The IMF conducted a Financial Sector Assessment Program (FSAP) for Australia in 2006 and concludes that Australia has a high overall level of compliance with the International Organization of Securities Commissions (IOSCO) Principles. The assessment adds that the Australian Securities and Investments Commission (ASIC) - the securities regulator in Australia - is generally at the forefront of international best practices in supervision and regulation, and is continuously reforming itself to improve its capacity as well as supervisory policies and practices. The areas with less than full compliance include operational independence of the supervisor, disclosure and insolvency regimes, and licensing and regulation of collective investment schemes, where Australia is only broadly compliant; prudential regulation of intermediaries, and regulation of large exposures, defaults and market disruptions, where Australia is partly compliant; and inspection, investigation and surveillance powers of the regulator, where Australia is adjudged non-compliant. A 2008 IMF report notes the progress made by Australia to implement the 2006 FSAP recommendations and reports that funding to the ASIC has been increased in the 2007-2008 Budget to support better regulation and enhance its supervisory resources and practices, streamline the corporate register, and develop its information technology systems over a four-year period. The report welcomes the continued effort of the Australian authorities to formalize the failure resolution and crisis management framework and also observes progress in the anti-money laundering/combating the financing of terrorism area. Several other laws, ASIC Policy Statements/Regulatory Guides and auditing standards have been framed or amended after the FSAP that bring Australia closer in line with IOSCO requirements.

General Overview

Australia's financial system is healthy, profitable, and resilient to shocks, observes the 2007 Article IV consultation report for Australia by the International Monetary Fund (IMF) and credits the deep, open and transparent financial markets for this achievement. Similarly, the "Public Information Notice" section of this report also notes that the supervision by the Australian Securities and Investments Commission (ASIC) is "well-established and continues to be refined" (p. 3). The 2007 IMF Article IV report finds that though some potential vulnerabilities identified by the 2006 Financial Sector Assessment Program (FSAP) continue to linger, the Australian authorities "have endorsed the key recommendations of the FSAP" (p. 10) and are working towards implementing some of them. The ASIC, as both the 2007 and the 2008 Article IV reports mention, has also received additional funding from the government budget to support its better regulation initiative program; streamline its corporate register; and develop its information technology systems over four years.

The IMF conducted an FSAP for Australia in 2006 and concluded that Australia "has a high overall level of compliance with the IOSCO [International Organization of Securities Commissions] Principles" (p. 40). The assessment notes that the implementation of a principles-based approach to regulation in Australia largely meets the vast number of detailed requirements of the IOSCO Principles. The preconditions for effective securities regulation are also well-established, with the country adopting wide-ranging structural reforms, sound fiscal and monetary policy frameworks and an "appropriate body of commercial law and a respected judiciary" (p. 40). Stock market capitalization is large, exceeding the country's GDP. Under the functional approach to supervision, the ASIC is not only the market conduct supervisor of the financial sector as a whole, but also the prudential supervisor of all listed and unlisted companies. As a matter of fact, the ASIC is the prudential regulator of "financial services providers that do not fall within those categories of firms [i.e. banks, building societies, credit unions, insurance companies, and friendly societies that are prudentially regulated by the Australian Prudential Regulation Authority (APRA)] such as financial advisers, and non-bank securities and derivatives brokers and dealers" (2006b, p. 96). The ASIC's supervision seeks to ensure that the financial services provider is well financed to meet its statutory obligations; has a financial buffer to absorb risks of loss or business failure; and is structured to incentivize compliance through fear of loss. The Australian Securities and Investments Commission Act spells out one of the functions of the ASIC as "monitoring and promoting market integrity and consumer protection in relation to the Australian financial system." The IMF assessment further adds that though the ASIC is a relatively new Commonwealth agency, it is generally at the forefront of international best practices in supervision and regulation, and is continuously reforming itself to improve its capacity as well as supervisory policies and practices. The IMF advises it to be persistent in its staff attraction and retention practices to ensure experienced staff with a wide and deep understanding of financial system risk and supervision of large institutions. The ASIC is listed as a member on the IOSCO website. It is also a signatory to the IOSCO Multi-lateral Memorandum of Understanding (MMoU) which implies that IOSCO's screening committee considered that Australia's legal and regulatory framework provides for effective cooperation and coordination with foreign regulators.

