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Corporate Law Economic Reform Program - Proposals for Reform: Paper No. 6


This is the initial position paper released in 1997.



Australian financial markets perform a fundamental economic function by facilitating the allocation of savings and resources to their most productive uses. Securities, derivatives and other investment markets can materially influence the long term financial security of many Australians. Household investment in financial assets is steadily increasing and financial markets play a key role in the pricing and management of these assets.

Efficient and credible financial markets will more readily attract domestic and foreign investment which, in turn, will contribute to the Government’s broader policy objectives of increased employment and sustainable economic growth. For example, efficient stock markets facilitate the flow of capital into private enterprise which promotes employment and business expansion.

To make Australia a leading edge financial centre we must develop a regulatory regime that encourages innovation and competition through providing a flexible and adaptable framework. The reforms proposed in this paper form a significant plank in the Government’s commitment to building Australia as a major financial centre. This will encourage investment and jobs.

Financial markets and intermediaries have experienced major change since the development of the current regulatory framework. Technological developments, globalisation and increased competition have had a major impact on market services and products. These forces are blurring traditional boundaries between institutions and products and presenting greater choices for investors. Also, retail investment is growing as a result of the heightened awareness of the need to provide for retirement and the attractiveness of large privatisations as investment vehicles. This highlights the need to ensure that regulation provides appropriate protection for retail investors which will encourage participation by first time investors.

The current regulatory framework has been criticised for failing to keep pace with market developments and modern commercial practices. Given the important role of financial markets in the Australian economy, it is critical that the regulatory regime for markets and financial intermediaries is consistent with the Government’s wider economic objectives. Market regulation needs to be reassessed to ensure that it takes account of the realities of the modern commercial environment and permits market participants to respond to the challenges presented by financial innovation and globalisation in a timely and sensitive manner. The regulatory regime should facilitate the mobilisation and investment of savings by the development of new and diverse markets and financial products, while at the same time enhancing efficiency, integrity and investor confidence.

To this end, this paper forms part of the Government’s Corporate Law Economic Reform Program (CLERP) which is reviewing key areas of business regulation to ensure that it is consistent with promoting a strong and vibrant economy. The policies outlined in the paper have been developed in consultation with a broad range of individuals and associations in the business and professional communities, as well as the Business Regulation Advisory Group (see Appendix A).

Scope of this Paper

The purpose of this paper is to identify the objectives of financial market regulation and propose a flexible, forward looking regulatory regime to satisfy those objectives. The proposals outlined in this paper deal with the Financial System Inquiry, Final Report (FSI) recommendations to:

  • provide consistent and comparable disclosure obligations for retail financial products including the introduction of profile statements (Recommendations 8 and 9);
  • introduce a single licensing regime for financial sales, advice and dealings with separate categories for investment advice on financial products (Recommendations 13 and 15);
  • replace the current regulation of securities and futures with a broader regulatory framework for ‘financial products’ (Recommendation 19);
  • permit retail participation in over the counter (OTC) derivatives markets (Recommendation 20);
  • introduce a single authorisation procedure for financial exchanges (Recommendation 21);
  • provide comparable regulation of financial exchanges and OTC markets (Recommendation 22);
  • regulate OTC markets through the licensing regime (Recommendation 23);
  • authorise clearing and settlement facilities (Recommendation 24); and
  • harmonise the regulation of collective investments and public offer superannuation (Recommendation 89).

Other recommendations of the FSI which will affect the financial markets include recommendations relating to the role and powers of the regulator. The proposals for reform are consistent with the FSI recommendations to:

  • establish a single agency called the Australian Corporations and Financial Services Commission (ACFSC) with comprehensive responsibilities to oversee the Corporations Law, financial market integrity and financial sector consumer protection (Recommendations 1 and 2); and powers to use a combination of regulatory approaches including the adoption of codes (Recommendation 7);
  • retain the Australian Competition and Consumer Commission (ACCC) responsibility for competition issues (Recommendations 5 and 80);
  • permit the ACFSC to devolve responsibility for accrediting market participants to industry bodies (Recommendation 14);
  • provide the ACFSC with broad enforcement powers (Recommendation 27);
  • improve reporting requirements of regulatory agencies (Recommendation 109);
  • place responsibility for the regulation of exchange risk controls with the ACFSC (Recommendation 57);
  • ensure that all regulatory agencies monitor the evolution of wholesale markets for the presence of institutions that are not otherwise subject to local or overseas regulation or prudential oversight (Recommendation 58); and
  • encourage the ACFSC to participate in global regulatory programs in relation to cross-border financial transactions(Recommendation 29).

This paper also deals with the recommendations of the Companies and Securities Advisory Committee Final Report on the Regulation of On-Exchange and OTC Derivatives Markets (CASAC).

Government Response to Financial System Inquiry Recommendations

On 2 September 1997, the Treasurer announced the Government’s response to the FSI recommendations. The Government has agreed to establish a new regulatory framework for the financial system. The agreement of the States and Territories will be required in order to establish the proposed regulatory framework.

Three regulatory agencies, each with system-wide responsibilities for the different objectives of government intervention in the financial system, will form the new framework:

  • the Reserve Bank of Australia (RBA) will be responsible for monetary policy, financial system stability and regulation of the payments system;
  • an Australian Prudential Regulation Authority (APRA) will provide prudential regulation for deposit taking institutions, life and general insurance companies, and superannuation funds; and
  • an Australian Corporations and Financial Services Commission (ACFSC) will provide regulation for the integrity of market conduct, consumer protection and corporations.

There will be legislative provisions to authorise the exchange of confidential information among the three regulators and there will be close co-operation between them, both bilaterally and through a Council of Financial Regulators for coordination across a wide range of issues.

Basis of New Regulatory Regime for Financial Markets and Investment Products

The new regulatory regime for financial markets and investment products is based upon:

  • provi
    ding comparable regulation of all financial products, including securities, derivatives, superannuation, life and general insurance and bank-deposit products;
  • licensing financial markets and providing consistent and comparable regulation for similar financial products;
  • licensing all financial intermediaries and imposing harmonised statutory obligations designed to protect retail investors; and
  • ensuring that ‘promoters’ or issuers of financial products provide comprehensible disclosure documents which assist investors to make informed decisions.

Significant benefits will be conferred on market participants and investors by providing a more uniform regulatory regime for financial markets, intermediaries and investment products. The development of a single regulatory regime will reduce administration costs and the costs imposed on intermediaries who must currently comply with different regulatory regimes. The proposals will also provide more certainty by removing unnecessary distinctions between financial products and encourage competition by providing a more competitively neutral regime for the regulation of markets and intermediaries.

Inquiries concerning this paper and its implementation can be made to:

Russell Campbell - Tel: (02) 6263 3962
Sue Vroombout - Tel: (02) 6263 3048
Vicki Wilkinson - Tel: (02) 6263 3977
John Dyson - Tel: (02) 6263 3094

all of Financial Markets Division, The Treasury.