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Course of Study:
(BSL201) Finance Law

Title of work:
Everett and McCracken's banking and financial institutions law, 8th ed. (2013)

Section:
Regulation - Chapter 2 pp. 45--126

Author/editor of work:
Everett, Dianne.; McCracken, Sheelagh.

Author of section:
Dianne Everett, Sheelagh McCracken

Name of Publisher:
Lawbook Co.
 CHAPTER 2

Regu1ation

Introduction..................................................................................... [2.001]
Finance sector regulation .................................................................. [2.001]
General regulation............................................................................ [2.010]
Financial products and services .. ................ .... .. .. .. .. .. .... .. .. .. .. .. .. . [2.050]
Introduction..................................................................................... [2.050]
Purpose and approach...................................................................... [2.050]
Key definitions................................................................................. [2.060]
Definition of financial product.......................................................... [2.070]
Traditional legal classification of financial products ........................... [2.070]
Historical focus of regulation............................................................ [2.080]
Dissatisfaction with regulatory approach........................................... [2.090]
A new regulatory approach .............................................................. [2.100]
Structure of the definition of financial product .................................. [2.110]
General definition............................................................................. [2.120]
Specific inclusions ............................................................................ [2.130]
Specific exclusions ............................................................................ [2.140]
Meaning under the ASIC Act............................................................ [2.150]
Definition of financial service........................................................... [2.160]
General definition............................................................................. [2.160]
Financial product advice................................................................... [2.170]
Dealing ............................................................................................ [2.180]
Makes a market................................................................................ [2.190]
Meaning under the ASIC Act............................................................ [2.200]
Definitions of retail client and wholesale client ................................ [2.210]
Retail client...................................................................................... [2.210]
Wholesale client ............................................................................... [2.220]
Regulation of financial service providers .... .... .. .. .. .. .. .. .. .. .... .. .. .. .... .. .. [2.230]
Licensing regime for financial service providers ................................ [2.230]
When is an AFS licence required....................................................... [2.240]
Application for an AFS licence.......................................................... [2.250]
Obligations of AFS licensees ............................................................. [2.260]
Representatives ................................................................................ [2.270]
Additional requirements for providers of financial product advice..... [2.280]
Removing financial service providers................................................ [2.290]
Regulation of financial products....................................................... [2.300]
Introduction..................................................................................... [2.300]
Point of issue or sale disclosure ........................................................ [2.310]
Ongoing disclosure........................................................................... [2.320]
Other obligations.............................................................................. [2.330]
General consumer protection regulation............................................ [2.340]
Introduction ..................................................................................... [2.340]
Corporations Act provisions ............................................................. [2.341]

45
EVE RETT AN D MCCRAC KE N 'S BAN KI N G A N D F I NANCIAL I N STITUTI O N S LAW

ASIC Act provisions . ........................................................................ [2.342]

Consumer credit............................................................................. [2.350]
Introduction..................................................................................... [2.350]
Licensing.......................................................................................... [2.360]
Responsible lending and other obligations . ....................................... [2.370]
ASIC's role........................................................................... ............ [2.380]
National Credit Code......................................... ;.............................. [2.390]
Phase II reforms............................................................................... [2.400]
Credit reporting.............................................................................. [2.410]
Credit reporting under the Privacy Act . ................................ ............ [2.410]
Proposed changes............................................................................. [2.420]
Prudential regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [2.430]
Introduction..................................................................................... [2.430]
Scope and purpose........................................................................... [2.430]
Legislation . .......................................................................... . ........... [2.440]
Authorisation................................................................................... [2.450]
Introduction..................................................................................... [2.450]
Deposit-taking.................................................................................. [2.460]
Life insurance................................................................................... [2.470]
General insurance............................................................................. [2.480]
Superannuation................................................................................ [2.490]
Prudential standards........................................................................ [2.500]
Introduction..................................................................................... [2.500]
Deposit-taking, life and general insurance......................................... [2.510]
Superannuation................................................................................ [2.520]
Enforcement and crisis management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [2.530]
Information gathering and investigation............................................ [2.530]
Directions......................................................................................... [2.540]
Disqualification of directors, managers and auditors.......................... [2.550]
Dealing with distressed and insolvent institutions............................. [2.560]
Financial claims schemes . ...................................................... ........... [2.570]
Financial assistance for superannuation funds................................... [2.580]
Data collection................................................................................ [2.600]
Access to statistical information........................................................ [2.600]
Registered financial corporations....................................................... [2.610]
Cash and transaction monitoring............................................... [2.650]
Proceeds of Crime Act...................................................................... [2.650]
Criminal Code Act: Money Laundering............................................. [2.660]
Financial Transaction Reports Act . .................................................... [2.670]
Anti-Money Laundering and Counter-terrorism Financing Act........... [2.680]
Penalties and offences....................................................................... [2.690]
Financial markets........................................................................... [2.700]
Introduction..................................................................................... [2.700]
Recent amendments.......................................................................... [2.700]
What is a financial market................................................................ [2.710]
Current financial markets . ................................................................ [2.720]
Licensing.......................................................................................... [2.730]

46
 Regulation I CH 2

Obligation to obtain a licence............................................................ [2.730]

Australian market licence . ................................................................ [2.740]
Obligations of a market licensee........................................................ [2.750]
Monitoring of voting power and character........................................ [2.760]
Supervision of financial markets by ASIC ......................................... [2.770]
ASIC's role....................................................................................... [2.770]
Market integrity rules....................................................................... [2.780]

INTRODUCTION

Finance sector regulation

[2.001] The finance sector is heavily regulated. Financial institutions and
corporations operating in the finance sector are subject to a number of
government regulatory regimes. These regimes have been substantially revised
over the last 20 years or so. Although some key statutes clearly still have their
roots in legislation of an earlier era, the relevant regulatory regimes have been
amended significantly to deal with the modern finance environment. (Also see
Chapter 6 Allocation of Risk.)
This chapter outlines the key 1 regulatory regimes directed at the finance
sector, namely:
financial products and services regulation;
consumer credit regulation;
credit reporting regulation;
prudential regulation;
data collection regulation;
cash and transaction monitoring regulation; and
financial markets regulation.
(The regulation of clearing and settlement facilities is dealt with in detail in
Chapter 3 Clearing and Settlement and the regulation of market misconduct is
covered in Chapter 5 Dealings With Financial Assets).
A number of these regimes are technical and complex. This chapter sets out
the structure and broad principles of these regimes; it does not focus on the
exemptions or exceptions to the broad principles. Readers should be aware that
many of these regimes are subject to extensive exemptions or exceptions, usually
hidden in detailed regulations or instruments made by the relevant regulator.
Readers who want a detailed understanding of the relevant regimes should
consult a specialist text. 2

While this chapter focuses on key regulatory regimes directed at the financial sector, it does not
cover all legislation relevant to the finance sector. For example, the Finance Sector (Shareholdings)
Act 1988 ( Cth) is not covered in this chapter.
2 See, for exam ple, R Baxt, A Black and P Hanrahan, Securities and Financial Services Law ( LexisN exis,
2008, 7th ed) (covering financial products and services regulation, market misconduct regulation and
financial markets regulation); G Pearson, Financial Services Law and Compliance in Australia (Cambridge

[2.001] 47
EVERETT A N D MCCRAC KE N 'S BAN KI N G AN D FI NANCIAL I N STITUTI O N S LAW

General regulation
[2.010] While the focus of this chapter is on regulatory regimes which are
directed specifically at the finance sector, it should not be forgotten that
regulatory regimes of more general import will also be highly relevant to the
operations of financial institutions and corporations. Clearly, entities in the
finance sector are subject to, for example, workplace health and safety
regulation, and anti-discrimination regulation. Additionally, detailed legislation
may govern, for example: the formation of financial institutions and corporations;
their capacity and powers to contract; their acquisition and disposition of
interests in property; and the taxation of their assets. Of course, general common
law principles also affect the operation of financial institutions and corporations.

FINANCIAL PRODUCTS AND SERVICES

Introduction

Purpose and approach

[2.050] The core of the Australian financial products and services regulatory
regime is in Ch 7 of the Corporations Act 2001 (Cth) (Corporations Act) . This
Chapter was introduced into the Corporations Act as part of the Corporate Law
Economic Reform Program (CLERP) (see [1.010]) by the Financial Services Reform
Act 2001 (Cth) (FSR Act). The FSR Act came into effect in March 2002 and was
subject to a transition regime, which ended in March 2004.
The main objects of Ch 7 are to promote: 3
(a) confident and informed decision making by consumers of financial products
and services while facilitating efficiency, flexibility and innovation in the
provision of those products and services; and
(b) fairness, honesty and professionalism by those who provide financial
services; and
(c) fair, orderly and transparent markets for financial products; and
(d) the reduction of systemic risk and the provision of fair and effective services
by clearing and settlement facilities.

(The object in paragraph (d) is mainly relevant to clearing and settlement

regulation which is in Pt 7.3 of Ch 7 (see Chapter 3 Clearing and Settlement). The
object in paragraph (c) is relevant to financial market regulation (see
[2.700]-[2.780]) and market misconduct regulation (see [5.400]-[5.550]), as well as
financial products and services regulation.)
The financial products and services regulatory regime in C h 7 is largely a
conduct and disclosure regulatory regime. The FSR Act introduced a new
harmonised Australian financial services licensing regime (see [2.230}-[2.290]).

