The International Capital Markets Review: Australia

Introduction

Australia has vibrant, professional and well-regulated capital markets open to foreign issuers.2

The recent 'Why Australia: Benchmark Report 2021' from the Australian Trade Commission indicates that Australia's capital markets comprise, inter alia:

  1. the third-largest stock market, by market capitalisation of freely floating stocks, in the Asian region and the ninth-largest globally;
  2. the third-largest debt capital market in the Asian region; and
  3. the fifth-largest superannuation (retirement savings) industry in the world.3

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 are 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.4

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:

  1. the Australian Securities and Investments Commission (ASIC) is the corporate, markets and financial services regulator responsible for market conduct and investor protection;
  2. 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
  3. 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:

  1. a history, since the mid 1980s, of legislative reform promoting growth and investment;
  2. 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);
  3. a highly educated, skilled, multilingual and computer-literate labour market, particularly in the financial sector;
  4. a strategic location in the Asia-Pacific region; and
  5. increasing integration with global capital markets.

Until recently, there has been a low level of issuance of government and semi-government fixed interest securities due to budget surpluses. This has changed dramatically as a result of measures to address the covid-19 pandemic.

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 objective is 'the financial safety of institutions and the stability of the Australian financial system', together with the supplementary considerations of efficiency, competition, contestability and competitive neutrality.5 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, audit and related matters, 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:

  1. 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;
  2. 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
  3. 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. As issues of government debt increase, it is expected that the CLF will decline.9 In September 2021, APRA announced that it expected ADIs to reduce their usage of the CLF to zero by the end of 2022, subject to market conditions.10

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 December 2019, the countercyclical buffer has remained unchanged at zero per cent since its introduction.11 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 Australia12 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)13 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:

  1. providing financial product advice;
  2. issuing or otherwise dealing in a financial product;
  3. making a market for a financial product;
  4. operating a registered managed investment scheme; or
  5. providing a custodial or depository service (i.e., holding financial products on behalf of others).14

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),15 there are few exemptions of general application. Certain regulated foreign financial institutions that operate in foreign jurisdictions that have a level of investor protection similar to Australia's can apply for a modified form of AFSL licence, known as a 'foreign AFS licence', authorising them to provide financial services to wholesale clients or professional investors in Australia.16 Transitional arrangements will apply to foreign financial service providers (FFSP) that were able to rely on the now repealed relief for foreign financial institutions operating in foreign jurisdictions that have a level of investor protection similar to Australia's. These transitional arrangements will continue to apply to FFSPs from 1 April 2020 until either the FFSPs have been granted a foreign AFS licence commencing before 31 March 2023 or the transitional period has ended on 31 March 2023 (whichever occurs first).17

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.18

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.19

A person who undertakes the business of providing financial product advice (e.g., recommending the purchase of securities) requires a licence.20 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.21

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 2021, there were 146 ADIs operating in Australia.22 Australian ADIs are major issuers in the domestic and international capital markets, with APRA's June 2021 statistics showing approximately A$812 billion in combined total short-term and long-term borrowings for selected ADIs.23 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.24 APRA published updated guidelines on the Restricted ADI licensing framework in August 2021.25

APRA has previously 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).26 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. While APRA expects that a foreign bank licensed as a foreign ADI in Australia will book its Australian business in the Australian branch, it should be noted that foreign ADIs are not restricted to issuing bonds into the Australia market from their Australian branch; such bonds may be issued from their head office. Recently, there have been Canadian, Korean, US and Singaporean banks that have issued bonds into the Australia market from their head office rather than through an Australian branch.

In March 2018, the Treasury Laws Amendment (Banking Measures No. 1) Act 2018 came into effect to further regulate non-ADI lenders, including non-ADI mortgage originators.27 This law extended 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 were also introduced for non-ADI lenders who contravene a direction from APRA. This gave 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. This 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 securities28 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.29

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 design and distribution obligations (DDO) and ASIC's product intervention powers to target consumer detriment for financial and credit products.30

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.31

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:

  1. 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;
  2. 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
  3. the specific disclosure required by the Corporations Act, including details of the offer and the interests of persons involved in the offer.32

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.33

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 could 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:

  1. defining the debt securities that qualify as simple corporate bonds;34
  2. 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;35
  3. 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
  4. 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. Australian Unity also launched a further offer of simple corporate bonds in September 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)36 or the requirements of another exemption are satisfied,37 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):

  1. the consideration payable for the product is at least A$500,000;
  2. the product is provided in connection with a business that is not a small business (this normally means at least 20 employees);
  3. 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
  4. 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. It is important to note that a foreign company that offers debentures in Australia or guarantees debentures offered in Australia will be deemed to carry on business in Australia for the purposes of the Corporations Act, unless the offer is structured so as not to require the issue of a prospectus.38

Liability issues

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).39

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:

  1. offering financial products under a document that contains a misleading or deceptive statement or a statement likely to mislead or deceive;
  2. creating an artificial price for trading in financial products on a financial market operated in Australia;
  3. creating a false or misleading appearance about the market or price for financial products;
  4. spreading misleading or false information;
  5. 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
  6. conduct that is unconscionable.40

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,41 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,42 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 markets43

Exchanges

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,44 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.45

Chi-X Australia Pty Ltd (Chi-X) has, since November 2011, operated as an alternative securities exchange, boosting competition in Australia's financial markets.46 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.

Since 1994, the ASX has operated the Clearing House Electronic Subregister System (CHESS), a clearing system for equity and debt securities (other than wholesale securities). CHESS is owned by a wholly owned subsidiary of ASX Limited, which authorises certain participants to access CHESS and settle trades. The ASX is currently preparing a replacement for CHESS, with the introduction of the replacement system to be used as soon as it is safe to do so, currently planned for April 2023.47 ASX will consider user feedback from its recent consultation in implementing the replacement, which is expected to meet current CHESS requirements of system availability, resilience, recoverability, performance and security, as well as providing services in a fair and effective way with sufficient financial, human and technological resources to operate the facility.48 Wholesale debt securities, however, are cleared in the Austraclear system, which is also owned by a wholly owned subsidiary of ASX Limited. Austraclear is not an exchange and does not provide price discovery. Instead, participants in the wholesale debt market trade on an over-the-counter basis among themselves. Debt securities may be quoted on the ASX if they are 'approved financial products' for the purposes of CHESS. Securities confined to wholesale investors may be quoted on the ASX as a wholesale debt security. These securities are cleared via Austraclear and not CHESS.