The main recommendations of the 2006 IMF assessment pertain to the capacity of ASIC, the role of the Treasury as it impacts the operational independence of the ASIC, the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework, and the framework for financial institution failure and crisis management. The assessment, however, mentions the Council of Financial Regulators (CFR) that is made up of high-level representatives of the Reserve Bank of Australia (RBA), the Treasury, the APRA, and the ASIC, and meets regularly. The assessment notes that it is a vital forum for the Australian financial sector, especially in the time of a financial crisis, when it could be used for coordination and development of a formal official response. In this regard, the 2008 IMF report welcomes the continued effort of the Australian authorities to formalize the failure resolution and crisis management framework that includes the introduction of legislation in Parliament in June 2008 to launch the Financial Claims Compensation Scheme. The report observes progress in the AML/CFT area as well; the Anti-Money Laundering and Counter-Terrorism Financing Act was passed in December 2006 with the potential of addressing many of the weaknesses pointed out in the 2006 FSAP.

The Principles

1. The responsibilities of the regulator should be clear and objectively stated.

FC

This principle is implemented, per the 2006 IMF FSSA. The provision of financial services is regulated by the ASIC whose responsibilities "are clearly defined and transparently set out" (p. 96). The chief law laying down the powers and functions of the ASIC is the 2001 Australian Securities and Investments Commission Act. This Act sets out explicitly the powers conferred upon the ASIC by other laws, mainly the 2001 Corporations Act; the 1984 Insurance Contracts Act; the 1993 Superannuation (Resolution of Complaints) Act; the 1995 Life Insurance Act; the 1997 Retirement Savings Accounts Act; and the 1993 Superannuation Industry (Supervision) Act. The ASIC does not have rule-making powers, which is the domain of the Treasurer. The ASIC does, however, issue Policy Statements and guidance on interpreting the regulations and legislation. The agency also has broad powers to grant exemptive relief from some parts of the Corporations Act. All Policy Statements, guidance and practice notes, individual relief instruments, and class orders issued by the ASIC are made publicly available on its website and the ASIC Gazette. The IMF assessment comments that though the ASIC's rule-making powers are very limited compared to other IOSCO members or even to the APRA, its power to grant exemptive relief is an important tool giving it considerable leverage to interpret and administer the Corporations Act under which major day-to-day business decisions are taken.

2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.

CP

This principle is broadly implemented, per the 2006 IMF assessment. The ASIC, as part of the executive branch of the government, is responsible to the Treasurer who is then accountable for the ASIC's actions to the Parliament. The IMF assessment observes that several powers of the Treasurer over the ASIC in this system of parliamentary responsibility could encroach upon the operational independence of the latter. The Treasurer can give written directions to the ASIC dictating its policies and priorities and instruct the ASIC to conduct an investigation in the public interest. Further, the ASIC is funded out of the Government's budget as approved by Parliament, and a growing proportion of its funding has been tied up in special purpose funds valid for limited periods. These above limitations have the potential of fettering the ASIC's operational independence. The assessment, therefore, recommends Australia to amend the Australian Securities and Investments Commission Act to remove the power of the Treasurer to give directions and instructions to carry out an investigation. The assessment also advises placing lesser emphasis on special purpose funding and enabling the ASIC to fund itself directly from levies on the financial services entities. The Australian authorities, however, respond by stating that "there is no intent to introduce new levies on corporations" (2006b, p. 126) and explain that the notions of independence espoused by IOSCO can not be reconciled with those of ministerial accountability as practiced in the Australian system of government. Further, as the assessment mentions, the government's implementation of the Uhrig Review under which the Treasurer can issue Statements of Expectation to the ASIC is also rife with the potential of making the ASIC a forum for the Treasury to implement its own agenda. In response, the authorities urge IOSCO to reconsider the requirements of this principle with an emphasis on administrative independence rather than "absolute strategic and financial autonomy from the executive arm of Government" (IMF 2006b, p. 126).

As for accountability, the IMF assessment notes that the ASIC is operationally transparent and publicly accountable for its actions. It publishes mandatory annual reports with audited accounts that are presented to the Parliament. The appointment of the APRA staff meets all requirements of this principle.

