Transcript CHAPTER 22 FINANCIAL SERVICES, PRODUCTS AND MARKETS At the end of this topic you should know: • what is meant by the terms.

CHAPTER 22
FINANCIAL SERVICES, PRODUCTS AND MARKETS
At the end of this topic you should know:
• what is meant by the terms “financial product” and
“financial services”;
• how financial services providers are regulated;
• how financial markets are regulated; and
• what market practices are prohibited.
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Introduction
One of the central aims of the legislation dealing with
financial services, financial markets and financial
products under Ch 7 of the Corporations Act is to
promote a fair and efficient market for a range of
financial products, services and markets.
For this reason the legislation requires a significant
amount of disclosure of information about the
products, as well as requiring those who provide
services in relation to financial products to be
licensed and markets for those products to be
regulated.
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Key Concepts
The term “financial product” has a general definition
as well as specific inclusions and exclusions. Under
the general definition (s 763A(1)) a financial product
is a facility through which, or through the acquisition
of which, a person:
• makes a financial investment: s 763B;
• manages financial risk: s 763C; or
• makes a non-cash payment: s 763D.
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Key Concepts
Securities are financial products and therefore
regulated under both Ch 7 and Ch 6D.
Interests in managed investment schemes are
specifically included as financial products:
s 764A(1)(b) and (ba).
Derivatives are financial products where the value is
determined by reference to something else, such as a
rate or index.
A margin lending facility allows an investor to borrow
money to acquire shares or other financial products.
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Key Concepts
The regulatory scheme in Ch 7 is concerned with the
provision of “financial services”. According to s 766A
a person provides a financial service if they:
• provide financial product advice;
• deal in a financial product; or
• make a market for a financial product.
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Regulation of Financial Service Providers
Finance service providers:
• must hold a licence (s 911A) and comply with a number
of obligations (s 912A);
• must comply with disclosure and other obligations for
retail clients (ss 761 G and 761GA) such as the Financial
Services Guide (ss 941A and 941B), the Statement of
Advice (s 946A), and in certain circumstances a Product
Disclosure Statement (Pt 7.9); and
• must not engage in prohibited conduct such as: short
selling; insider trading; manipulation of the market;
disseminating information; false and misleading
statements; dishonest conduct; and misleading and
deceptive conduct.
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Liability for Breach of Prohibition
Breach of the prohibitions can result in criminal liability, or
civil liability if a person suffers loss.
Breach can also result in civil penalties.
Where the court is satisfied that a civil penalty provision
has been contravened it must make a declaration and can
then make an order to pay the Commonwealth a
pecuniary penalty, or compensation order for damages on
the application of ASIC.
In addition, the court may make a variety of orders to
ensure that insiders are denied any benefit from the
insider trading activities.
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Regulation of Financial Markets
The role of a financial market is to bring together buyers and
sellers of financial products, thus enabling efficient capital
resource allocation.
A “financial market” is defined as a facility through which
offers to acquire or dispose of financial products are regularly
made or accepted: s 767A.
There are two markets for securities:
1. The primary market; and
2. The secondary market.
On 1 August 2010, ASIC took over the responsibility for
ensuring compliance with its market rules from ASX.
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Licensing of Financial Markets
If an entity operates a financial market it must hold an
Australian Financial Markets Licence (AFML):
s 791A.
Application for an AFML must be made to ASIC:
s 795A.
ASIC must be satisfied that the applicant will comply
with obligations set out in s 792A relating to having
adequate operating rules, clearing and settlement
arrangements, and compensation arrangements in
the event of default by market participants.
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Role of ASIC
Role of APRA
ASIC, as the main regulator of financial services, has
wide powers to regulate financial markets and
financial service providers.
The Australian Prudential Regulation Authority also
provides supervision and regulation of a number of
financial institutions across Australia. This role is now
shared with ASIC to the extent that ASIC regulates
financial products and financial services.
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Role of ASX
Listing on the ASX
The ASX (and other operators) have operating rules
that govern the relationship between brokers, their
clients and the ASX.
Those rules have effect as a binding contract
between the ASX and the market participants
(brokers), and between the participants, except to the
extent of any inconsistency between these rules and
ASIC’s market integrity rules: s 793B.
Public companies seeking listing must apply to the
ASX, supplying details of their activities. They must
generally have a minimum of 500 shareholders, and
also meet requirements as to size.
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Continuous Disclosure
One of the most important obligations imposed on
listed entities is to keep the market fully informed.
The obligation is to disclose information that is “price
sensitive”, that is, information that is likely to have a
material effect on the price or value of the securities.
The Listing Rule goes on to provide that some
information does not need to be disclosed.
Chapter 6CA (ss 674-678) gives statutory force to the
continuous disclosure obligation imposed on listed
entities.
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Enforcement of Listing Requirements
National Guarantee Fund
Entities that fail to comply with the rules can be subject to a
number of sanctions, including suspension of their
securities from trading and, in the case of serious or
persistent breaches, possible delisting by the ASX.
The situations in which compensation can be claimed
include:
• a claim for an unauthorised transfer of securities:
reg 7.5.53;
• a claim in respect of insolvency of a broker:
reg 7.5.64; or
• a claim in respect of failure to transfer securities:
reg 7.5.74.
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