University Press, 2009) (covering financial products and services regulation); A Beatty, A Peckham, T
Coburn, D Daniels and M Bengttson, Australian Consumer Credit Law ( Lexis N exis Loose-leaf Service);
and Davis, Noel, The Law of Superannuation in Australia ( Lexis N exis electronic resource).
3 Corporations Act 2001 (Cth), s 760A.

48 [2.010]
 Regulation I CH 2

The focus of the licensing regime is on the conduct and disclosure obligations
imposed on holders of Australian financial services licences (AFS licensees) and
their representatives. 4 Conduct and disclosure obligations are also imposed on
other participants in the financial services market, such as unlicensed product
issuers (see [2.300]-[2.330]). That is, consistent with the regulatory philosophy
and approach outlined in Chapter 1 Regulators (see [1.020]), the preferred
regulatory tools in the FSR Act are conduct regulation aimed at addressing the
market failure caused by market participants failing to act with integrity and
disclosure regulation designed to address the market failure caused by
information asymmetry between industry and clients and the lack of
transparency in financial markets. 5 The underlying assumptions are,
predominantly, that:
participants in the financial markets can be relied upon to make rational
decisions in their own interests provided they are given all the information
needed to make an informed decision and those they deal with behave with
honesty and integrity; and
industry should be free to structure its business and offer any products and
services it wants, 6 provided it makes the disclosures required and complies
with general conduct obligations designed to prevent dishonesty or lack of
integrity.
(For discussion of possible changes to this regulatory philosophy and approach
see [1.030].)

Key definitions
[2.060] The scope of the financial products and services regulatory regime in
Ch 7 of the Corporations Act is determined by the following key definitions:
financial product (see [2.070]-[2.140]);
financial service (see [2.160]-[2.190]); and
0 retail and wholesale client (see [2.210]-[2.220]).
The provision of a financial product triggers certain disclosure and some
conduct obligations which are largely 7 set out in Ch 7 of the Corporations Act
(see [2.300]-[2.330]). The provision of a financial service triggers certain
licensing, conduct obligations and disclosure obligations which are also set out
in Ch 7 of the Corporations Act (see [2.230]-[2.280]). The provision of financial
products and services also triggers certain general consumer protection

4 Licensees can have two categories of representatives: authorised representatives who are given
written authorisation to provide financial services on behalf of the licensee under the Corporations
Act 2001 (Cth) ss 91 6A or 91 6B; and other representatives such as employees or directors of the
licensee. See Corporations Act 2001 (Cth), s 91 0A.
5 Financial System Inquiry Final Report (Canberra: AGPS 1 997) (Chair: S Wallis), pp 237-8.
6 Financial System Inquiry Final Report (Canberra: AGPS 1 997) (Chair: S Wal l is), pp 1 97, 280.
7 Some obligations are found elsewhere. For example, the disclosure obligations for offers of
securities are in Corporations Act 2001 (Cth), Ch 6D. See also Chapter 2L in relation to debentures and
Chapter 5C in relation to managed investment schemes.

[2.060] 49
EVE RETT A N D M CC RAC KE N 'S BAN KI N G A N D FI NANCIAL I N STITUTI O N S LAW

provisions in the Australian Securities and Investments Commission Act 2001 (Cth)
(ASIC Act) (see [2.342]). It is important to note, however, that the definitions of
financial product and financial services vary slightly in the ASIC Act and the
Corporations Act. (For the ASIC Act definitions see [2.150], [2.200].)
Finally, the relevant conduct and disclosure obligations can vary depending
on whether a financial service or product is provided to a retail client or a
wholesale client.

Definition of fin ancial product

Traditional legal classification offinancial products

[2.070] Commercially there are numerous financial products in use, many with
names that leave those unfamiliar with financial markets bewildered. To the
uninitiated "caps", "collars" and "cuffs" are items of dress; to those in the
markets, however, they are shorthand terms describing financial products used
to manage financial risk. 8
Lawyers have traditionally sought to classify financial investment products in
terms of either debt or equity. This classification indicates the legal relationship
of the holder to the issuer and, to some extent, the risk assumed by the holder. If
the product (for example, a bond or a note) is classified as debt, the interest of
the holder is contractual in nature. The fundamental contractual rights obtained
by the holder are generally a right to repayment of the principal and to a return
in the form of interest. The obligations of the issuer of debt are typically made
absolute and fixed in time under the contract, and are not dependent on the
performance of the issuer. By contrast, an equity product, such as a share in a
company, gives its holder a proprietary interest in the issuer itself, and its return,
in the form of a dividend, is usually linked to the performance of the issuer.
Derivatives, on the other hand, are not regarded as investment products;
rather they are regarded as risk management tools. They are neither debt nor
equity. They are purely contractual arrangements under which one party agrees
to do something, typically to make a payment or to transfer an asset upon the
occurrence of a particular event or at a specified time in the future.
These legal distinctions between the various broad types of financial product
are not necessarily appreciated by the average investor, who is focused
commercially on simply making a profitable return. 9

8 See [5.350] for the judicial interpretation of these terms.

9 See Howard, Companies - What They Are and How They Work (Oxford U niversity Press: Oxford 1 989),
p 69.

50 [2.070]
 Regulation I CH 2

Historical focus of regulation

[2.080] Much of 20th century financial regulation in Australia focused on those
financial products that were made available to the public through exchanges and
traded on those exchanges. 10 Initially, exchange-traded products were limited to
securities. Reflecting the understanding of the distinction between debt and
equity discussed in [2.070], the regulation divided securities into shares and
debentures, the latter being a generic legal term used to describe indebtedness. 11
Since the 1950s, the term also encompassed the interests of investors in collective
investment schemes, originally termed "prescribed interests" (and now known
as "interests in a managed investment scheme"). 12 With the establishment of the
first futures exchange in 1960 and the introduction of trading in futures,
regulation was extended to cover these new products, known as futures
contracts.
Securities and futures contracts were perceived as very different products and
hence were regulated as distinct categories. Securities were governed by the
general companies legislation and additionally, from the 1970s, by more
specialised securities industry legislation, while futures contracts were the object
of specific futures trading legislation. The Corporations Law set up a new legal
framework upon its introduction in 1989, collecting these various provisions
under the umbrella of the same legislation, although the separate regulatory
regimes continued their separate existence. This situation was maintained under
the Corporations Act in Chs 7 and 8 when that Act replaced the Corporations Law
in 2001, and remained until the FSR Act came into force (see [2.050]).

Dissatisfaction with regulatory approach

[2.090] As products became more sophisticated, the basic legal division between
securities and futures outlined at [2.070] became unsatisfactory. The distinction
was not always easily drawn in practice. In 1995, for example, the Supreme
Court of New South Wales in Sydney Futures Exchange Ltd v Australian Stock
Exchange Ltd (1995) 16 ACSR 148 had to determine into which category low
exercise price options (LEPOs) would fall in order to resolve whether the then
Australian Stock Exchange had the power to make such options available. After
lengthy analysis of the nature of the options and of the scope of the statutory
definitions, the court concluded that the options were in fact securities rather
than futures contracts. Subsequent to this decision, amendments were made to
the Corporations Law to enable new products to be classified by regulation as
either securities or futures contracts in order to obtain the benefit of the desired

10 Other regulation d i d exist. N egotiable instruments such as bills o f exchange a n d promissory notes
were, for example, regulated under the Bills of Exchange Act 1909 (Cth) (see Chapters 8 Bills of
Exchange and 9 Promissory Notes).
11 See [5.320J for the current forma l legal definition of debenture.
12 Since the FSR Act, however, the term "securities" has, for the purposes of Ch 7 (apart from Pt 7.11)
been defined more narrowly, excluding managed investment interests (see Corporations Act 2001
(Cth), s 761A).

[2.090] 51
 EVERETT AN D MCCRAC KE N 'S BAN KI N G A N D FI NANCIAL I N STITUTI O N S LAW

regulatory regime, even though the particular product might not fall within the
statutory definition of the relevant term (Corporations Law, ss 72A 92A).
The distinction between securities and futures regulation which the
Corporations Law drew in Chs 7 and 8 was heavily criticised, in particular, for the
consequential lack of uniformity in the treatment of derivative products. Some
derivatives were regarded as securities and hence governed by Ch 7, while
others fell within the regulatory regime provided by Ch 8. Still others fell
expressly outside the regulatory regime by reason of the then s 72, namely,
agreements entered into by Australian banks or investment banks, such as
currency swaps, interest rate swaps, forward exchange rate contracts and
forward interest rate contracts. This exclusion was apparently the result of
concern expressed by banks and merchant banks over the breadth of the
statutory definition. 13 In practice, the statutory exemption resulted in the
creation of a substantial over-the-counter (OTC) market (see [5.010]).