3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

FC

The 2006 IMF assessment finds that this principle is implemented. The ASIC has "an appropriate range of powers and other regulatory tools that fully reflect the fact that it has civil and criminal jurisdiction and extensive and diverse responsibilities as regulator of the corporate sector, markets regulator and regulator of financial services providers" (IMF 2006b, p. 98). Its powers of licensing, setting conditions for licenses, ongoing supervision, inspection, investigation and enforcement are "comprehensive" (IMF 2006b, p. 98). The ASIC's resources, as allotted to it in the national budget, are also adequate to meet its supervisory objectives, and it can allocate them as it finds appropriate, except in the case of special purpose funds that are earmarked for - as their name suggests - special purposes. The Australian authorities respond by stating that the ASIC has seen increases in its funding in the previous years and that evidences continued government support to the ASIC's regulatory role.

4. The regulator should adopt clear and consistent regulatory processes.

FC

The 2006 IMF assessment finds this principle implemented. All Policy Statements and policy notes issued by the APRA for its supervised entities are publicly available in the interest of operational consistency and regulatory transparency. The Freedom of Information Act also empowers an individual to see any document held by the ASIC under certain limitations. Any decision taken by the ASIC must be backed by reasons and persons subject to it are entitled to a hearing on it. Though the Treasurer or the ASIC are not required by law to consult with the general public or persons affected by their regulations or administrations, in practice both regulators consult with industry bodies, general public as well as other regulators extensively. The IMF assessment, however, suggests improvements in this consultation process by advising that it be more informal and start at the policy formulation phase, and also that the industry give more committed input to the process.

5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

FC

Per the 2006 IMF assessment, this principle is implemented. The ASIC staff are subject to the Australian Public Service Values and the Australian Public Service Code of Conduct "which set out the highest standards of behavior including requirements to behave honestly and with integrity, to disclose or avoid conflict of interest, not to make improper use of inside information" (IMF 2006b, p. 99). Strict confidentiality is also maintained with regard to personal information. The ASIC staff is further subject to a broad range of sanctions for non-compliance with the Public Service Act and the Code of Conduct spanning reprimands and termination of employment.

6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.

FC

This principle is implemented, as noted by the 2006 IMF assessment. Per the ASIC, there are no SROs in Australia and it is the sole license-granting authority in the country. The assessment therefore notes that "IOSCO has indicated that there are no criteria for this Principle" (2006b, p. 100). However, the assessment finds that there are certain entities such as those licensed as markets and clearing and settlement faculties that perform some self-regulatory functions such as have eligibility, trading, disciplinary and sanction rules for participants.

7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

FC

The 2006 IMF assessment finds this principle implemented. The assessment further notes that the "regulatory functions carried out by Australia's exchanges and their regulation by ASIC are described in Principles 25 and 26" (2006b, p. 100).

8. The regulator should have comprehensive inspection, investigation and surveillance powers.

II

The 2006 IMF assessment finds that this principle is not implemented. While the ASIC has a comprehensive range of inspection, investigation and surveillance powers in almost all respects, its powers to impose AML/CFT requirements on the financial services providers or to impose sanctions for non-compliance is limited. The AUSTRAC, which is the country's AML/CFT regulator, also does not fill in the gaps and the legislative framework provided by the Financial Transaction Reports Act has many limitations, too. This accounts for the no compliance rating from the IMF FSSA. The IMF, however, notes that Australia is in the process of reforming its AML/CFT regime to come in line with international standards. In this context, a U.S. Department of State's (U.S. DoS) 2008 report attests that the Anti-Money Laundering and Counter-Terrorism Financing Act that was passed in 2006 and later amended in 2007 imposes many new reporting and record-keeping requirements on financial sector entities that were missing in the Financial Transaction Reports Act and also introduces risk-based supervision. The new Act makes the AUSTRAC the prime AML/CFT regulator as well as the country's financial intelligence unit and broadens its powers to ensure AML/CFT compliance. However, the U.S. DoS report does not directly address Australia's compliance with the requirements of this principle as a result of these improvements.

9. The regulator should have comprehensive enforcement powers.

FC

The 2006 IMF assessment finds this principle implemented. The ASIC has "the necessary powers to enforce compliance with the laws and regulations relating to securities activities" (2006b, p. 101). The assessment also notes that though the ASIC lacks the power to impose administrative fines, this limitation is not consequential given the range of alternative powers available to it. To further bolster its enforcement powers, the IMF recommends removing ambiguities in the ASIC's powers to enforce a search warrant and undue burden on it during civil penalty proceedings in a court of law.