ASIC capital requirements for market participants

In 2018, ASIC consulted on proposed changes to the capital requirements for certain market participants prescribing 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. Currently, market participants are subject to the financial requirements of the ASIC market integrity rules for capital, including certain risk-based capital requirements specific to each market participant.49 Market participants include all persons allowed to participate directly (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.50

On 16 June 2021, ASIC announced that the new ASIC Market Integrity Rules (Capital) 2021 (Capital Rules) will replace the existing separate rule books for securities market participants and futures market participants to create a common set of rules for capital. The new rules will, among other changes, move futures market participants from the existing net tangible asset regime to a risk-based regime, revise minimum core capital requirements for both futures market participants and securities market participants, and simplify capital requirements by removing redundant rules and forms. Market participants will be required to comply with the new rules from 17 June 2022.51

Hybrid securities

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.52 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 law denies imputation benefits on franked distributions made by a corporate tax entity that give rise to a foreign income tax deduction, and these measures 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 2017.53

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.54 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.55

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 2015.56

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 that 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.57 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.58

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

The revised Prudential Standard CPS 226: margining and risk mitigation for non-centrally cleared derivatives commenced on 1 October 2019 and was further revised in August 2020. CPS 226 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.

Benchmark interest rate reform

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.59 The laws have given 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 are also required to obtain a new benchmark administrator licence from ASIC, which is able to impose conditions on the grant of a licence. On 1 January 2017, ASX took over the role of administrator of Bank Bill Swap (BBSW) rates.60 In June 2018, ASIC made 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.61 Previously, BBSW was the subject of litigation in 2018, when ASIC commenced legal proceedings against three of Australia's major banks for unconscionable conduct and market manipulation in setting the BBSW rate.62 Consequently, changes to BBSW administration has resulted in ASIC having power to compel the inputs to BBSW.63 The International Swaps and Derivatives Association's consultation on benchmark fallbacks 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. BBSW is now allowed to be used in the European Union and is also included on the European Securities and Markets Authority's register for third-country benchmarks.

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.64

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.65 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.66

Corporate governance

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:

  1. to act honestly;
  2. to exercise care and diligence;
  3. to act in good faith in the best interests of a company and for a proper purpose;
  4. not to improperly use their position or company information; and
  5. 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 judgement 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:

  1. 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;67
  2. 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;68
  3. James Hardie Industries: directors' duties of diligence and care in approving ASX announcements;69
  4. 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;70 and
  5. Vocation: directors were found to be in breach of their duties in connection with answers provided in a due diligence questionnaire. The Federal Court found that the business judgement rule is no defence to failing to comply with continuous disclosure obligations as decisions relating to continuous disclosure are not business judgements.71

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. The Personal Liability for Corporate Fault Reform Act 2012 of Australia (Reform Act) commenced operation. The Reform Act has harmonised the approach of all Australian jurisdictions to personal criminal liability for corporate fault. Among other measures, 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.72

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.73 The legislation included clear powers for APRA to set resolution planning requirements and ensure banks and insurers are better prepared for times of financial crisis. The laws also equip APRA with an expanded set of crisis resolution powers to facilitate the orderly resolution of a distressed bank or insurer. The 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.74

Competition laws

The Competition and Consumer Act 2010 is the primary competition and consumer protection legislation in force in Australia.75 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. In September 2020, ACCC and ASIC signed an updated memorandum of understanding for greater information sharing, transparency and collaboration between the two agencies. The two agencies worked closely during the covid-19 pandemic in relation to issues such as authorisations on anti-competitive arrangements in the financial system.76 For example, on 30 March 2020, the ACCC granted an interim authorisation to the Australian Banking Association and its member banks to discuss, agree and give effect to arrangements to benefit their customers for the purpose of varying loan facilities, providing emergency fiscal stimulus and cost relief, and accessing banking services.77

Anti-money laundering

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:

  1. deposit-taking;
  2. remittance services;
  3. electronic funds transfers;
  4. foreign exchange contracts;
  5. issuing and selling securities and derivatives in the course of carrying on a business of issuing securities or derivatives;
  6. redeeming a bearer bond as issuer of the bond;
  7. providing interests in managed investment schemes;
  8. lending and allowing loan transactions; and
  9. finance leasing providing custodial or depositary services, and pensions, annuities and life insurance policies.

Privacy law

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.78 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:

  1. 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;
  2. introduce a comprehensive scheme for credit reporting that regulates information disclosed to, and by, credit reporting bodies, credit providers and affected information recipients; and
  3. 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:

  1. 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;
  2. an organisation may only solicit and collect personal information that is reasonably necessary for one or more of its functions or activities;
  3. 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
  4. 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. Furthermore, 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.79

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.

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:

  1. resilience measures that aim to reduce the impact of potential future crises;
  2. superannuation and retirement income measures that aim to improve the efficiency and operation of the superannuation system;
  3. innovation measures that will unlock new sources of finance and support competition;
  4. consumer outcome measures designed to increase consumer confidence both in participation in the financial system and that consumers are being treated fairly; and
  5. regulatory system measures that aim to make regulators more accountable and more effective.80

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.