A new regulatory approach

[2.100] In light of the dissatisfaction described above, the government adopted a
new approach with the introduction of the FSR Act. Behind the FSR Act lay the
clear intention to achieve consistent regulation of functionally similar markets
and products. 14 The reforms cast the legislative net much wider than previously,
bringing within its boundaries a diverse range of financial products, including
securities, derivatives, insurance, superannuation, deposit accounts and payment
facilities. 15 The legal definition of "financial product" in the FSR Act is explored
at [2.110]-[2.140]. Some products, however, were not brought within the net of
the FSR Act. For example, consumer credit 16 is largely regulated through a
separate regulatory regime (see [2.350]-[2.400]) and bills of exchange continue to
be largely governed by the Bills of Exchange Act 1 909 (Cth) (see Chapter 8 Bills of
Exchange). Some products, such as shares and interests in managed investments
. schemes, come within the definition of a "financial product" but are subject to
additional regulation outside Ch 7. 17
While the broad regulation of financial products in the FSR Act may often be
perceived by those in the finance industry as restrictive, it should not be
forgotten that regulation can also provide protection. A product which falls
within the definition of financial product will benefit, for example, from the

13 Currie, Australian Futures Regulation (Sydney: Longman Professional, 1 994), pp 32, 43-45.
14 Financial Products, Ser vice Providers and Markets - An Integrated Framework: Implementing CLERP 6
(Canberra: AGPS, 1 9 97), p 3. See also [1.020].
15 Explanatory Memorandum, Financial Services Reform Bi// 2001 (Cth), para 1 . 6 .
16 Margin lending facilities (as defined in t h e Corporations Act 2001 (Cth), s 761 EA) are included in the
d efinition of financial product for the purposes of Ch 7: C orpo rations Act 2001 (Cth), s 764A(1 )(1). A
credit facility is also a financial product for the purposes of the Australian Securities and Investments
Commission Act 2001 (Cth), s 1 2 BAA(7)(k). Otherwise, consumer credit is regulated under the National
Consumer Credit Protection Act 2009 (Cth) (see [2.350 ]-[2.400 ]).
17 For example: the disclosure obligations for offers of securities are in the Corporations Act Ch 6 D; and,
the requirements for the registration, structure, governance and winding-up of managed investment
schemes are in the Corporations Act 2001 (Cth), Ch 5C.

52 [2.100]
 Regulation I CH 2

protective provision which prevents a product from being invalidated by State

and Territory gaming and wagering legislation. Section llOli of the Corporations
Act states that a person may enter into a contract that is a financial product and
that that contract is valid and enforceable despite any State or Territory law
relating to gaming and wagering. This is an important provision. Until its
introduction in the FSR Act, there was concern that some financial products, in
particular OTC derivatives, 18 might be regarded by a court as illegal
agreements, contrary to various State and Territory gaming and wagering
legislation. 19

Structure of the definition offinancial product

[2.110] The definition of financial product is now in Div 3 of Pt 7.1 of the
Corporations Act. Section 762A provides an overview of the legislative
approach. The definition has three components:
1. a general definition of a financial product (Pt 7.1, Div 3, Subdiv B) that
looks at the function or purpose of the product, not its legal form or the
institution issuing the product (see [2.120]);
2. a list of specific products that are included in the definition of financial
product (Pt 7.1, Div 3, Subdiv C) regardless of whether they fall within
the general definition. Many of the products in this list of specific
inclusions would fall within the general definition in any case but their
inclusion in the list of specifically included products enhances certainty
(see [2.130]); and
3. a list of things that are excluded from the definition of financial product
(Pt 7.1, Div 3, Subdiv D) regardless of whether they are within the general
definition or the list of products that are specifically included in the
definition (see [2.140]).

Given the continuing development and increasing sophistication of financial

products, it is the legislature's intention that the definition be sufficiently flexible
to embrace new products without the need for further legislative amendment. 20
This three-part definition is thus supposed to be future-proof and reduce
regulatory gaps.

General definition
[2.120] As noted above ([2.110]), the general definition adopts a functional
approach by defining financial product by reference to the doing of one of three

18 There was statutory protection in relation t o option contracts, futures contracts a n d other prescribed
contracts which were entered into on a stock or futures market under the corporations legislation.
19 See generally M cCracken, "Confronting the Legal Dimension" in Sheedy and McCracken (eds),
Derivatives: The Ris ks that Remain (Sydney: Alien & U nwin, 1 9 97). For an argument that financial
products are converging with gaming prod ucts, see Palmer, "Contracts for difference, spread bets
and over the counter derivatives: Through a lawyer's looking class" (2007) 25 C &S U 246 esp at pp
266-267.
20 Explanatory M emorandum, Financial Services Reform Bill 2001 (Cth), see, for example, paras 2.26,
6.37·

[2.120] 53
EVERETT AN D M CCRACK E N 'S BAN KI N G A N D F I NANCIAL I N STITUTI O N S LAW

acts. The intention is to treat functionally similar products in a like manner and
to avoid the kind of difficulties that arose with respect to the previous formal
definitions of securities and futures contracts (see [2.090]). Accordingly, s 763A(l)
of the Corporations Act provides that a financial product is:
[A] facility through which, or through the acquisition of which, a person does one
or more of the following:
(a) makes a financial investment . . . ;
(b) manages financial risk . . . ;
(c) makes non-cash payments . . .

"Facility" is defined to include intangible property and/ or an arrangement

(s 762C). Each of the acts described in s 763A is further defined in the
Corporations Act:
Making a financial investment (s 763B) For a person to be regarded as making a
financial investment, two points need to be satisfied. First, that person (the
investor) must give money or money's worth (a "contribution") to another
person in circumstances where that other person uses it to generate a financial
return (or other benefit) for the investor or at least one or both of them intend
that the contribution be so used. Secondly, the investor must have no
day-to-day control over the use of the contribution to generate the return. The
legislation gives by way of example payments to acquire shares from the
issuer or interests in a registered scheme from the responsible entity. On the
other hand, purchase of real property or bullion is not making a financial
investment because "while the property or bullion may generate a return [for
the purchaser], it is not a return generated by the use of the purchase money
by another person." 21
Managing financial risk (s 763C) A person is regarded as managing a financial
risk if they do one of two things. Either they manage the financial
consequences of particular circumstances or, more specifically, they avoid or
limit the financial consequences of price movements ("fluctuations in, or in the
value of, receipts or costs"). Examples in the legislation are insurance, futures
contracts and currency swaps.
Making non-cash payments (s 763D) A person makes a non-cash payment if they
make payments (or even simply cause them to be made) otherwise than by the
physical delivery of Australian or foreign currency in the form of notes and/ or
coins. Examples of non-cash payment facilities in the legislation include direct
debit and cheque facilities (including travellers' cheques). Given the breadth of
the category, however, it was necessary specifically to exclude certain payment
mechanisms, such as letters of credit issued by a financial institution, cheques
drawn by a financial institution on itself (that is, bank cheques) or guarantees
given by a financial institution (s 763D(2)(b)). Also excluded are particular
payment facilities such as those where payment can only be made to one

21 Corporations Act 2001 (Cth), note to s 7638.

54 [2.120]
 Regulation I CH 2

person or those excluded by regulations due to the limited number of

potential payees or persons using the facility to make payments
(s 763D(2)(a)). 22
This general definition essentially looks at the objective purpose of the person
acquiring the facility. The actual purpose for which the financial product is
acquired is not of itself conclusive. If the facility is one through which people
commonly do one of these three acts, it is to be regarded as a financial product
(s 763A(2)). It does not matter that a particular person has acquired it for a
different purpose. The Explanatory Memorandum to the Financial Services Reform
Bill 2001 (Cth) 23 gives the example of a derivative acquired for speculative use
rather than as a risk management tool. Such a product would still be a facility for
managing a financial risk.
Finally, it should be noted that the general definition (but not the list of
specific inclusions) is subject to an exemption for incidental products in s 763E of
the Corporations Act. This exemption is intended to ensure that the definition of
"financial product" does not pick up a range of consumer transactions that have
an element, but not the primary purpose, of making an investment, managing a
financial risk or making a non-cash payment. Section 763E provides that if an
incidental component of the product is a financial product but it is reasonable to
assume that the main purpose of the product is not a financial product purpose
(that is, making a financial investment; managing a financial risk; or making a
non-cash payment) then the product is not a financial product. 24 For example,
the definition of "managing a financial risk" could potentially cover warranty
periods or guarantees in contracts for the sale of goods but these are considered
to be outside the definition because the primary purpose of the contract is the
sale of goods. 25

Specific inclusions
[2.130] The specific inclusions, that is, those products that are to be regarded as
financial products regardless of whether they fall within the general definition,
are listed in s 764A of the Corporations Act or are declared by regulations made
pursuant to that section (s 764A(l)(m)). They include many of those interests that
would have been regarded as securities and futures under the previous
classification, such as a security, an interest in a registered scheme, debentures
stock or bonds issued (or proposed to be issued) by a government and a
derivative. A derivative is defined more broadly than the old futures contract
and potentially covers not only exchange-traded instruments but also other

22 For further information about the regulation of non-cash payment facilities and the excl usions from
the definition see ASI C Regulatory Guide 1 8 5 Non-cash payment facilities ( N ovember 2005).
23 See para 6-44.
24 For judicial consideration of s 763E see Bar e/ay MIS Group of Companies Pty Ltd v ASIC (2002 ) 125 FCR
374 and Internati onal Litigation Partners Pty Ltd v Chameleon Mining N L (2011) 248 FLR 149; [2011]
N SWCA 5 0 .
25 Explanato ry Memorandum, Financial Services Reform Bi/1 2001 (Cth), para 6 -46.

[2.130] 55
 EVERETT AN D MCCRAC K E N 'S BAN KI N G A N D F I NANCIAL I N STITUTI O N S LAW

arrangements to be settled in the future under which value derives from (or
varies by reference to) factors such as an asset, a rate, an index or a commodity
(ss 761A, 761D).
Other interests that were not previously regulated under the Corporations Act
but which now come within its purview as financial products are, for example,
certain contracts of insurance, certain life insurance policies, superannuation
interests, RSA accounts, deposit-taking facilities offered by authorised deposit
taking institutions (ADis) in their banking business and foreign exchange
contracts which are not derivatives or which do not provide for immediate
settlement.
More recent inclusions in the list of things that are financial products are:
a First Home Saver Account (s 764A(l)(ha));
a margin lending facility (s 764A(l)(l));
a carbon unit (s 764A(l)(kaa));
% an Australian carbon credit unit (s 764A(l)(ka)); and
" an eligible international emissions unit (s 764A(l)(kb)).