10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

FC

This principle is implemented, per the 2006 IMF assessment. The enforcement powers of the ASIC are found to be effective. Its entity-based risk scoring system, STIRS, assists the ASIC in rating an applicant for a license. The ASIC prefers risk-based inspections and surveillance to periodic routine inspections to monitor the activities of licensed financial services providers. The IMF comments that "a clearer articulation of objectives and the identification and adoption of a comprehensive suite of tools for identifying and prioritizing risk would be helpful in maximizing" (2006b, p. 103) the effectiveness of risk-based surveillance.

11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

FC

The 2006 IMF assessment finds this principle implemented. Australia has signed the IOSCO Multi-lateral Memorandum of Understanding (MMoU) which implies that IOSCO's screening committee considered that Australia's legal and regulatory framework provides for effective cooperation and coordination with foreign regulators. The ASIC is authorized by the Australian Securities and Investments Commission Act to share public and non-public information with domestic and foreign counterparts with appropriate confidentiality limitations. The IMF forwards a recommendation in this respect by suggesting that the requirement that the ASIC must seek the Attorney-General's permission before acquiring and transmitting information to its foreign counterparts be removed.

12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

FC

This principle is reported as implemented by the 2006 IMF assessment. The ASIC can conclude information sharing agreements with any domestic or overseas securities regulator. It is party to numerous MoUs with domestic regulators (APRA, RBA, ACCC, and Taxation Office), government departments, the Australian Stock Exchange, as well as 35 foreign regulators. It is also a party to the IOSCO MMoU. For added measure, the ASIC also has the power to provide assistance without a formal MoU in place. The IMF forwards a recommendation in this respect by suggesting that the requirement that the ASIC must seek the Attorney-General's permission before acquiring and transmitting information to its foreign counterparts be removed.

13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

FC

The 2006 IMF assessment finds this principle implemented. The ASIC can provide public as well as confidential information in its possession under the Australian Securities and Investments Commission Act. For so doing, it may compel information from the supervised entities with the Attorney-General's approval under the 1992 Mutual Assistance in Business Regulation Act for the violation of a foreign business law or the 1987 Mutual Assistance in Criminal Matters Act for a foreign serious offense. However, the IMF assessment observes that procedural delays in providing assistance can reduce its effectiveness and recommends that the ASIC be given authority to acquire and transmit information to its foreign counterparts directly without seeking the Attorney-General's permission or, as is being proposed, the Treasury's permission.

14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.

CP

This principle is broadly implemented, per the 2006 IMF assessment. The Corporations Act provides for disclosure on an offer of securities to the investors, and it may take the form of a prospectus, short form prospectus, profile statement or offer information statement. The ASIC keeps copies of such prospectuses for possible dissemination, although neither the Corporations Act nor the ASIC spell out specifically the items to be listed in the prospectuses. Under the supervisor's principles based approach, the entities are required to interpret their obligations and leave the final decision of the adequacy of the disclosure to the judgment of the ASIC. In addition, the disclosing entities, that include public companies, large proprietary companies, and collective investment schemes, must prepare annual as well as semi-annual audited financial reports and directors' reports for which the obligations are extensively spelled out. The annual financial reports are mandated to follow the Australian modified version of International Financial Reporting Standards (IFRSs). The IMF assessment advises the issuance of a Policy Statement by the ASIC to clarify its interpretations on the obligations of the entities under the Corporations Act and to provide guidance on prospectus disclosure. The ASIC declared its intent, per the IMF assessment, to publish a Policy Statement for public consultation in 2006. The intended Policy Statement is now in effect (ASIC Regulatory Guide No. 168, 2007).