Penalties

In March 2019, the commonwealth government passed legislation to strengthen penalties in the corporate and financial sector in response to the Royal Commission into misconduct in financial services. The legislation introduced stronger civil penalty provisions in Part 7.7A of the Corporations Act, the ASIC Act, the National Consumer Credit Protection Act 2009 and the Insurance Contracts Act 1984.81

Competition

In May 2017, the government announced plans to enhance competition in the banking industry, which include:

  1. 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. The open banking regime has a phased implementation timetable and commenced on 1 July 2020 in relation to deposits, transaction accounts, and credit and debit cards. The effects of the open banking regime are not yet known.82
  2. reducing regulatory barriers to entry for new and innovative entrants; and
  3. 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.83

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.84 The case is due to be heard in the Federal Court of Australia.85 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.86 The outcome of these proceedings and any implications for capital markets may not be known for some time.

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 and design and distribution obligations

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, including debentures, where there is retail product distribution. While the product intervention power is currently in force, the design and distribution obligations were not due to commence until 5 October 2021. The original commencement date of 5 April 2021 had been deferred because of the impact of the covid-19 pandemic.

The design and distribution obligations apply to debentures issued by ADIs, even where no prospectus is required, and even where the issue is of a simple corporate bond. It is important to note that the design and distribution obligations apply in addition to the disclosure obligations and that the product intervention power may be exercised notwithstanding that a product has otherwise been offered in compliance with disclosure and other applicable laws.

ASIC issued ASIC Regulatory Guide 274 'Product design and distribution obligations' (RG 274) on 11 December 2020, which explains ASIC's interpretation of the design and distribution obligations. Under Regulation 7.8A.06 of the Corporations Regulations, debentures issued by ADIs and life insurance companies are financial products that require target market determinations even though such issues are otherwise exempt from the requirements to issue a prospectus. Target market determinations are written documents prepared and made available to the public before engaging in retail product distribution conduct. DDO does not impact the wholesale markets. DDO relates to the primary offer of securities in the retail markets, and obliges issuers to determine target markets of the securities. Issuers and distributors must then take reasonable steps to ensure that the distribution of the securities is consistent with that target market. However, DDO does not oblige issuers and distributors to limit trading in the secondary (listed) market. The effect of DDO on retail markets is not yet known.

On 17 June 2020, ASIC published ASIC Regulatory Guide 272 'Product intervention power' (RG 272), which provides an overview of ASIC's product intervention power.87 RG 272 takes into account ASIC's consultation on the draft regulatory guide in 2019, as well as the recent decision in Cigno Pty Ltd v. Australian Securities and Investments Commission [2020] FCA 479 that strengthened ASIC's ability to use its product intervention power and confirmed that the power extends not only to features of financial products, but also to the circumstances and conduct that allow the products to be made available.88

ASIC first used its product intervention power to ban the provision of short-term credit products unless specified conditions were complied with in relation to fees and charges.89 ASIC has also launched a consultation on a product intervention order to stop continuing consumer harm in relation to continuing credit contracts.90 Further product intervention orders include banning the sale of binary options to retail clients91 and imposing conditions on the issue and distribution of contracts for difference to retail clients.92 Thus far, ASIC's product intervention orders have not related to capital market products.

Technology and market infrastructure

In August 2018, the World Bank mandated the Commonwealth Bank of Australia (CBA) 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.93 The bond will be created, allocated, transferred and managed through its life cycle using distributed ledger technology.94 In August 2019, the World Bank issued a second tranche of the blockchain bond via bond-i. There have been an increasing number of blockchain bond issuances internationally; however, there have not been any further issuances in Australia.

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 for funding 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 12 SIB initiatives that have been implemented by state governments and many more are underway for implementation in Australia.95

In June 2020, the Commonwealth's National Housing Finance and Investment Corporation, jointly with ANZ, UBS and Westpac, led a social bond issue of A$562 million, representing the largest social bond issue by an Australian issuer.96

Australian corporates have also issued green and 'gender' bonds to fund relevant social impact programmes. As of December 2019, the Australian market for investments that achieve social or environmental goals as well as financial returns was estimated to be around A$19.9 billion.97

In June 2021, Wesfarmers issued the first sustainability-linked bond in Australia, which raised A$1 billion.98

Impact investing and community investing increased by 72 per cent in 2018 to A$13.8 billion. This growth was driven largely by domestic green bond issuance of A$2.8 billion, with this asset type now accounting for A$8.4 billion of the data set. However, other types of impact investment products such as social impact bonds and property or infrastructure (including renewable energy funds) have also grown rapidly, from nearly A$800 million to A$2.3 billion over the same period.99

Australian corporate bond market inquiry

Despite amendments to the regulatory regime for corporate debt over the past decade to facilitate a deeper and more active retail bond market in Australia, the market remains small compared to those in similar countries.100 In February 2020, the commonwealth government announced that the Standing Committee on Tax and Revenue will inquire into and report on the development of the Australian retail corporate bond market.101

The inquiry will focus on examining the tax treatment of corporate bonds for issuers and investors to determine whether there are impediments to the issue of corporate bonds from a tax perspective compared to other forms of financing. Some industry submissions have commented on the effect of the availability of franking credits on instruments classified as equity investments for tax purposes, such as AT1 securities issued by regulatory financial institutions, compared to bonds that are classified as debt.102 The inquiry will also assess comparable policies in other jurisdictions, in addition to impediments related to the further development of the retail corporate bond market in Australia.

Public hearings for the inquiry were held in November 2020.103 No report has yet been released in respect of the findings from the inquiry.