Specific exclusions
[2.140] Products that are specifically excluded from the definition of financial
product, regardless of whether they come within the general definition in s 763A
or the list of specific inclusions in s 764A, are set out in s 765A of the
Corporations Act, the Corporations Regulations 2001 (Cth) (Corporations
Regulations) (s 765A(l)(y)), or in written declarations made by the Australian
Securities and Investments Commission (ASIC) which have been notified in the
Commonwealth of Australia Gazette (ss 765A(l)(z), 765A(2)). 26 Examples of
excluded products include certain insurance arrangements (such as health
insurance, Commonwealth and State insurance, Export Finance and Insurance
Corporation insurance, and reinsurance), company undertakings to pay related
companies, Real-Time Gross Settlement (RTGS) facilities (see [3.140]), designated
payment systems, foreign exchange contracts for immediate settlement, and
certain interests in unregistered managed investment schemes.
Importantly, credit facilities within the meaning of the regulations are
excluded. The relevant regulation is Corporations Regulations, reg 7.1.06. Credit
refers to arrangements under which payment of a debt is deferred or a debtor
incurs a deferred debt and includes any form of financial accommodation,
financial benefits arising from (or as a result of) a loan, drawing accepting
indorsing or otherwise dealing in a negotiable instrument and a letter of
credit. 27 If the credit is consumer credit, it is, however, regulated under the
National Consumer Credit Protection Act 2009 (Cth) (see [2.350]-[2.400]).

26 ASI C has declared loyalty schemes and electronic road toll devices not to be financial products: see
AS I C Regulatory Guide 185 Non-cash payment facilities ( N ovember 2005), [RG 1 8 5 .38]-[RG 1 8 5 .42].
27 On the scope of the exclusion for credit see: International Litigation Partners Pty Ltd v Chameleon
Mining NL [2012] H CA 45; (2012) 8 6 AUR 1289.

5 6 [2.140]
 Regulation I CH 2

Meaning under the ASIC Act

[2.150] The definition of "financial product" is extended under the ASIC Act.
While adopting the initial approach in the Corporations Act to defining a
financial product by reference to the making of a financial investment,
management of a financial risk and the making of non-cash payments, the
express inclusions and exclusions are wider, thus modifying the meaning of the
term. A critical change is the express inclusion of credit as a financial product for
the purposes of Div 2 of Pt 2 of the ASIC Act. Additionally, all types of interests
in managed investments schemes (that is, all interests in registered and
unregistered schemes) are financial products for the purposes of the ASIC Act
(s 12BAA(7)(b)).
This extended definition is, however, only for the purposes of the
unconscionable conduct and consumer protection provisions set out in Div 2 of
Pt 2 of the ASIC Act (see [2.344]).

Definition of financial service

General definition
[2.160] "Financial service" is defined in Div 4 of Pt 7.1 of the Corporations Act.
Persons are generally regarded as providing a financial service if they
(s 766A(1)):
(a) provide financial product advice (see section 766B);
(b) deal in a financial product (see section 766C);
(c) make a market for a financial product (see section 766D);
(d) operate a registered scheme; or
(e) provide a custodial or depository service (see section 766E); or
(f) engage in conduct of a kind prescribed by regulations made for the purposes of
this paragraph.

Each of these traditional financial services involves certain conduct in relation to

a financial product. Since 2010, 28 "the provision by a trustee company of a
traditional trustee company service constitutes the provision, by the company, of
a financial service."
The definitions of financial product advice, dealing and market making are
further explored below ([2.170]-[2.190]).

Financial product advice

[2.170] Financial product advice is broadly defined in s 766B of the Corporations
Act as a recommendation or a statement of opinion (or a report of such) that
satisfies one of the following criteria:
.. (subjective criterion) it is intended to influence a person or persons in making a
decision in relation to a particular financial product or class of financial
products or an interest in such; or

28 Section 766A(1A) inserted by the Corporations Legislation Amendment (Financial Services

Modernisation ) Act 2009 (Cth), Sch 2 effective 6 May 201 0.

[2.170] 57
EVERETT A N D MCCRAC K E N 'S BAN KI N G A N D FI NANCIAL I N STITUTI O N S LAW

(objective criterion) it could reasonably be regarded as being intended to have

such an influence.
Certain types of advice are specifically excluded, such as advice given by a
lawyer on legal matters or advice given by a tax agent. The section also tries to
make clear what constitutes a recommendation by stating, for example, that
certain responses to inquiries about the cost of, or the rate of return on, a
particular financial product may not amount to a recommendation (s 766B(7)).
The legislation distinguishes between two types of financial product advice:
personal advice and general advice (s 766B(2)). Advice is classified as personal
where it is given or directed to a person where (s 766B(3)):
(a) the provider of the advice has considered one or more of the person's
objectives, financial situation and needs . . . ; or
(b) a reasonable person might expect the provider to have considered one or
more of those matters.

All other advice is categorised as general advice (s 766B(4)).

Dealing
[2.180] Section 766C of the Corporations Act contemplates the type of conduct
which can amount to "dealing in a financial product". Five specific acts are listed
in s 766C(l) as amounting to dealing:
1. applying for or acquiring a financial product;
2. issuing a financial product;
3. varying a financial product;
4. disposing of a financial product; or
5. underwriting securities or managed investment interests.

A person also deals in a financial product if they arrange for a person to engage
in any of these acts (s 766C(2)). However, if a person deals in the product on
their own behalf they are not considered to be dealing, unless the person is an
issuer of financial products and the dealing relates to those products (s 766C(3)).
However, a body corporate (other than an investment company (s 766C(5)) does
not deal by issuing its own securities (s 766C(4)). Amongst the other specific
exclusions are certain transactions in securities issued by a government or public
authority (s 766C(4)).

Makes a market
[2.190] Three conditions have to be satisfied before a person is regarded as
making a market for a financial product. A person is within the definition if
(s 766D(l)):
(a) either through a facility, at a place or otherwise, the person regularly states
the prices at which they propose to acquire or dispose of financial products
on their own behalf; and
(b) other persons have a reasonable expectation that they will be able to
regularly effect transactions at the stated prices; and

58 [2.180]
 Regulation I CH 2

(c) the actions of the persons do not, or would not if they happened through a
facility or at a place, constitute operating a financial market because of the
effect of paragraph 767A(2)(a).

Paragraph (a) does not apply if the person is the issuer of the relevant product
(s 766D(2)).

Meaning under the ASIC Act

[2.200] Like the ASIC Act definition of financial product (see [2.150]), the ASIC
Act definition of financial services is also broader than the definition in the
Corporations Act. For example, operating a financial market or a clearing and
settlement facility (s 12BAB(l)(f)) are included in the ASIC Act definition of
financial service. The definition of dealing in the ASIC Act is not subject to the
same exclusions as in the Corporations Act and includes dealing by an issuer in
its own products.

Definitions of retail client and wholesale client

Retail client
[2.210] The definition of "retail client" is set out in the Corporations Act, s 761G.
For general insurance products referred to in s 961G(5)(b), or services in relation
to general insurance products, all individuals and small businesses are retail
clients (s 761G(5)). Superannuation products and RSA products, or services in
relation to these products, are provided to persons as a retail client in all but
limited circumstances (s 761G(6)(a)). (The most notable of these limited
circumstances is where the service is provided to a trustee of a superannuation
fund, an approved deposit fund, a pooled superannuation trust or a public
superannuation scheme that has net assets of at least $10 million.)
For all other financial products, the general starting point is s 761G(7) which
states that the product or service is provided to a person as a retail client unless
one or more of four circumstances (set out in paras (a)-(d)) apply, as follows:
the price for the product (or the value of the product to which the service
relates) equals or exceeds a prescribed amount (currently A$500,000). The
Corporations Regulations set out how certain products are valued and the
treatment of superannuation sourced income (see, for example, Corporations
Regulations, regs 7.1.17B - 7.1.26);
the product or service is provided for use in connection with a business that is
not a small business (that is, it employs no less than lOO people if it relates to
the manufacture of goods or otherwise not less than 20 people);
if neither the product or the service is provided for use in connection with a
business, the acquirer gives the provider, before the provision of the product
or service, a certificate given within the previous two years (see Corporations
Regulations, reg 7.6.02AF) by a qualified accountant stating that the acquirer
has either net assets of at least the prescribed amount (currently A$2.5 million)
or has a gross annual income for each of the previous two financial years of at
least the prescribed amount (currently A$250,000); and/or

[2.210] 59
EVE RETT A N D M C C RACKEN'S BAN KI N G A N D F I N A N C IAL I N STITUTI O N S LAW

the person is a professional investor. This term is defined in the Corporations

Act, s 9 to include: financial services licensees; specified bodies regulated by
the Australian Prudential Regulation Authority (APRA); trustees of
superannuation funds; listed entities and related companies; a person
controlling at least A$10 million; and investment businesses investing funds
subscribed by the public.
Furthermore, s 761GA, which was introduced in 2007, enables an experienced
investor (a sophisticated investor) to be regarded in specified circumstances as a
wholesale client, rather than as a retail client. 29

Wholesale client
[2.220] A person who is not a retail client is a wholesale client. Section 761G(4)
provides that:
a financial product or a financial service is provided to, or acquired by, a person as
a wholesale client if it is not provided to, or acquired by, the person as a retail client.

