The Federal Government’s objective of promoting Australia as a financial services hub and improving competition between market operators is commendable. However, the new market regulation regime, introduced to foster market competition, contains several flaws which need to be addressed.
Legislation enacting the reforms was passed in March in the form of the Corporations Amendment (Financial Market Supervision) Act 2010 (Reform Act). Under this law, major domestic securities exchanges such as the Australian Securities Exchange (ASX) and the Sydney Futures Exchange (SFE) will transfer their market supervisory functions to the Australian Securities and Investments Commission (ASIC).
In addition to promoting Australia as a financial services hub, the Government sees the Reform Act as a further step towards improving regulation of the financial industry and promoting competition by removing the conflicts of interest inherent in the current law whereby financial markets supervise themselves.
It does this by removing the obligation on domestic holders of Australian market licences (AMLs), such as ASX, to supervise their markets; providing ASIC with responsibility for supervising domestic financial markets; and providing ASIC with additional powers, including the power to make Market Integrity Rules (MIRs) and to establish a Markets Disciplinary Panel (MDP) to enforce the MIRs.
Market Integrity Rules
ASIC released a consultation paper (CP 131) in March setting out proposals for its new MIRs for the ASX and SFE, which are largely based on the existing ASX Market Rules and SFE Operating Rules. ASIC’s current intention is also to follow ASX’s and SFE’s existing Guidance Notes in respect of the application of the MIRs.
However, the MIRs will only apply to domestic AML holders, participants of licensed markets and prescribed entities under the regulations. They will not apply to overseas AML holders, which are licensed under section 795B(2) of the Corporations Act (Overseas Market Operators).
The MIR will cover three areas of regulation – market misconduct, brokers’ dealings with clients and participants’ internal management. Breaches under the MIRs will attract a civil penalty under the Corporations Act. The most serious offences will attract a maximum fine of $1 million, in line with current ASX penalties.
Market Disciplinary Panel
Another consultation paper (CP 136) was released in May detailing the functions of the proposed MDP, which will be comprised of a panel of experts from the financial services industry appointed by ASIC to consider alleged breaches of MIRs. The MDP will have power to issue infringement notices as an alternative to civil penalties.
The maximum penalty the MDP can impose is $600,000 for very serious breaches, such as market manipulation. Alternatively, infringement notices can direct remedial action, such as paying compensation and attendance at training courses.
In addition to issuing infringement notices, the MDP can approve any enforceable undertaking issued by ASIC to ensure consistent outcomes and market credibility. These enforceable undertakings can cover penalty payments, compensation payments, training and all the other matters that an infringement notice can cover.
Flaws in the new regime
We have identified a number of flaws in the new regime:
- The rationale behind limiting the application of the MIRs to domestic AML holders, participants of licensed markets and prescribed entities under the regulations is questionable. All AML holders should be subject to MIRs, including Overseas Market Operators.
- It is unclear how, in practice, ASIC’s MIRs will interact with the operating rules of domestic AML holders. The ASX and SFE are currently re-writing their operating rules to reflect the reforms, however, at the time of publication of this article, these have not yet been issued. Similarly, the ongoing role of the ASX disciplinary
- tribunal is also unclear given the new role of the MDP.
- The maximum $1 million penalty for breach of a MIR by an individual or a corporation is too low. In comparable jurisdictions, such as in the UK, there is no limit to the relevant penalties.
The objectives of promoting Australia as a financial services hub and increasing competition would be better served if the procedures to obtain an AML were simpler and gave greater recognition to a body which is appropriately regulated in a recognised overseas jurisdiction.
The introduction of a concept of “approved overseas jurisdictions” for market licensing purposes should be considered. This would allow an Overseas Market Operator that is already licensed and regulated in its home jurisdiction to be exempt from the AML requirements where it operates a professional or wholesale market in Australia. To rely on the exemption, it would have to satisfy the conditions of the exemption, including submitting to the jurisdiction of the Australian courts in respect of its domestic activities. A viable equivalent regime already exists in the context of Australian financial services licences (AFSLs), under ASIC Regulatory Guide 176 and related instruments, whereby certain overseas regulated financial services providers that are appropriately licensed and regulated in their home jurisdictions are exempt from the AFSL requirements.