Insider trading

In May 2021, ASIC commenced proceedings in the Federal Court against Westpac Banking Corporation, alleging insider trading, unconscionable conduct and breaches of its Australian financial services licensee obligations in contravention of Sections 912A and 1043A of the Corporations Act and Section 12CB of the ASIC Act. ASIC is seeking declarations, pecuniary penalties and ancillary orders for the hedging of large exposures, relating to the privatisation of a majority stake in electricity provider, Ausgrid. While the outcome of the proceeding is not yet known, it serves as a reminder that, in Australia, insider trading provisions are not confined to dealing in exchange traded products and extend to wholesale or OTC securities markets.104

Market practices

In September 2020, ASIC released revised practice guidelines that include ASIC's expectations of AFS licensees engaged in debt capital market transactions. These include the identification and management of potential conflicts of interest, having effective policies and procedures to identify and manage confidential and market-sensitive information, having processes to ensure information provided is not misleading or deceptive, and having active and effective supervision to monitor transactions.105

Climate change impacts

In April 2021, APRA released draft guidance for managing financial risks of climate change for consultation, with feedback to be provided by 31 July 2021. APRA has developed Prudential Practice Guide CPG 229 Climate Change Financial Risks which provides APRA's view of best practice in areas such as governance, risk management, scenario analysis and disclosure. The practice guide does not create new obligations or requirements. CPG 229 is aligned with recommendations from the Financial Stability Board's Task Force on Climate-related Financial Disclosures. The final CPG 229 is expected to be released before the end of 2021.106

ii Financial sector reforms

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 (the Royal Commission). 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.107 The government has committed to taking action on all the recommendations.108 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 institutions109 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.110

As mentioned above, the Australian government is committed to implementing all the recommendations arising out of the Royal Commission. Since the Royal Commission's final report was released, the Australian government has implemented at least 34 of these commitments and work is still underway to implement further recommendations. Recently, the Financial Regulator Assessment Authority, which assesses the effectiveness and capability of APRA and ASIC every two years, was established as a result of the Royal Commission's recommendations.111

Bank governance

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.112 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.113 In December 2020, APRA released an information paper reviewing the implementation of BEAR by certain major ADIs.114

On 4 February 2019, the commonwealth government announced that it would implement the recommendations of the Royal Commission to extend BEAR to all APRA-regulated entities, including banks, insurance and superannuation firms, and provide joint administration to ASIC as the conduct regulator. The new regime will be both an expansion of BEAR – to cover a broader range of APRA-regulated entities – and a strengthening of the obligations imposed by BEAR on institutions and individuals. On 22 January 2020, the commonwealth government released a consultation paper for this extended BEAR – now to be called the 'Financial Accountability Regime' (FAR).115

On 16 July 2021, the Australian government released the draft legislation for FAR for consultation. FAR will be jointly administered by APRA and ASIC. Provisions relating to ADIs and NOHCs are expected to commence from 1 July 2022 (or six months after the legislation receives assent, whichever is later).

The draft legislation mostly follows the proposal paper that was introduced in 2020. FAR extends the obligations imposed by the BEAR to all APRA regulated entities, and also strengthens the obligations imposed by BEAR. In particular, a wider range of people are proposed to be accountable persons, including individuals who are directors or have senior executive responsibility for any significant business divisions, dispute resolution, remediation programmes, breach reporting, compliance or internal audit. An accountable person would also include a person with end-to-end accountability for the management of each product offered by the entity (e.g., head of a business division).

Consultation on the draft legislation occurred in July and August 2021, with the passage of the legislation scheduled for late 2021. The BEAR is intended to be repealed once FAR has taken effect for those entities.

Basel III reforms and other prudential initiatives

On 1 January 2018, a new version of the liquidity standard (APS 210) introduced a net stable funding ratio (NSFR) for locally incorporated ADIs that are subject to the LCR regime. 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 2023.116

In July 2017, APRA announced new capital benchmarks for the Australian banking system to ensure it has capital ratios that are 'unquestionably strong',117 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.118 APRA is 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. APRA released an updated APS 220 (Credit Quality), which came into force on 9 September 2020 and intends to consult on a revised version of CPS 220 (Risk Management) in 2022.119 In December 2020, APRA released for consultation changes to the capital framework, aiming to embed the 'unquestionably strong' levels of capital, as well as improve flexibility and transparency, increase risk sensitive and simplify the framework.120 These measures continue to contribute to significant issues of regulatory capital by Australian ADIs.

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, 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.121 APRA has also revised its APS 115 to reflect a single standardised measurement approach for the capital treatment of operational risks.122 APRA proposes aligning the implementation date of these revised capital standards with the Basel Committee timetable of 1 January 2023, with the revised APS 115 to commence for certain ADIs on 1 January 2022.123

In August 2018, APRA announced options to improve the transparency, comparability and flexibility of the ADI capital framework.124 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 2019.125

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.126 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 has consulted on its proposed approach for the implementation of additional loss-absorbing capacity to support the orderly resolution of ADIs.127 On 9 July 2019, APRA released its response to submissions on proposed changes to the application of the capital adequacy framework designed to support the orderly resolution of a failing ADI. APRA determined that requiring ADIs to maintain additional total capital is the best course of action to support orderly resolution. However, in recognition of the concerns raised around market capacity for Tier 2 capital, APRA will set the increase in total capital requirements at three percentage points of RWA, instead of four to five percentage points.128 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.

On 2 July 2018, APRA released for consultation a discussion paper regarding its proposed revisions to the related entities framework for ADIs regarding the levels of exposure to their related entities that ADIs may have.129 Revised standards incorporating the outcomes of this review will commence on 1 January 2022.130

On 15 October 2019, APRA released for consultation a discussion paper on proposed changes to Prudential Standard APS 111 Capital Adequacy: Measurement of Capital. APRA has indicated that the proposed changes aim to ensure Australian deposit holders continue to be protected when the major banks hold significant investments in subsidiaries.131 In May 2021, APRA released a consultation package including a revised draft APS 111. Proposed revisions will increase the amount of capital required to support equity investments in large subsidiaries and reduce the amount required for small subsidiaries. Consultation for the revisions closed on 10 June 2021. On 5 August 2021, APRA released a final revised APS 111 which will come into effect from 1 January 2022.132

In December 2019, APRA commenced a consultation aimed at updating and strengthening the capital framework for private health insurers. APRA's proposals aim to increase minimum capital requirements for insurers and be in line with existing capital standards applying to the life and general insurance industries. Submissions on this consultation closed on 30 September 2020.133

In June 2021, APRA released a letter to ADIs setting out a roadmap on the implementation of capital framework reforms to 2023, including timelines for consultations and suggestions on how the industry can prepare to be compliant with the revised capital framework from 1 January 2023.134 APRA is aiming to release the final prudential standards in November 2021.135