The Government is currently considering reform of the definitions of "retail

client" and "wholesale client". 30

Regulation of finan cial service providers

Licensing regime for financial service providers

[2.230] An important goal of the legislative reforms introduced into the
Corporations Act by the FSR Act was the promotion of "fairness, honesty and
professionalism by those who provide financial services" (s 760A(b)). The single
licensing system for financial service providers who carry on a financial services
business in Australia, introduced by the FSR Act, is one of the key means by
which this goal is achieved.
This single licensing regime replaces the previously separate licensing
requirements under Chs 7 and 8 of the pre-FSR Act Corporations Act relating to
securities and futures dealings, the then Insurance (Agents and Brokers) Act 1 984
(Cth) and the pre-FSR Act Superannuation Industry (Supervision) Act 1993 (Cth). 3 1
The financial services licence may authorise the provision of all or only some
financial services, depending on the scope of the provider's activities. 32

29 The financial services licensee has, for example, to be satisfied that the client's previous experience
ena bles the client to assess the particular product's merits, value and risks, together with the client's
own information needs and the adequacy of the information supplied by the licensee and the
product issuer. The licensee is required to document its reasons for it being so satisfied and the client
has to acknowledge in writing that it has n ot received any Product Disclosure Statements or other
statements. See generally Explanatory Memorandum, Corporations Legislation Amendment (Simpler
Regulatory System ) Bill 2007 ( Cth ), p 24.
30 Australian Government, Wholesale and Retail Clients: Future of Financial Advice Options paper (January
2011).
31 See Explanatory M emorandum, Financial Services Reform Bill 2001 ( Cth ) , para 11 .2.
32 The licence authorisation sets out the scope of financial services that a licensee is authorised to
conduct. The authorisation may permit the licensee to perform one or more financial services and
may be further limited by reference to particular financial products.

60 [2.220]
 Regulation I CH 2

Failure to obtain an Australian financial services (AFS) licence when one is

required is an offence (s 911A(1)). Furthermore, agreements entered into with a
client when a person is not licensed may be set-aside by the client (ss 925A,
925B). A client may give written notice of its wish to rescind the agreement
within a reasonable period. During the time that the client is entitled to give that
notice (and if the notice would result in rescission), the agreement is
unenforceable (s 925E). A non-licensed person is prohibited from attempting to
recover from the client any commission or fee under (or in connection with) the
agreement (s 925F) and the client may recover any such amounts actually paid
(s 925H). A person is also prohibited from falsely holding out that they are
licensed, exempt from holding a licence, acting as someone else's representative
or acting within the scope of their authority, if that is not the case (s 911C).

When is an AFS licence required

[2.240] Section 911A provides that a person who carries on a financial services
business in Australia must hold an AFS licence covering the provision of the
financial services, unless an exemption applies.
As discussed above (see [2.160]), financial service is defined in Div 4 of Pt 7.1
of the Corporations Act. However, a person who provides a financial service is
only required to be licensed if they carry on a business of providing such
services. Section 761C provides that in working out whether a person carries on
a financial services business, Div 3 of Pt 1.2 needs to be taken into account.
However, s 21(3)(e) does not apply. In addition, the common law on carrying on
a business is relevant. 33
Further, a person only needs an AFS licence if they carry on the financial
services business in Australia. Both Div 3 of Pt 1.2 of the Corporations Act and
the case law on carrying on a business are relevant to the determination of
whether the business is carried on in Australia. Section 911D is also relevant. It
provides that:
a financial services business is taken to be carried on in this jurisdiction by a person
if, in the course of the person carrying on the business, the person engages in conduct
that is:
(a) intended to induce people in this jurisdiction to use the financial services the
person provides; or
(b) is likely to have that effect;
whether or not the conduct is intended, or likely, to have that effect in other places as
well.

This recognises that a financial services business in Australia can be carried on

remotely through, for example, the internet. The initial jurisdictional scope of the
licensing regime was broad and it has been reduced by a number of exemptions
which are summarised in Section D and the Appendix of ASIC Regulatory Guide
121 Doing financial services business in Australia (April 2011).

33 See generally AS I C Regulatory Guide 1 21 Doing financial services business in Australia (April 2011),
Section C.

[2.240] 61
EVE RETT A N D M CCRAC K E N 'S BAN KI N G A N D FI NANCIAL I N STITUTI O N S LAW

Finally, a person does not require an AFS licence if they are exempted from
the requirement to obtain a licence. There are many exemptions in s 911A(2) of
the Corporations Act and in the Corporations Regulations. It is not possible to go
through all these exemptions. However, it is important to note three key
exemptions that have shaped the scope of the Australian financial services
licensing regime.
The most significant exemption is in s 911A(2)(a) of the Corporations Act for
persons who provide a financial service as a representative of a person who
holds an AFS licence (or a person who is exempt from the requirement to hold a
licence). The representative, who is exempted from the requirement to hold an
AFS licence under this provision, may be an employee or director of the AFS
licensee. They may also be a third party, that is, any other person (individual or
corporate) who is acting on behalf of the AFS licensee. These third party
representatives are called authorised representatives. "Representative" is defined
in s 910A. Section 911B limits when a person can legally provide financial
services on behalf of another person as a representative. This exemption for
representatives shapes the licensing regime because it means that licensing
happens at the entity or institutional level, not the individual level. That is, the
main control mechanism over entry into the finance industry - the licensing
process - focuses on the relevant institutions. The financial services licensing
regime is not a typical professional licensing regime.
The intermediary authorisation exemption in s 911A(2)(b) 34 of the
Corporations Act is another key exemption. Essentially it exempts product
issuers from the requirement to be licensed if they have an arrangement with an
AFS licensee ("an intermediary authorisation") under which the AFS licensee or
their authorised representatives makes offers to arrange for the issue of the
product and the product issuer then issues the product. The AFS licensee's
licence must cover the issue of the product. This exemption (which is supported
by the exemptions in s 911A(2)(ba) (entry into an intermediary authorisation)
and s 911A(2)(c) (variation or disposal of a financial product by the issuer of the
product)) also shapes the financial services licensing regime. It means that
product issuers do not have to be licensed. Many product issuers will, in fact, be
licensed but this exemption means that the true focus of the AFS licensing
regime is on financial services, not financial products. Entities manufacturing
(that is, issuing) products will not necessarily be subject to the various conduct
obligations imposed on AFS licensees. 35
Another important exemption is the exemption in respect of companies
regulated by APRA that only provide services to wholesale clients (s 911A(2)(g)
of the Corporations Act). This exemption is justified on the basis that the goal of

34 This exemption does not apply to issuers of margin loans: Corporations Regulations 2001 ( Cth ) ,

reg 7.6.01AAA .
35 U n licensed product issuers may have to have internal dispute resolutions procedures and belong to
an external dispute resolution scheme: Corporations Act 2001 (Cth), s 1 017G.

62 [2.240]
 Regulation I CH 2

market integrity is satisfied through the regulation imposed by APRA 36 and

consumer protection is not an issue for such wholesale services.

Application for an AFS licence

[2.250] Application for an AFS licence is made to ASIC (s 913A of the
Corporations Act), which is the body responsible for granting or rejecting the
application (s 913B). ASIC has no discretion in the matter. Section 913B directs
ASIC to either grant or refuse the application depending on whether or not the
requirements set out in that section are satisfied. Those requirements are in part
procedural; the applicant must make the application in the appropriate form and
provide any requested information. From a more substantive perspective, before
granting an AFS licence, ASIC must have no reason to believe that:
the applicant is likely to contravene the obligations that will apply under
s 912A if the AFS licence is granted (s 913B(l)(b)); and
the applicant or the applicant's responsible officers are not of good fame and
character (s 913B(2) and 913B(3)).
These substantive requirements have recently been strengthened as part of the
Future of Financial Advice Reforms. 37
ASIC cannot refuse to grant a licence without giving the applicant an
opportunity to be heard (s 913B(5)) and a refusal to grant a licence can be
appealed to the Administrative Appeals Tribunal (AAT). ASIC can impose
conditions on the licence (s 914A). 38 A key condition, called the authorisation,
will set out the financial services that can lawfully be provided under the
authority of the AFS licence.
ASIC's powers to suspend and cancel a licence and to ban individuals are
considered below (see [2.290]).

Obligations ofAFS licensees

[2.260] Holders of AFS licences have certain conduct and disclosure obligations.
Consistent with the stated aim of achieving "fairness, honesty and
professionalism" (see [2.230]), s 912A(l)(a) of the Corporations Act places a
broad conduct obligation on the licensee to "do all things necessary to ensure
that the financial services covered by the licence are provided efficiently, honestly
and fairly". 39 Section 912A also imposes a number of general conduct
obligations on AFS licensees. The AFS licensee must:

36 Explanatory M emorandum, Financial Services Reform Bi/1 2001 (Cth), para 11.6.
37 See Corporations Amendment (Future of Financial Advice) Act 2012 (Cth).
38 The power to impose conditions is, however, restricted where the licensee is regulated by APRA
insofar as AS I C is required to consult i nitially with APRA if the condition would impact on the
licensee's usual activities. Moreover, the power to impose a condition that would prevent an ADI
from being able to carry on all or any of its banking business is actually exercisable by the M i nister,
although the Minister is required to act on the advice of AS I C after AS I C has consulted with APRA.
39 For judicial consideration of this phrase, see Story v National Companies and Securities Commission
[1988] 1 3 NSWLR 661. See also Re Koala Hydroponics Ltd and ASIC [2002] AATA 41 and Financial
Ombudsman Service Determination 21177, 14 December 2010.

