FCR 430.
54 Australian Securities and Investments Commission v. MacDonald (No. 11) (2009) 256 ALR 199, Morley v. Australian Securities and Investments Commission (2010) 274 ALR 205 and James Hardie Industries NV v. Australian Securities and Investments Commission (2010) 274 ALR 85. Judgments in these proceedings were given by the High Court of Australia on 3 May 2012. See Australian Securities and Investments Commission v. Hellicar (2012) 247 CLR 345 and Shafron v. Australian Securities and Investments Commission (2012) 247 CLR 465.
55 Australian Securities and Investments Commission v. Cassimatis (No. 8)  FCA 1023 at -. At  Edelman J finds that ‘the content of a duty of care and diligence can be considerably affected by shareholder consent . . . but . . . the interests of the corporation are not always entirely coincident with the interest of shareholders’. In this regard, directors may still breach their directors’ duties under the Corporations Act where they embark on a course of conduct that is highly likely to contravene the law, even where that conduct is authorised by shareholders.
56 Before state governments commenced to enact legislation in accordance with this reform project, there were more than 700 separate state and commonwealth laws imposing personal liability on directors and officers of a company as a result of a statutory breach by that company.
58 On 1 January 2011, the Trade Practices Act 1974 of Australia was amended and renamed the Competition and Consumer Act 2010.
59 The enactment of the Privacy Amendment (Enhancing Privacy Protection) Act is a direct response by the commonwealth government to the Australian Law Reform Commission Report No. 108, ‘For Your Information: Australian Privacy Law and Practice’.
60 Personal Property Securities Amendment (Deregulatory Measures) Act 2015 of Australia.
61 For more information, see media release ‘ASIC consults on new product intervention power use’ at https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-157mr-asic-consults-on-new-product-intervention-power-use/
64 For more information, see media releases at https://www.worldbank.org/en/news/press-release/2018/08/09/world-bank-mandates-commonwealth-bank-of-australia-for-worlds-first-blockchain-bond and https://www.commbank.com.au/guidance/newsroom/cba-picked-by-world-bank-to-deliver-world-s-first-standalone-blo0-201808.html.
65 For more information, see https://www.socialventures.com.au/impact-investing/social-impact-bonds/
67 For more information, including a copy of the final report, see https://treasury.gov.au/publication/p2019-fsrc-final-report
68 See the government’s response at https://treasury.gov.au/publication/p2019-fsrc-response.
69 See the Terms of Reference within the Letters Patent at https://financialservices.royalcommission.gov.au/Documents/Signed-Letters-Patent-Financial-Services-Royal-Commission.pdf.
70 APRA released its new Enforcement Approach in April 2019 around its future role and use of enforcement activities in achieving its prudential objectives. See media release ‘APRA releases new Enforcement Approach’ and APRA’s page ‘Enforcement’, available at https://www.apra.gov.au. The ASIC Commissioner also recently set out ASIC’s renewed enforcement priorities in his speech on 30 August 2019 at the 36th Annual Conference of the Banking and Financial Services Law Association, stating that ASIC’s enforcement work will have a core focus on deterrence, public denunciation and punishment.
71 ASIC v. Westpac (No 2) (2018) 357 ALR 240.
72 The Federal Court found a breach of Section 12CC of the ASIC Act 2001 (Cth), stating that ‘Westpac’s conduct was against commercial conscience as informed by the normative standards and their implicit values enshrined in the text, context and purpose of the ASIC Act specifically and the Corporations Act generally’ (see at ). The Court also found that Westpac’s product disclosure statements ‘[fell] short of any disclosure of the vulnerability of the BBSW to manipulation’ at  and that Westpac ‘had the capacity to trade so as to influence, or likely influence, the BBSW to its advantage’ at .
73 For more information, see ‘Review into Open Banking in Australia – Final Report’ at https://treasury.gov.au/consultation/c2018-t247313/.
74 For more information, see ‘Competition in the Australian Financial System’ at https://www.pc.gov.au/inquiries/completed/financial-system/report.
75 For more information, see media release ‘Criminal cartel charges laid against ANZ, Citigroup and Deutsche Bank’ at https://www.accc.gov.au/media-release/criminal-cartel-charges-laid-against-anz-citigroup-and-deutsche-bank.
76 For more information, see https://asic.gov.au/about-asic/news-centre/find-a-media-release/2018-releases/18-268mr-asic-commences-civil-penalty-proceedings-against-anz-for-alleged-continuous-disclosure-breach-in-relation-to-2015-institutional-equity-placement/.
77 The Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Act 2018 is available at https://www.legislation.gov.au/Details/C2018A00005.
78 The Banking Executive Accountability Regime (Size of an Authorised Deposit-taking Institution) Determination 2018 is available at https://www.legislation.gov.au/Details/F2018L00651.
79 See media release ‘Turnbull Government to strengthen APRA’s crisis management powers’ at www.treasury.gov.au. The draft legislation is in response to the consultation on the commonwealth’s September 2012 paper ‘Strengthening APRA’s Crisis Management Powers’.
80 Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018.
85 See APS 112 Capital Adequacy: Standardised Approach to Credit Risk.
86 See APS 115 Capital Adequacy: Standardised Measurement Approach to Operational Risk.
89 See APS180; for more information see ‘Counterparty credit risk for ADIs’ at https://www.apra.gov.au/counterparty-credit-risk-adis.
91 For further information, see https://www.apra.gov.au/consultation-increasing-loss-absorbing-capacity-authorised-deposit-taking-institutions-support.
93 See Treasury Laws Amendment (Mutual Reforms) Act 2019.
94 Prior to 9 September 2017, this framework sat under the Corporations Amendment (Financial Benchmarks) Bill 2017.
96 For more information, see ‘Financial benchmarks’ at https://asic.gov.au/regulatory-resources/markets/financial-benchmarks/.
97 For more information, see ‘18-202MR ASIC consults on proposed changes to the capital requirements for market participants’ at https://asic.gov.au/about-asic/media-centre/find-a-media-release/2018-releases/18-202mr-asic-consults-on-proposed-changes-to-the-capital-requirements-for-market-participants/.