In July 2021, APRA released a consultation letter on contingent liquidity to locally-incorporated ADIs subject to LCR requirements. Because of the covid-19 pandemic, APRA believes it would be prudent for ADIs to maintain surplus self-securitised assets amounting to at least 30 per cent of its LCR net cash outflows.136

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. The May 2021 revisions to APS 111 propose to clarify Common Equity Tier 1 capital is not permitted to have any unusual features that could undermine its role as the highest quality loss absorbing capital.137 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.138 It should be noted that this framework is not confined to mutual entities that are subject to prudential supervision by APRA or intending to raise regulatory capital. On 24 December 2020, Australian Unity issued the first mutual capital instrument.139

AONIA reference rate

The alternative reference rate for Australia is the Interbank Overnight Cash Rate (the Cash Rate), which is administered by the RBA. The RBA sets an operational target rate and, as the banks use the market for unsecured overnight interbank loans to manage their liquidity, the Cash Rate results from the average rate of those transactions, which is expected to meet the RBA's operational target rate.140 On 10 August 2020, the Australian Financial Markets Association, a member-driven industry body that represents participants in Australia's financial markets and providers of wholesale banking services, clarified the definition of AONIA to be the published screen rate for the RBA Cash Rate.141 Accordingly, the term 'AONIA' is another way to refer to the Cash Rate and is now coming into more common usage in the Australian market.142

Although there are no plans for the cessation of bank bill swap rates in Australia, AONIA is receiving some consideration as an alternative reference rate for debt capital market transactions. In June 2019, the South Australian Government Financing Authority issued a one-year floating rate note using AONIA as the reference rate. In December 2019, CBA led Australia's first AONIA-linked securitisation of residential mortgage-backed securities.143 In June 2020, the South Australian Government Financing Authority issued a three-year floating rate note using AONIA as a reference rate.144 Some domestic issuers now include AONIA as an option for issuances in their debt programmes.

Amendment to hybrid mismatch rules

On 25 August 2020, the commonwealth government passed amendments to Australia's hybrid mismatch rules.145 Among other clarifications, the amending legislation prevents imputation benefits being denied on a distribution on AT1 capital where the distribution gives rise to a foreign income tax deduction; instead, the amount is included in the issuer's assessable income. The amendments seek to ensure that the uncertainties associated with the impact on foreign laws do not unduly interfere with AT1 capital issuances.

Updated licensing approach for new banking entrants

In March 2021, APRA commenced consultation on an updated approach to licensing and supervising new ADIs, which outlines stronger requirements for being granted a banking licence. These changes reflect a focus on sustainability rather than the short-term ambition of receiving a licence and becoming an ADI, and may have been prompted by an ADI returning deposits and exiting the industry in early 2021. Consultation closed on 30 April 2021.146 APRA finalised its revised approach to licensing and supervising new ADIs on 11 August 2021. The finalised approach requires restricted ADIs to have more advanced contingency plans and a limited launch of both an income-generating asset product and deposit product. The finalised approach also provides more clarity around capital requirements for new entrants.147

Cyber resilience

In February 2021, APRA stated that they would be engaging independent auditors to assess compliance with Prudential Standard CPS 234 (Information security). APRA has emphasised that they expect firms to prioritise cybersecurity, and that APRA intends to take a more expansive approach towards cyber supervision.148

Impact of the covid-19 pandemic on Australian debt capital markets

The ongoing covid-19 pandemic has had a significant impact in Australia and on Australia's capital markets, as well as on the ability of individuals, businesses and governments to operate in Australia. Among numerous other effects, the covid-19 pandemic has led to:

  1. a reduction in the level of new issuances in capital markets, by both domestic and foreign issuers, in Australia;
  2. an initial increase in spreads, leading to the withdrawal of certain retail issues, followed by spreads beginning to contract, probably because of a lack of supply;
  3. an increase in liability management transactions as issuers deleverage;
  4. an expected increase in government debt, at both the commonwealth and state levels, as these governments introduced numerous measures aimed at counteracting the effects of the covid-19 pandemic and supporting the Australian economy during the resulting financial crisis; and
  5. the postponement of regulatory reform and changes in regulatory focus, details of which are provided below.

There continues to be considerable uncertainty as to the duration and further impact of the covid-19 pandemic, including in relation to government, regulatory or health authority actions, work stoppages, lockdowns, quarantines and travel restrictions. Given this uncertainty, the ongoing effects of the covid-19 pandemic on Australian capital markets are unclear.

Commonwealth government

In response to the covid-19 pandemic, the Reserve Bank established the Term Funding Facility (TFF) in March 2020, which offered low-cost fixed-rate three-year funding to ADIs to support borrowing. From 30 June 2021, the facility closed to new drawdowns and A$188 billion of funding was outstanding. The ending of the TFF may mean that there will be greater cause for bank issuances into the capital markets.

APRA

In March 2020, in response to the impact of the covid-19 pandemic, APRA suspended the majority of its planned policy and supervision initiatives,149 including deferring its scheduled implementation of the Basel III reforms in Australia by one year.150 In April 2020, the issuing of new licences was also suspended because of the significant challenges new entrants would have faced because of economic uncertainty. Owing to the covid-19 pandemic, APRA at one point recommended banks to hold minimum levels of earning retention. However, this position has since been retracted.151 On 10 August 2020, APRA announced that it will recommence public consultations on select policy reforms, including:

  1. the cross-industry prudential standard for remuneration;
  2. ADI capital reforms incorporating APRA's unquestionably strong framework, Basel III and measures to improve transparency, comparability and flexibility;
  3. insurance capital reforms to incorporate changes in the accounting framework; and
  4. the prudential standard for insurance in superannuation and updated guidance on the sole purpose test.