15. Holders of securities in a company should be treated in a fair and equitable manner.

FC

The 2006 IMF assessment finds this principle implemented. Per the assessment, "listed companies are required to publish annual and half yearly audited accounts, hold annual general meetings subject to proper advance notice and are subject to a modern continuous disclosure regime" (2006b, p. 92). Minority shareholder interests are adequately protected, and their rights are respected. 5 percent of the shareholders can call for an extraordinary general meeting. The Corporations Act enables all shareholders and the general public to appeal in a court of law against a company's conduct, its acts of omission and commission, or such actions or resolutions that may be discriminatory, prejudicial or oppressive against members. The appointment of a director must be confirmed by the members at the annual general meeting. The stipulations on registration and transfer of shares and other rights also seem clear. Proxy voting is being reformed. Bankruptcy proceedings also treat all members equally under the Corporations Act. Takeovers under the Corporations Act are underpinned by the Eggleston Principles that ensure that acquisition of control is competitive, informed and efficient. A takeover bid must be disclosed to the ASIC, the shareholders and the market, if applicable. Shareholders have defined rights in a takeover, as also safeguards when a company enters into a scheme of arrangement since it could lead to a change in control. Overall, corporate control is subject to the oversight and intervention by the ASIC and the Takeovers Panel that is funded by the government.

16. Accounting and auditing standards should be of a high and internationally acceptable quality.

FC

This principle is reported as implemented by the 2006 IMF assessment. The assessment goes on to state that "Australia's accounting profession is widely recognized as meeting a high international standard" (2006b, p. 111) and further that Australian auditing standards "are based on International Standards on Auditing that are regarded as being comprehensive" (2006b, p. 111). Australia has used a modified version of IFRSs since January 1, 2005. In November 2006, the Australian Accounting Standards Board (AASB), which is one of the two bodies responsible for setting accounting standards in the country, issued Exposure Draft (ED) 151 "Australian Additions to, and Deletions from, IFRSs" for comment. According to the text of ED 151, the adoption of IFRSs in Australia is an ongoing process and the AASB must consider providing new or amended Australian equivalents in line with the amendments made to IFRSs. The Deloitte Accounting Alert of September 2007 notes that in March 2007, the AASB released Amending Standard AASB 2007-4 "Amendments to Australian Accounting Standards arising from ED 151 and Other Amendments" that implements the majority of the proposals in AASB ED 151 and also includes other amendments due to equivalent International Accounting Standards Board (IASB) changes. The update further notes that these amendments will bring Australian standards in line with IFRSs. In addition, the text of the amended Australian standards confirms that, except for IAS 26, Australian standards are in compliance with IFRSs for the for-profit sector.

According to the 2006 Foreword to the AUASB Pronouncements, the 2004 Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 had the underlying objective to improve the operation of the capital market by promoting transparency, accountability and shareholder activism. The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act delivered some specific and significant changes to a number of Acts, including the 2001 Corporations Act and the 2001 Australian Securities and Investments Commission Act, thereby resulting in a number of changes affecting the Australian auditing framework. These amendments led to the establishment of the Auditing and Assurance Standards Board (AUASB) - the Australian auditing standard-setter - and also gave the Australian Standards on Auditing (ASAs) the force of law. According to a 2006 CPA Australia self-assessment, the ASAs are based on International Standards on Auditing (ISAs) promulgated by the International Auditing and Assurance Standards Board. However, ASAs have been modified to reflect the Australian legal environment. In 2005, the Financial Reporting Council (FRC), Australia's joint auditing and accounting standard setter with the AASB and the AUASB, issued the strategic direction for the AUASB with regard to development of auditing standards which required the use of ISAs as a base for redrafting of ASAs issued prior to 2004, mentions the 2006 AUASB Foreword. The FRC/AASB/AUASB joint annual reports for 2006-2007 confirm that compliance with the AUASB's reissued standards, effective July 1, 2006 enables compliance with the equivalent ISAs in most cases. Since Australian standards are sector neutral the same set of standards are mandatory for listed as well as non-listed companies.

17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.

CP

This principle is broadly implemented, per the 2006 IMF assessment. Collective Investment Schemes, known in Australia as managed investment schemes are regulated primarily by the Corporations Act. They are required to hold an AFSL issued by the ASIC. The AFSL is granted only when specific requirements are met by the applicant. These requirements are set out and further clarified in several Policy Statements issued by the ASIC. Managed Investment Schemes operating in more than one jurisdiction are managed with the help of bilateral agreements concluded by the ASIC with relevant foreign regulators. Managed Investment Schemes are also subject to the Corporations Act in the ongoing conduct of their business and the ASIC is armed with wide-ranging remedial powers to enforce compliance and address defaults. However, the assessment observes that the requirements laid down in the Corporations Act are not specific or comprehensive enough and there is room for the ASIC to spell out its expectations of proper behavior in an array of areas in the daily conduct of business of Managed Investment Schemes through the publication of a Policy Statement.