[2.260] 63
EVE RETT AN D M C C RAC KE N 'S BANKI N G AN D F I NANCIAL I N STITUTI O N S LAW

have in place adequate arrangements for the management of conflicts of

interest; 40
comply with conditions on their AFS licence;
,, comply with the financial services laws ("financial services laws" is defined in
s 761A);
ensure their representatives comply with the financial services laws;
unless they are also regulated by APRA, have adequate resources (including
financial, technological and human resources);
unless they are also regulated by APRA, have adequate risk management
arrangements;
maintain their own competence;
ensure their representatives are adequately trained and competent; and
if providing services to retail clients, have a dispute resolution system,
consisting of internal dispute resolution procedures and membership of an
ASIC-approved external dispute resolution scheme that covers, together with
complaints that are dealt with by the Superannuation Complaints Tribunal,
complaints made by retail clients in relation to the services provided.

These general conduct obligations are "scaleable", that is, what a licensee must
do to comply with the obligations will depend on the nature, scale and
complexity of their business. 41
An AFS licensee that provides financial services to retail clients must also
have arrangements for compensating those retail clients for loss or damage
suffered because of breaches of Ch 7 of the Corporations Act by the licensee or
its representatives (s 912B). The effect of Corporations Regulations, reg 7.6.02AAA
is that insurance companies, life insurance companies and ADis regulated by
APRA are exempt from the requirement to have compensation arrangements
and that most other AFS licensees comply with the s 912B obligation by
obtaining professional indemnity (PI) insurance. 42 Licensees can have
compensation arrangements other than PI insurance provided such arrangements
are approved by ASIC (s 912B(2)(b), s 912B(3)).
AFS licensees are required to report significant 43 breaches or likely breaches
of their obligations to ASIC, as soon as practicable and, in any case within 10
business days after becoming aware of the breach or likely breach (s 912D).

40 For judicial consideration of this obligation see AS/C v Citigroup Global Markets Australia Pty Ltd (No 4)
(2007) 1 6 0 FCR 35 at 95-97.
41 AS I C Regulatory Guide 104 Licensing: Meeting the general obligations (October 2007), [RG 1 04.21 ]-[RG
1 04.22}.
42 See AS I C Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees (December
2010).
43 "Significant" is defined by reference to the factors specified in Corporations Act 2001 (Cth),
s 912D( 1 )(b) such as: previous breaches; impact on the provision of financial services; indication of
inadequacy of compliance arrangements; and, resulting actual or potential financial loss to clients or
to the licensee.

64 [2.260]
 Regulation I CH 2

Finally, there are additional conduct obligations on AFS licensees in Pt 7.8 if

the Corporations Act, such as:
• obligations relating to dealing with client's money and other property
(Divs 2 - 3);
• special provisions dealing with insurance (Div 4);
• special provisions relating to margin lending facilities, including responsible
lending and margin calls (Div 4A); and
• obligations in relation to financial records, statements and audit (Div 6).

AFS licensees (and their authorised representatives) have disclosure, as well as

conduct, obligations. The key disclosure obligation is the obligation to provide a
Financial Services Guide (FSG). 44 An AFS licensee (and an authorised
representative (see [2.270] below)) must give an FSG to retail clients to whom
they provide financial services (ss 941A, 941B). The FSG is a comparatively short
disclosure document designed to give retail clients sufficient information to
enable them to make an informed decision about whether to acquire financial
services. The requirements in relation to FSGs, including the content
requirements, are set out in Div 2 of Pt 7.7 of the Corporations Act.

Representatives
[2.270] Financial services are frequently provided by representatives of AFS
licensees. In general, such representatives are employees or directors of an AFS
licensee (or related body corporates) or third party representatives of an AFS
licensee, called authorised representatives. Section 910A of the Corporations Act
defines "representative" broadly. However, in order to rely on the exemption
from licensing in s 911A(2)(a) (see [2.240]), a representative must comply with
s 911B. In general, this means a person can only act as a representative of a
principal if they are:
• an employee or director of the principal (or a related body corporate) and the
principal holds an AFS licence covering the service provided by the
representative; 45
• an authorised representative of the principal, whose authorisation covers the
particular service being provided, and the principal holds an AFS licence
covering the service provided by the representative;
• an employee of an authorised representative whose authorisation covers the
particular service, provided that the service is the provision of a basic deposit
product or a facility for making non-cash payments that is related to a basic
deposit product, or is the provision of a service prescribed by the regulations;

44 Additional disclosure obligations on providers of financial advice are discussed in [2.280] below.
45 The provider must not be an employee or director of any other person carrying on a financial services
business (or of a related body corporate). He or she m ust also not be an authorised representative of
any other such person.
EVERETT A N D MCCRAC KE N 'S BAN KI N G A N D FI NANCIAL I N STITUTI O N S LAW

an AFS licensee whose licence covers the provision of the service; 46 and
a representative of a principal who is exempt from AFS licensing in relation to
the service provided.
Under s 916A, an AFS licensee may authorise a person to act as an authorised
representative by giving the person a written notice. The authorised
representative may be authorised to provide all of the services covered by the
principal's AFS licence or a subset of those services. Natural persons, bodies
corporate and partnerships may be authorised representatives. An authorisation
may be revoked by a licensee at any time by written notice (s 916A(4)).
Authorised representatives can sub-authorise individuals to provide services on
behalf of the AFS licensee provided the licensee consents in writing to such
sub-authorisation (s 916B, Corporations Regulations reg 7.6.08). The individual,
who is sub-authorised in this way, becomes an authorised representative of the
AFS licensee. It is possible for a representative to act as authorised representative
of more than one licensee, provided that each licensee consents or the licensees
are related bodies corporate (s 916C).
It is an offence for an AFS licensee authorising (or revoking the authorisation
of) an authorised representative to fail to notify ASIC in the prescribed written
form within 15 business days (10 in the case of a revocation) (s 916F).
ASIC may give information to an AFS licensee about a person who ASIC
believes is (or will be) a representative if it reasonably believes that the
information is true and considers it appropriate to give that information
(s 916G). There are restrictions on the use of that information (s 916G).
Licensees are responsible to clients for the conduct of their representatives,
even if that conduct is not within authority, unless the representative clearly 47
disclosed the lack of authority to the client (ss 917B, 917C, 917D).
Authorised representatives are required to provide FSGs to retail clients
(s 941B, see [2.260]). Additional obligations are imposed on authorised
representatives who provide financial product advice (see [2.280]).

Additional requirements for providers offinancial product advice

[2.280] Div 3 of Pt 7.7 of the Corporations Act and the new 48 Pt 7.7A impose
additional conduct and disclosure obligations on those who provide financial
product advice.

46 A financial services licensee can generally not act as authorised representative of another licensee.
Rather, it should use its licence to provide the services on behalf of the other (Corporations Act 2001
(Cth), s 91 6 D). There is an exception for a licensee which is the authorised representative of an
insurer who acts under a so-called binder (s 91 6 E). A "binder" is an authorisation relating to dealings
in risk insurance prod ucts (s 761A).
47 Corporations Act 2001 (Cth), s 917D(c) states that "the clarity and prominence of the disclosure was
such as a person would reasonably require for the purpose of deciding whether to acquire the
relevant financial service."
48 Pt 7.7A was inserted into the Corporations Act 2001 (Cth) by the Corporations Amendment (Future of
Financial Advice) Act 2012 (Cth) and the Corporations Amendment (Further Future of Financial Advice)
Act 2012 ( Cth ). The provisions are in relation to financial advice. The key advice provisions in these

66 [2.280]
 Regulation I CH 2

Div 2 of Pt 7.7A sets out four obligations for persons who provide personal
advice to retail clients: 49
1. an obligation to act in the best interests of the client in relation to the
advice (s 961B(l)). Section 961B(2) provides an adviser with a limited
"safe harbour" in relation to this duty by providing that an adviser will be
taken to have satisfied the best interests duty if they prove that they have
taken each of the steps set out in that subsection; 5 0
2. an obligation to "only provide . . . advice to the client if it would be
reasonable to conclude that the advice is appropriate to the client had the
provider [that is, the adviser] satisfied the duty under s 961B to act in the
best interests of the client" (s 961G);
3. if it is reasonably apparent that the information given by the client about
their objectives, financial situation and needs is incomplete or inaccurate,
an obligation to warn the client that the advice is, or may be, based on
incomplete and inaccurate information relating to the client's relevant
personal circumstances and that, therefore, the client should consider the
appropriateness of the advice before acting on it (s 961H); and
4. if an adviser knows, or reasonably ought to know, that there is a conflict
between the interests of the client and the interests of the adviser or
various related entities, an obligation to give priority to the client's
interest when giving advice (s 961J) .