APRA has also begun a phased resumption of the issuing of new licences.152

APRA's corporate plan for 2021–2025 highlights a widening of APRA's perspective as a prudential supervisor from the previous year, and notes that, along with the ongoing pandemic, 'there are many other factors that are influencing the shape and risk profile of the financial system…to which APRA needs to respond.'153

ASIC

ASIC has delayed a number of activities not immediately necessary in light of these significantly changed circumstances, including consultations, regulatory reports and reviews.154 ASIC deferred the commencement of the design and distribution obligations referred to above (originally scheduled to commence on 5 April 2021) until 5 October 2021 because of the impact of the covid-19 pandemic.

In response to covid-19, ASIC made several changes to its supervisory approach,155 including stepping up its market supervision work to support the fair and orderly operation of markets, supporting consumers who may be vulnerable to scams and sharp practices or who fall into hardship, facilitating the timely completion of capital raisings and other urgent transactions, providing regulatory relief, where appropriate, and identifying measures to support small business. ASIC has also released a report into allocation in debt capital market transactions, and has reminded market participants of the importance of managing conflicts of interest and complying with applicable securities laws in bookbuilds and the allocation process.156

In August 2021, ASIC committed to promoting economic recovery as one of its key strategic priorities, including by targeting regulatory and enforcement action to areas of greatest harm.157

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 continues to be the subject of intense public security as well as facing unprecedented disruption arising from the covid-19 pandemic. This is likely to generate further regulatory change, some of which may affect practices in the Australian capital market.

Footnotes

1 Ian Paterson is a senior partner at King & Wood Mallesons. This chapter has been updated with the help of Louise Yun and Jenny Guo, associates 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 2019, just under A$21.1 billion worth of kangaroo bonds were issued. In February 2019, McDonald's and General Motors issued their first ever Australian dollar bonds and global children's charity VisionFund issued its first ever kangaroo bond in November 2019.

3 See 'Why Australia: Benchmark Report 2021', Australian Trade Commission (March 2021), available at www.austrade.gov.au.

4 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.

6 The prudential standards of the Australian Prudential Regulation Authority are available at www.apra.gov.au.

7 APRA Annual Report 2012, Chapter 1, page 11, available at https://www.apra.gov.au/file/10371.

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.

9 For further information, see 'Aggregate Committed Liquidity Facility available to ADIs from 1 April' at https://www.apra.gov.au.

10 For further information, see 'APRA phases out reliance on Committed Liquidity Facility' at https://www.apra.gov.au.

11 See APRA's annual Information Paper (11 December 2019) on the countercyclical capital buffer at https://www.apra.gov.au. See also media release 'APRA holds countercyclical capital buffer at zero per cent' at https://www.apra.gov.au.

12 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.

13 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.

14 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.

15 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.

16 See 'Foreign financial services providers – practical guidance', available at https://asic.gov.au.

17 See ASIC Corporations (Amendment) Instrument 2021/510.

18 The terms and conditions of debt securities issued by foreign issuers need to be governed by 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. There have been instances of foreign issuers issuing debt securities partially, or in some cases wholly, governed by foreign law for foreign regulatory capital purposes.

19 APRA Prudential Standard APS 111, Attachment E Paragraph 14 and Attachment H Paragraph 13.

20 Sections 766A(1)(b), 766B and 911A of the Corporations Act.

21 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.

22 For more information see APRA's paper 'Statistics: Quarterly authorised deposit-taking institution performance statistics - highlights' (released 8 June 2021), available at https://www.apra.gov.au.

23 See APRA's 'Monthly Authorised Deposit-taking Institution Statistics' (June 2021), available at https://www.apra.gov.au.

24 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.

25 See APRA's 'Licensing for authorised deposit-taking institutions', available at https://www.apra.gov.au.

26 Letters of 14 April 2011 and 19 September 2013 entitled 'Operation of Foreign Banks in Australia' to all ADIs, available at https//www.apra.gov.au.

27 This law was previously introduced as the Treasury Laws Amendment (Non-ADI Lender Rules) Bill 2017 and was passed into law as the Treasury Laws Amendment (Banking Measures No. 1) Bill 2017.

28 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. ASIC is currently consulting on remaking Class Order [12/1482] 'When debentures can be called secured notes', due to expire on 1 April 2022, to continue the relief currently given without significant changes.

29 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).

30 For more information, see 'Product intervention powers' in Section II.i.

31 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.

32 ASIC, Regulatory Guide 228: Prospectuses: Effective Disclosure for Retail Investors (August 2019).

33 Previously, in 2010, ASIC had provided class order relief to promote the issue of vanilla corporate bonds to retail investors, but very few issues were undertaken based on this relief.

34 Among the key requirements are that the securities be debentures, in Australian dollars, for a term of not more than 15 years, not subordinated and not convertible into other classes of securities. Early redemption rights are also regulated.

35 The legislation is now in Sections 713B to 713E of the Corporations Act and Regulation 6D2.04-06 of the Corporations Regulations.

36 See Section 9 of the Corporations Act.

37 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.

38 See Section 601CD(2) of the Corporations Act.

39 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.

40 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.

41 Wingecarribee Shire Council v. Lehman Brothers Australia Ltd (in liq) (2012) 301 ALR 1.

42 ABN Amro Bank NV v. Bathurst Regional Council (2014) 224 FCR 1.

43 A general description of Australia's taxation regime is beyond the scope of this chapter but can be found in 'A guide to doing in business in Australia', available at www.kwm.com.

44 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.

45 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.

46 In addition to the ASX and Chi-X, there are a number of small regional securities exchanges that operate in Australia.

47 See 'CHESS Replacement: Confirmed Implementation Timetable Response to consultation feedback' (October 2020) available at https://www2.asx.com.au.

48 For more information, see '20-229MR ASIC and RBA announce expectations for CHESS replacement' at https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-229mr-asic-and-rba-announce-expectations-for-chess-replacement/.

49 See ASIC Market Integrity Rules (Securities Markets – Capital) 2017.

50 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/.

52 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.

53 See Part 3 of Schedule 2 to the Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018.

55 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.