18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

FC

The 2006 IMF assessment finds this principle implemented. The Corporations Act sets out the duties of a managed investment scheme with regard to the holding and use of scheme assets, and requires the management to act in the best interests of its clients, especially in the event of a conflict. Additionally, every scheme must have a constitution that governs the management and members of the scheme and that is legally binding on them. Apart from the ASIC's surveillance and enforcement powers over a managed investment scheme, the presence of a majority of external directors or a compliance committee with a majority of external members in the scheme as well as independent auditors reporting directly to the ASIC afford added protection for investors. Further, the Corporations Act stipulates that property of the entity and of its investors be carefully segregated and also has strict requirements on custody of client assets. Winding up of a managed investment scheme has also been provided for, with the requirement that the scheme be wound up in accordance with the constitution and the rulings of the court of law.

19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

FC

This principle is reported as implemented by the 2006 IMF assessment. The requirements to provide detailed information through a Product Disclosure Statement (PDS) when a managed investment scheme is offered to the public is sufficiently spelled out in the Corporations Act, finds the assessment. However, a "clear, concise, and effective" PDS has not been achieved in practice as weaned from discussions with financial services providers and investor groups. The assessment, however, expects the modifications to the Financial Services Reform Act amendments to the Corporations Act to result in improvement in this area.

20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

CP

This principle is broadly implemented, per the 2006 IMF assessment. The ASIC has issued a Policy Statement (PS 132) that addresses valuation issues and several accounting standards also provide advanced guidance. The managed investment scheme must value its assets regularly and submit to the ASIC a compliance plan as to how the scheme property will be valued. Withdrawals are dealt with in the constitutions of the managed investment schemes, and the ASIC expects that withdrawal and acquisition prices be independently verifiable. However, the assessment takes note of high-profile cases of unit-pricing errors that cast doubts on the efficacy of the monitoring system. The ASIC and the APRA have, in response, issued a guide to good practice in unit trust pricing in consultation with the industry. However, the assessment avers that the effectiveness of this guide is yet to be seen. Also, regulation is not adequate to ensure compliance. The Australian authorities respond by stating that they did not identify any problems with the regulatory arrangements found deficient by the IMF, and therefore were not concerned from a regulatory impact perspective. However, they recognize the importance of monitoring compliance with accurate unit pricing obligations and are working on developing policies to facilitate timely and precise unit price calculations.

21. Regulation should provide for minimum entry standards for market intermediaries.

FC

The 2006 IMF assessment finds this principle implemented. The Corporations Act sets out minimum entry requirements for applicants of an AFSL on a general level in keeping with the principles based regulatory approach; however they are fairly comprehensive. The licensing regime is enforced by the AFSL holder's obligation to notify the ASIC of a potential or actual breach of its compliance, and by the ASIC's power to impose restrictions on a licensee, and suspend or cancel its license. However, the ASIC's power to suspend or cancel the license of an APRA-licensed entity is more problematic. Generally, the ASIC needs to consult with the APRA before taking the step, and if the entity happens to be a bank, the power can only be exercised by the Treasurer on the advice of the ASIC. Similar restrictions, notes the IMF, do not apply to the APRA that may suspend or cancel an ASIC licensee's license. The IMF assessment, therefore, calls for formal reciprocal constraints on the APRA as well as the ASIC, although in practice consultation almost always takes place both ways.

22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

CP

This principle is reported as partly implemented by the 2006 IMF assessment. The Corporations Act imposes capital requirements on AFSL holders through their entry requirements. Further, the ASIC Policy Statement (PS 166 Licensing: Financial Requirements) sets out initial as well as ongoing financial requirements. APRA-licensed entities follow prudential requirements set out by the APRA; and participants in the Australian Securities Exchange follow financial requirements of the exchange, provided that the ASIC is satisfied that they are an adequate substitute to the ASIC's requirements. The IMF observes that the base level capital requirements set by the ASIC are not only in line with international best practices, but also exceed them; however its risk-based capital requirements, despite being comprehensive, do not follow international norms. Many risk elements, such as off-balance sheet risk or risk from unlicensed affiliates of AFSL holders are not factored in, thereby leaving gaps in the ASIC's risk-based supervision. The IMF, therefore, recommends the ASIC to develop a more stringent risk-based capital framework that is in line with international standards.