The best interests obligation in s 961B is significantly attenuated if the advice

relates only to basic banking products or general insurance (ss 961B(3) (4)). -

Moreover, the duty to give priority to client's interests in s 961J does not apply to
advice in relation to these products (s 961J(2) - (3)) .
The new Pt 7.7A also bans various conflicted payments in the advice industry.
The ban has three parts:
1. a ban on conflicted remuneration given to AFS licensees and
representatives who provide financial product advice (personal and
general advice) to retail clients (Div 4);
2. a ban on volume-based shelf-space fees paid to platform operators (Div 5,
Subdiv A); and

Acts commenced on 1 July 2012: Corporations Amendment (Future of Financial Advice) Act 2012 (Cth),
s 1 and Corporations Amendment (Further Future of Financial Advice) Act 2012 (Cth), s 2. H owever, on
the whole, compliance is effectively voluntary until 1 July 2013 (see Corporations Act 2001 (Cth),
ss 962D and 967).
49 Section 961(1) Corporations Act 2001 (Cth) limits the Division to the provision of personal advice to
retail clients. The obligation will generally fall on the individ ual who provides the financial product
advice. H owever, if the advice is not provided by an individual (because, for example, it is provided by
a computer program) the obligation will fall on the legal person (generally a corporate AFS licensee
or corporate authorised representative) who provides the advice: AS I C Consultation Paper 1 82,
Future of Financial Advice: Best interests duty and related obligations - Updated to RG 175 (August
2012).
50 The "safe harbour" is relatively illusory because the final step in s 912 B(2)(g) of the Corporations Act
2001 ( Cth) is "taken any other step that, at the time the advice is provided, would reasonably be
regarded as being in the best interests of the client, given the client's relevant circumstances."

[2.280] 67
EVE RETT A N D MCCRACKEN'S BAN KI N G AN D F I NANCIAL I N STITUTI O N S LAW

3. a ban on charging retail clients asset-based advice fees on borrowed funds

(Div 5, Subdiv B).

Finally, the new Pt 7.7A introduces two obligations for those who have ongoing
fee arrangements with clients who receive personal advice. Ongoing fee
arrangements are arrangements under which the retail client pays a fee for
financial advice services for a period of 12 months or more (s 962A) . 5 1 After the
commencement of the provisions, 52 new 53 retail 54 clients who enter into such
arrangements to pay for personal advice 55 will receive a fee disclosure statement
and, unless an ASIC exemption applies, a renewal notice (Div 3, Subdiv B) .
Existing retail clients who have ongoing fee arrangements will only receive the
fee disclosure statement (Div 3, Subdiv C). The obligation to provide these new
documents falls on the "fee recipient", that is, the licensee or representative who
entered into the ongoing fee arrangement, or their assignee (s 962C). The fee
recipient must provide the retail client with a fee disclosure statement annually
(ss 962G(l), 962J, 9625) . 56 The fee disclosure statement must set out retrospective
information about fees and services (s 962H(2)) .
The renewal notice (or opt-in as it is frequently called) must be provided to
the retail client biennially (ss 962K(l), 962L) . 57 It must explain that:
• the client may renew the ongoing fee arrangement by giving the fee recipient
notice in writing of an election to renew the arrangement; and
• the arrangement will terminate if the client does not elect to renew the
arrangement by giving the fee recipient notice in writing of an election to
renew within 30 days of the fee recipient giving the renewal notice and fee
disclosure statement to the client.

51 Arrangements under which a person pays a fixed sum for financial advice that has already been
received in instalments over a fixed period of time are exempted from the definition of "ongoing fee
arrangement" ( s 962A( 3 ) of the Corporations Act 2001 ( Cth )) .
52 The provision commenced on 1 J uly 2012: Corporations Amendment (Future of Financial Advice) Act
2012 ( Cth ) , s 1 and Corporations Amendment (Further Future of Financial Advice) Act 2012 ( Cth ) , s 2.
H owever, on the whole, compliance is effectively voluntary until 1 July 2013 ( see Corporations Act 2001
( Cth ) ss 962D and 967 ) .
53 " N ew clients" are persons who have not been provided with personal advice as a retail client by the
financial adviser before the commencement of Pt 7.7A Div 3, and who entered into an ongoing fee
arrangement with the adviser on or after that day: s 962D of the Corporations Act 2001 ( Cth ) .
54 Sections 962A( 1 )( a ), 962A( 2 )( a ) of the Corporations Act 2001 ( Cth ) limit the provisions to retail clients.
55 Sections 9 62A( 1 )( a ), 962 ( 2 )( a ) of the Corporations Act 2001 ( Cth ) l imit the provisions to personal
advice
56 Sections 962G (1 ) , 962J (for new clients ) , 962S (for existing clients ) of the Corporations Act 2001 ( Cth ) .
Essentially, the fee disclosure statement must be given before the end of the period of 30 days
beginning, initially, on the anniversary of the commencement of the ongoing fee arrangement, and,
thereafter, on the anniversary of the day immediately after the end of the year to which the last fee
disclosure statement related: ss 962G ( 1 ), 9 62J of the Corporations Act 2001 ( Cth ) .
57 Essentially, the renewal notice must be provided before the end of the period of 30 days beginning,
initially, on the second anniversary of the day on which the ongoing fee arrangement was entered
into and, thereafter, on the second a n niversary of the last day on which the arrangement was
renewed: ss 962K( 1 ) , 962L of the Corporations Act 2001 ( Cth) .

68 [2.280]
 Regulation J CH 2

ASIC may exempt fee recipients from the obligation to give new clients a
renewal notice if ASIC is satisfied that the fee recipient is bound by an
ASIC-approved code of conduct that "obviates the need for persons bound by
the code to be bound by the opt-in requirement" (s 962CA) .
Part 7.7 imposes two disclosure obligations on AFS licensees or authorised
representatives that provide financial product advice to retail clients. If the AFS
licensee or authorised representative provides general advice only, they must
provide the general advice warning (s 949A) . That is, they must warn the client
that the advice has been prepared without taking into account the client's
objectives, financial situation or needs and because of this the client should
consider the appropriateness of the advice before acting on it. If the advice
relates to a particular financial product, the AFS licensee or authorised
representative must advise the client to obtain and consider the relevant Product
Disclosure Statement (PDS) . If the AFS licensee or authorised representative
provides personal advice to a retail client they must generally provide a
Statement of Advice, setting out the advice and other mandatory content, to the
retail client (ss 946A - 947E).

Removing financial service providers

[2.290] As well as granting AFS licences (see [2.250]), ASIC monitors AFS
licensees' performance of their obligations. ASIC may look to AFS licensees (and
their representatives) for assistance in monitoring whether they are complying
with financial services laws and, more generally, for carrying out its other
functions (s 912E of the Corporations Act) . Provided the requests are reasonable,
AFS licensees and their representatives must comply. ASIC has express power to
direct an AFS licensee to provide a written statement and to obtain an audit
report as to its services and business (s 912C) .
ASIC has powers to remove participants from the financial services industry
by suspending or cancelling AFS licences or by banning individuals from
providing financial services.
An AFS licence can only be suspended or cancelled immediately in limited
circumstances (s 915B), namely:
' the AFS licensee asks ASIC to suspend or cancel the licence;
' the AFS licensee ceases to carry on the financial services business;
the AFS licensee enters a form of insolvency proceedings;
the AFS licensee is an individual and is convicted of a serious fraud (or in the
case of a partnership, one or more of the partners is convicted of a serious
fraud or, if the licensee is a trust, the trustee is a natural person and convicted
of a serious fraud);
c the AFS licensee is an individual and becomes incapable of managing their
affairs because of mental or physical incapacity (or, if the AFS licensee is a
trust and the trustee is a natural person, the trustee becomes incapable of
managing their affairs); or

[2.290] 69
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the AFS licensee is a responsible entity of a registered scheme and the

members of the scheme have suffered, or are likely to suffer, loss or damage
because the responsible entity has breached the Corporations Act. 58
ASIC may cancel or suspend a licence after giving the licensee an opportunity to
be heard 59 in the following situations (s 915C) :
the licensee has not complied with its obligations under s 912A;
ASIC has reason to believe the licensee is likely to contravene its obligations
under s 912A in the future;
ASIC is no longer satisfied that the licensee (or its responsible officers) is of
good fame or character;
a banning or disqualification order is made against the licensee or against a
representative of a licensee and ASIC considers that the representative's
involvement in the provision of the licensee's financial services will
significantly impair the licensee's ability to meet its obligations; or
the AFS licence application was materially false or misleading or omitted a
material matter.
ASIC will not necessarily suspend or cancel a licence simply because one of the
relevant grounds is satisfied. ASIC has discretion to cancel or suspend the
licence. It should only exercise its discretion where it is necessary and
appropriate to do so in light of the purpose of its discretionary power. This
means ASIC should only cancel or suspend an AFS licence where it is necessary
to do so in order to protect the public. 60 ASIC's powers to suspend or cancel an
AFS licence are modified where the licensee is regulated by APRA (s 9151) .
Part 7.6, Div 8 of the Corporations Act gives ASIC the power to make a
banning order. A banning order is a written order that prohibits the banned
person from providing financial services whether as an AFS licensee or as a
representative of such a licensee. The banning order can be tailored; it can ban
the provision of all financial services or specified financial services in specified
circumstances or capacities, either permanently or for a specified period (s 920B).
Section 920A(3) provides that ASIC can ban a person without a hearing if:
the person's licence was cancelled or suspended on one of the bases justifying
suspension or cancellation without a hearing; or
the person was convicted of serious fraud.
The bases on which ASIC may ban a person after a hearing have recently been
expanded. 6 1 As set out in s 920A, ASIC may now ban a person, after a hearing if:
ASIC suspends or cancels an AFS licence held by the person on one of the
grounds requiring a hearing;

58 See s 915 8(4) for the requirements in relation to trustee companies.

59 The principles and procedures AS I C adopts for these hearings are set out in its Regulatory Guide 8
Hearings Practice Manual (March 2002).
60 Story v National Companies and Securities Commission (1988) 13 N SWLR 661 at 685-686.
61 Corporations Amendment (Future of Financial Advice) Act 2012 (Cth), Sch 1, items 5 - g .