56 These reforms were implemented through ASIC Derivative Transaction Rules (Clearing) 2015.

57 See Corporations Act, Section 901D(a); Corporations Regulations 2001 of Australia, Regulation 7.5A.50(2).

58 See Corporations Regulations 2001 of Australia, Regulation 7.5A.50(3).

59 Prior to 9 September 2017, this framework sat under the Corporations Amendment (Financial Benchmarks) Bill 2017.

60 For more information, see 'Benchmark Administration' at https://www.asx.com.au/services/benchmark.htm.

61 For more information, see 'Financial benchmarks' at https://asic.gov.au/regulatory-resources/markets/financial-benchmarks/.

62 ASIC v. Westpac (No. 2) (2018) 357 ALR 240. 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), as well as contravening its financial services licensee obligations.

63 ASIC Financial Benchmark (Compelled) Rules 2018 (Cth).

64 Access to the Guarantee Scheme for new liabilities was closed in March 2010.

65 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.

66 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.

67 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) [2019] FCA 807 supports findings in Australian Securities and Investments Commission v. Fortescue Metals Group Ltd (2011) 190 FCR 364 that the business judgement rule is no defence to failing to comply with continuous disclosure obligations as such continuous disclosure decisions are not business judgements (see at [739]).

68 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.

69 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.

70 Australian Securities and Investments Commission v. Cassimatis (No. 8) [2016] FCA 1023 at [496]–[525]. At [525] 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.

71 Australian Securities and Investments Commission v. Vocation Limited [2019] FCA 807. Judgment in this proceeding was given by the Federal Court of Australia on 31 May 2019.

72 For more information, see the Bills Digest for the Personal Liability for Corporate Fault Reform Bill 2012, available at https://www.aph.gov.au.

73 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'.

74 Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018.

75 On 1 January 2011, the Trade Practices Act 1974 of Australia was amended and renamed the Competition and Consumer Act 2010.

76 For more information, see media release 'APRA and ACCC sign updated Memorandum of Understanding' at https://www.apra.gov.au/news-and-publications/apra-and-accc-sign-updated-memorandum-of-understanding.

78 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'.

79 Personal Property Securities Amendment (Deregulatory Measures) Act 2015 of Australia.

80 The response is available at www.treasury.gov.au/fsi.

81 See the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019.

82 For more information, see 'Review into Open Banking in Australia – Final Report' at https://treasury.gov.au/consultation/c2018-t247313/.

83 For more information, see 'Competition in the Australian Financial System' at https://www.pc.gov.au/inquiries/completed/financial-system/report.

84 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.

85 For more information, see media release 'ANZ, Citigroup and Deutsche Bank committed for trial in Federal Court on criminal cartel charges' at https://www.accc.gov.au/media-release/anz-citigroup-and-deutsche-bank-committed-for-trial-in-federal-court-on-criminal-cartel-charges.

87 See ASIC Regulatory Guide 272 'Product Intervention Power' (17 June 2020), available at https://asic.gov.au.

88 This decision was upheld by the Full Federal Court on 29 June 2021.

89 See ASIC Corporations (Product Intervention Order – Short Term Credit) Instrument 2019/917 (12 September 2019).

90 See ASIC Consultation Paper 330 'Using the product intervention power: Continuing credit contracts' (9 July 2020) and addendum to Consultation Paper 330 (10 November 2020), available at https://asic.gov.au. This order would allow ASIC to address significant detriment identified in the continuing credit industry, which often affected vulnerable clients and those in financial difficulty.

91 ASIC Corporations (Product Intervention Order—Binary Options) Instrument 2021/240.

92 ASIC Corporations (Product Intervention Order—Contracts for Difference) Instrument 2020/986.

93 For more information, see media release 'World Bank and CBA partner to enable secondary bond trading recorded on blockchain' at https://www.commbank.com.au.

97 'Responsible Investment Benchmark Report – 2020 Australia', available at https://responsibleinvestment.org/wp-content/uploads/2020/10/RIAA-RI-Benchmark-Report-Australia-2020.pdf.

99 For more information, see 'Responsible Investment Benchmark Report: 2019 Australia' prepared by Responsible Investment Association Australasia, available at https://responsibleinvestment.org/.

100 For more information, see the Standing Committee on Tax and Revenue's Terms of Reference for the inquiry, available at https://www.aph.gov.au/Parliamentary_Business/Committees/House/Tax_and_Revenue/CorporateBondMarket/Terms_of_Reference.

104 For more information, see '21-093MR ASIC commences civil proceedings against Westpac for insider trading' at https://asic.gov.au/about-asic/news-centre/find-a-media-release/2021-releases/21-093mr-asic-commences-civil-proceedings-against-westpac-for-insider-trading/.

105 For more information, see '20-219MR ASIC and IOSCO report on conflicts of interest within debt capital raising process' at https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-219mr-asic-and-iosco-report-on-conflicts-of-interest-within-debt-capital-raising-process/.

106 For more information, see 'APRA releases guidance on managing the financial risks of climate change' at https://www.apra.gov.au.

107 For more information, including a copy of the final report, see https://treasury.gov.au/publication/p2019-fsrc-final-report.

110 See below for further information on ASIC and APRA.

111 The Financial Regulator Assessment Authority is established under the Financial Regulator Assessment Authority Bill 2021, which received Royal Assent on 29 June 2021.

112 The Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Act 2018 is available at https://www.legislation.gov.au/Details/C2018A00005.

113 The Banking Executive Accountability Regime (Size of an Authorised Deposit-taking Institution) Determination 2018 is available at https://www.legislation.gov.au/Details/F2018L00651.

114 For further information, see media release 'APRA releases information paper on BEAR implementation at three large ADIs' at https://www.apra.gov.au/news-and-publications/apra-releases-information-paper-on-bear-implementation-at-three-large-adis.

115 For further information see 'Financial Accountability Regime (FAR)' at https://treasury.gov.au/consultation/c2020-24974.