23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.

FC

This principle is reported as implemented by the 2006 IMF assessment. The ASIC's Policy Statement (PS 164 Licensing: Organizational Capacities) lays down detailed specifics of management and organizational structures that are required to obtain an AFSL. The Corporations Act also sets out in comprehensive details the requirements governing firm/client relationships, though these provisions go against the grain of a principles based approach to regulation. The documents required to be given to the client under the Act are fairly detailed and non-compliance can amount to sanctions for breach. The Act also has a clause prohibiting a firm from engaging in "unconscionable conduct" that can cover a wide array of actions liable for sanctions. Further, though the Corporations Act does not say so explicitly, it has been interpreted by the ASIC to require firms to have a compliance function in the organization that also monitors internal control policies and procedures. The Financial Services Reform Act that amended the Corporations Act has stipulated additional detailed disclosure requirements that not only increase regulatory burden on the firms but also goes against the interest of the client in that they serve to camouflage pertinent information from the clients. The government is aware of this unintended outcome of the regulation, finds the IMF, and is taking steps to modify the Financial Services Reform Act.

24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

CP

This principle is broadly implemented, per the 2006 IMF assessment. The ASIC has "established the necessary contacts and procedures to be followed to achieve a coordinated response to major market disruptions" (p. 119) and is assisted by the Australian Stock Exchange (ASX) that constantly monitors open positions of participants. (In this context, it is pertinent to add that during the 2006 IMF FSAP, Australia had two exchanges - the ASX and the Sydney Futures Exchange (SFE). The SFE merged in December 2006 with the erstwhile ASX to form a new entity, the Australian Securities Exchange (also abbreviated ASX)). When an AFSL holder becomes insolvent, its AFSL is immediately suspended or cancelled without a court resolution. The responsible persons' domestic or foreign accounts are also frozen and the ASIC or the responsible person may solicit an order from the court to release specific amounts from the account to pay to the ASIC or its nominee to be further distributed to claimants as spelled out in the order. A corporation whose AFSL has been withdrawn is wound up under the court's order obtained by the ASIC, and as the case may be, a receiver is appointed. As soon as practicable, the ASIC must publish a notice of action in the above situation on its website or official Gazette, and notify the operator of the market or clearing and settlement facility of which the AFSL holder was a member. The ASIC has the power to share confidential information with domestic as well as foreign regulators during default and insolvency proceedings. However, the IMF assessment observes that one gap in the insolvency response of the ASIC - though it does not affect Australia's compliance with this principle - pertains to the absence of a general customer compensation scheme. The IMF nevertheless notes that new regulations introducing such provisions are in the offing (in the public consultation stage) and will be implemented in July 2006. In this regard, the 2007 IMF report welcomes the continued effort of the Australian authorities to formalize the failure resolution and crisis management framework that incorporates the proposed Financial Claims Compensation Scheme. The 2008 Financial Stability Review report published by the RBA further informs that the 2007 Corporations Amendment (Insolvency) Act has effected a number of changes to the Australian insolvency laws that include strengthening creditor rights of a company placed in administration; granting greater powers to the ASIC and the Companies Auditors and Liquidators Disciplinary Board to regulate and discipline insolvency practitioners; and more stringent requirements for the administrators in terms of disclosure of their remuneration and relevant relationships and indemnities, and obligation to report to the ASIC annually instead of every three years.

25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

FC

The 2006 IMF assessment reports this principle as implemented. The Treasurer licenses market operators (Australian Markets License) and clearing and settlement facilities (Clearing and Settlement Facility License) with advice from the ASIC. There are minimum requirements for the eligibility for a license. The IMF notes that no significant benefit accrues from the placement of licensing authority with the Treasurer in practice, and therefore recommends moving the power from the Treasurer to the ASIC.