116 See media release 'APRA responds to submissions on ADI leverage ratio, and extends timeline for broader capital framework reforms' (November 2018) at https://www.apra.gov.au; see media release 'APRA announces deferral of capital reform implementation' (30 March 2020) at https://www.apra.gov.au. On 21 November 2019, APRA also released a response to submissions in relation to the November 2018 consultation on the leverage ratio requirement for ADIs and also proposed further amendments to incorporate recent technical changes to the Basel Committee on Banking Supervision's leverage ratio standard.

117 For further information, see 'Information Paper: Strengthening banking system resilience – establishing unquestionably strong capital ratios' (19 July 2017) at www.apra.gov.au.

118 See APRA media release 'APRA responds to first phase of consultation on revisions to ADI capital framework' (June 2019), available at https://www.apra.gov.au.

119 See APRA Discussion Paper 'APS 220 Credit Risk Management' (March 2019), available at https://www.apra.gov.au. On 12 December 2019, APRA released an updated prudential standard on credit risk management requirements for authorised deposit-taking institutions that will come into effect from 1 January 2022. In December 2020, APRA invited feedback on the revisions on the APS 220 released in September, which will be subject to public consultation. APRA also released a draft Prudential Practice Guide 'APG 220 Credit Risk Management' (APG 220) for consultation. The three-month consultation in relation to this APG 220 closed on 12 March 2020. On 19 August 2021, APRA released a letter to ADIs and the final Prudential Practice Guide for APG 220 Credit Risk Management.

120 See APRA media release 'APRA seeks to enhance flexibility and resilience of ADI capital framework' available at https://www.apra.gov.au.

121 See APS 112 Capital Adequacy: Standardised Approach to Credit Risk.

122 See APS 115 Capital Adequacy: Standardised Measurement Approach to Operational Risk.

123 See APRA's response at https://www.apra.gov.au/sites/default/files/response_to_submissions_-_revisions_to_the_capital_framework_for_adis.pdf; see media release 'APRA announces deferral of capital reform implementation' (30 March 2020) available at https://www.apra.gov.au and media release 'Governors and Heads of Supervision announce deferral of Basel III implementation to increase operational capacity of banks and supervisors to respond to Covid-19' (27 March 2020) available at https://www.bis.org.

124 See Discussion Paper 'Improving the transparency, comparability and flexibility of the ADI capital framework' (14 August 2018) at https://www.apra.gov.au.

125 See APS 180; for more information see 'Counterparty credit risk for ADIs' at https://www.apra.gov.au/counterparty-credit-risk-adis.

126 See Discussion Paper 'Increasing the loss-absorbing capacity of ADIs to support orderly resolution' (8 November 2018) at https://www.apra.gov.au.

128 For more information, see 'Response to submissions – loss-absorbing capacity' available at https://www.apra.gov.au.

129 See Discussion Paper 'Revisions to the related entities framework for ADIs' (July 2018) at https://www.apra.gov.au.

130 See APRA media release 'APRA announces new commencement dates for prudential and reporting standards' (16 April 2020), available at https://www.apra.gov.au.

131 For more information see 'Revisions to Prudential Standard APS 111 Capital Adequacy: Measurement of Capital' at https://www.apra.gov.au.

132 For more information, see 'APRA releases consultation to enhance capital adequacy for ADIs with subsidiaries' at https://www.apra.gov.au.

133 For more information, see 'Review of the private health insurance capital framework' at https://www.apra.gov.au.

134 For more information, see letter 'ADI Capital Reforms: Roadmap to 2023' at https://www,apra.gov.au.

135 For more information, see letter 'Bank Capital Reforms: Update' at https://www.apra.gov.au.

136 For more information, see letter 'Contingent liquidity – proposed guidance' at https://www.apra.gov.au.

137 For more information, see 'APRA releases consultation to enhance capital adequacy for ADIs with subsidiaries' at https://www.apra.gov.au.

138 See Treasury Laws Amendment (Mutual Reforms) Act 2019.

140 For more information see 'Benchmarks Update: March 2019' at https://afma.com.au/policy/member-news/2019/2019_03_Benchmarks_Update.pdf.

142 For more information see 'Benchmarks Update: March 2019' at https://afma.com.au/policy/member-news/2019/2019_03_Benchmarks_Update.pdf.

145 Treasury Laws Amendment (2020 Measures No. 2) Bill 2020.

146 For more information, see 'APRA updates licensing approach for new banking entrants' at https://www.apra.gov.au.

147 For more information, see 'APRA finalises new approach to licensing and supervising new banks' at https://www.apra.gov.au.

148 For more information, see 'Corporate Plan 2020/24' (August 2020) at https://www.apra.gov.au.

149 See APRA media release 'APRA adapts 2020 agenda to prioritise COVID-19 response' (23 March 2020), available at https://www.apra.gov.au.

150 See APRA media release 'APRA announces deferral of capital reform implementation' (30 March 2020), available at https://www.apra.gov.au.

151 For further information, see 'Letter to authorised deposit-taking institutions – Capital management' available at https://www.apra.gov.au and see media release 'APRA updates capital management guidance and releases ADI stress test results' at https://www.apra.gov.au.

152 See media release 'APRA to recommence prudential policy program and issuing of new licences' at https://www.apra.gov.au.

153 See 'APRA's new Corporate Plan focuses on protecting today, while preparing for tomorrow' at https://www.apra.gov.au.

154 See ASIC media release 'Details of changes to ASIC regulatory work and priorities in light of COVID-19' available at https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-086mr-details-of-changes-to-asic-regulatory-work-and-priorities-in-light-of-covid-19/.

155 See ASIC media release 'Details of changes to ASIC regulatory work and priorities in light of COVID-19' available at https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-086mr-details-of-changes-to-asic-regulatory-work-and-priorities-in-light-of-covid-19/.

156 'Allocations in debt capital market transactions' (Report 668, September 2020) available at https://asic.gov.au/regulatory-resources/find-a- document/reports/rep-668-allocations-in-debt-capital-market-transactions/.

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