26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

FC

This principle is reported as implemented by the 2006 IMF assessment. On-going compliance with the terms of the license by the Australian Markets License (AML) holder is assessed and enforced by the ASIC through annual assessments, on-site and off-site examinations and interviews with the staff. The ASIC is empowered under the Corporations Act to access the exchange's electronic trading platform and related records and require its assistance on request. The publicly available MoU between the ASIC and the ASX reinforces the latter power of the ASIC and promotes cooperation, mutual assistance and effective communication between the supervisor and the exchange. The Treasurer can compel compliance of the AML holders through directions and court orders on the express advice of the ASIC. The ASX was modernizing its organizational structure and collaborative arrangement with the ASIC as well as changing the provider of its trading platform as of the time of the assessment. The ASIC was constantly monitoring the developments to ascertain that the transition did not impact the ASX's ongoing compliance with regulations. As regards clearing and settlement facilities, including those operated by exchanges, the assessment finds that the ASIC shares oversight responsibility with the RBA. The RBA has issued a financial stability standard for Clearing and Settlement Facility License (CSFL) holders acting as a central counterparty and one for CSFL holders acting as a settlement facility. There is functional division of powers, with the RBA focusing on payment systems and the ASIC emphasizing customer interests and investor confidence in the system. The IMF notes that the "co-responsibility arrangements appear to work well" (2006b, p. 122). The 2006 IMF assessment also mentions the Sydney Futures Exchange (SFE) as the Australian derivatives exchange; however, the SFE has since merged with the erstwhile Australian Stock Exchange to form a new entity, the Australian Securities Exchange.

27. Regulation should promote transparency of trading.

FC

The 2006 IMF assessment finds this principle implemented. The Corporations Act obliges exchanges to have operating rules, approved by the Treasurer at the time of the licensing of the exchange, that address the execution of orders and the recording and effective disclosure of transactions. The exchange operating rules are as a matter of regulatory precedence highly transparent. The licensing process also emphasizes the requirement of equality of access to trading information. The ASX also has systems and measures in place to promote transparency in trading. There has been an extensive debate on the pros and cons of having the identification of the broker-dealer carrying out a trade published in real-time trade reports. The outcome was the removal of the identification of the broker-dealer from the reports.

28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

FC

Per the IMF's 2006 assessment, this principle is implemented. The Corporations Act prohibits market manipulation, market cornering, insider trading, misleading statements, front running and other fraudulent or deceptive conduct. Misleading statements and deceptive conduct attract only civil liability, whereas the rest are liable to both civil and criminal prosecution. The ASX is obliged under the mutual Memorandum of Understanding to notify to the ASIC as soon as it discovers that a person has or is about to breach the Corporations Act, and not wait till it takes enforcement action. The ASX can impose sanctions for breach of regulations that range from censure, fining, suspension to expulsion from membership. The ASX has surveillance systems in place to effectively record and disclose transactions. The ASIC has the power to share confidential information with the ASX. The continuous disclosure obligations imposed on the listed companies under the Corporations Act are also effective, long-standing and constantly improving. The IMF asks the ASIC and the ASX to maintain constant pressure on issuers to achieve effective compliance.

29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

CP

The 2006 IMF assessment finds this principle partly implemented. Australia's regulation of clearing and settlement facilities is adequate and if that were the only criteria to measure the adequacy of the management of large exposures, default risk and market disruption, the IMF assessment would have considered this principle implemented. However, the IMF notes that all market operators are not required to have clearing and settlement facilities, though the ASIC has advised the Treasurer to keep such requirements as terms of a license. The rules of the Australian Clearing House (the central counterparty and clearinghouse of the ASX) on default were found to follow international norms. However, large exposures, default risk and market disruption possible during bilateral transactions between AFSL holders not supervised by the APRA are not regulated and therefore open to risk. Though such transactions are effected in accordance with internally accepted global master agreements such as those promulgated by the International Swaps and Derivatives Association, they still carry residual risks not covered by such norms, and as such, the IMF recommends improvements in domestic regulation in this area.

30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.

II

This principle was not assessed by the 2006 IMF assessment. However, the assessment notes that the ASIC shares oversight responsibility of clearing and settlement facilities with the RBA. CSFL holders are subject to the financial stability standard issued by the RBA. The RBA supervises the payment system function of the clearing and settlement facilities looking out for compliance with the Committee on Payment and Settlement Systems-International Organization of Securities Commissions standards, while the ASIC supervises market conduct to safeguard consumer interests and investor confidence in the facilities. The IMF notes that the "co-responsibility arrangements appear to work well" (2006b, p. 122).