70 [2.290]
 Regulation I CH 2

the person has not complied with their obligations as an AFS licensee under
s 912A;
ASIC has reason to believe that the person is likely to contravene their
obligations as an AFS licensee under s 912A;
the person has not complied with a financial services law; or
ASIC has reason to believe that the person is likely to contravene a financial
services law;
the person is convicted of fraud;
the person becomes an insolvent under administration;
ASIC has reason to believe that the person is not of good fame or character. (In
deciding whether a person is not of good fame or character, ASIC must have
regard to any conviction of the person, within the last 10 years for an offence
that involves dishonesty and is punishable by imprisonment for at least
3 months, whether the person has held an AFS licence that was suspended or
cancelled, whether a banning or disqualification order has previously been
made against the person and any other matter that ASIC considers relevant);
ASIC has reason to believe that the person is not adequately trained, or is not
competent, to provide financial services; or
the person has been involved, or is likely to become involved, in a
contravention of a financial services law by someone else.
Like the power to suspend or cancel a licence, the power to ban an individual is
discretionary. ASIC should exercise this power where it is necessary and
appropriate in light of the purpose of the power, which is to protect the public. 62
Finally, it should be noted that ASIC may apply to the court for a
disqualification order under s 921A if it cancels an AFS licence held by a person
or makes a banning order against a person that is to operate permanently. The
court may make a banning order permanently or for a specified period in
relation to all financial services or in relation to specified financial services. A
person against whom a disqualification order is made cannot be granted an AFS
licence.

Regulation of financial products

Introduction
[2.300] The issue or sale of a financial product may trigger certain conduct and,
in particular, disclosure obligations even if the issuer or seller is not an AFS
licensee. This section briefly describes the point of sale or issue disclosure
requirements, the ongoing disclosure requirements, and other key obligations in
relation to advertising, dispute resolution, cooling off and hawking that are
associated with financial products. It should be remembered that additional
Corporations Act requirements apply to particular classes of financial products;
for example, an offer of debentures may have to comply with Ch 2L, as well as

62 Re Tweed and Australian Securities and Investments Commission (2008) 47 AAR 51 8 at 571-579.

[2.300] 71
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with the disclosure requirements in Ch 6D, and Ch 5C governs the registration,

governance and winding up of managed investment schemes.

Point of issue or sale disclosure

[2.310] The point of issue or sale disclosure requirements for financial products
vary depending on whether the relevant financial product is a security or not.
For financial products, other than securities (as defined in the s 761A of the
Corporations Act), the main point of issue or sale disclosure document is the
Product Disclosure Statement (PDS) 63 and the relevant requirements are set out
in Pt 7.9 of the Corporations Act. A PDS is intended to overcome the information
deficits of the retail client. That is, it is supposed to provide retail clients with all
information they need to make an informed decision about whether to acquire a
financial product. The Parliament's intention was that a PDS would inform retail
clients about the relevant financial product in a way that that allows retail clients
to compare functionally similar products; comparability is a key public policy
requirement. 64
Generally, 65 a PDS must be given to a retail client in three situations:
1. Recommendation situations: a PDS must generally b e given where, in the
course of providing personal advice to a retail client, an AFS licensee or
an authorised representative has recommended that the client acquire a
financial product, and the acquisition is either by way of issue to the
client, or by way of transfer to the client under a regulated secondary sale
to which the PDS requirements apply (s 1 012A). (Although the PDS will
be given to the client by the person providing the recommendation, it will
be prepared by the issuer or, where relevant, the seller (s 1013A) .)
2. Issue situations: a PDS must generally be given where an issuer or other
regulated person (s lOll B) offers to issue, or arrange the issue of, or issues
a financial product to a retail client, or accepts an offer from a retail client
to acquire the financial product (s 1012B) .
3. Regulated secondary sale situations: the PDS requirements generally apply to
the issue, rather than secondary sale, of financial products. However, a
PDS generally has to be given to a retail client in the limited secondary
sale situations set out in s 1012C. This is, essentially, an anti-avoidance
provision, designed to deal with situations where the initial issue was
structured to avoid the PDS requirements. 66

The content requirements for PDSs are primarily set out in ss 1013C - 1 013K of
the Corporations Act. As noted above, a key purpose of these requirements is to
ensure broadly consistent disclosure in relation to functionally similar financial

63 In some situations a Supplementary Product Disclosure Statement may be used (see Subdiv D, Div 2
of Pt 7.9).
64 Explanatory Memorandum, Financial Services Reform Bi// 2001 (Cth), paras 2.30-2.35
65 There are many exceptions. See, for examp le, the Corporations Act 2001 (Cth), s 1 0120.
66 S e e generally AS I C Regulatory G u i d e 173 Disclosure for on-sale o f securities a n d other financial products
(J une 201 2).

72 [2.310]
 Regulation I CH 2

products, thus enabling consumers to compare products. Therefore, when the

FSR Act commenced the content requirements were the same regardless of the
type of financial product to which the PDS related. However, over time this "one
size fits all" approach has been eroded and the content requirements are now
increasingly tailored for different types of financial products . 67
For securities (as defined in s 700) the main 68 point of issue or sale disclosure
document is the prospectus. In limited situations (s 709) an issuer of securities
may use an offer information statement. The circumstances in which these
documents must be given, the content requirements and the relevant liability
provisions are set out in Ch 6D.

Ongoing disclosure
[2.320] Like the point of issue or sale disclosure requirements, the ongoing
disclosure requirements vary depending on the type of product. For products
other than securities (defined in s 761A), a number of ongoing disclosure
requirements are set out in Div 3 of Pt 7.9 of the Corporations Act. Notably,
issuers of financial products that have an investment component (see
s 1017D(l)(b)) must provide periodic statements, at least annually, to persons
who hold the financial product and who initially acquired the product as a retail
client, provided the product was offered, or applied for, in Australia (s 1017D) .
The periodic statement must give the holder "the information that the issuer
reasonably believes the holder needs to understand his or her investment in the
financial product" (s 1017D(4)). Subsection 1017D(5) provides a list of content
that must be included in the periodic statement to the extent it is relevant.
Section 1017B establishes a regime for the ongoing disclosure of material
changes and significant events that applies to all financial products other than
securities (excluded by s lOlOA) and certain interests in managed investment
schemes (which are excluded by s 1017B(2)). Under this regime, disclosure must
be made by the issuer to any person who holds a financial product and was a
retail client at the time of acquiring the product, provided the product was either
offered or applied for in Australia (s 1017B(l)) . The issuer must disclose any

67 See, for example, Corporations Regulations 2001 ( Cth ), regs 7.9.15D, 7.9.15E and 7.9.15F which
effectively introduce a tailored PDS regime for general insurance; Corporations Regulations 2001
( Cth ), reg 7.9.61AA which introduced the short-form product d isclosure statement; and, the shorter
PDS requirements for first home saver accounts, margin loans, simple managed investment schemes
and most superannuation products in Corporations Regulations 2001 ( Cth ), Subdivs 4.1 - 4.2C, Div 4 of
Pt 7·9· Also see ASI C's regulatory guides which set out guidance on disclosure benchmarks and
principles to be followed in PDSs for certain product classes: AS I C Regulatory Guide 45 Mortgage
schemes-improving disclosure for retail investors ( May 2012 ) , Regulatory Guide 46 Unlisted property
schemes-improving disclosure for retail investors ( March 2012 ) , AS I C Regulatory Guide 227 Over-the­
counter contracts for difference: Improving disclosure for retail investors (August 2011 ), AS I C Regulatory
Guide 231 Infrastructure entities: Improving disclosure for retail investors (January 2012 ) , AS I C
Regulatory G u i d e 2 3 2 Agribusiness managed investment schemes: Improving disclosure for retail
investors (January 2012 ), AS I C Regulatory Guide 240 Hedge funds: Improving disclosure ( September
2012 ) .
68 If AS I C approves a profile statement may be prepared in addition to the prospectus ( s 709 ( 2 ) of the
Corporations Act 2001 ( Cth )) . Profile statements do not appear to be used in the market.

[2.320] 73
EVERETT AN D MCCRAC K E N 'S BAN KI N G A N D FI NANCIAL I N STITUTI O N S LAW

material change to a matter, or significant event that affects a matter, provided

that matter would have been required to be included in a PDS prepared on the
day before the change or event occurs (s 1017B(1A)). Information which is
reasonably necessary for the holder to understand the nature and effect of the
material change or significant event must also be disclosed (s 1017B(4)).
Products that are not covered by the s 1017B regime for disclosure of material
changes and significant events are covered by the continuous disclosure
requirements in Ch 6CA.

Other obligations
[2.330] Retail clients who acquire the products referred to in s 1019A (eg various
risk insurance products, managed investment products and investment life
insurance products) by way of issue or regulated secondary sale have the benefit
of a cooling off period. Generally, they are entitled to return the product during
a period of 14 days starting on the earlier of the time when the acquisition was
confirmed or 5 days after the day on which the product was issued or sold to the
client (s 1 019B) .
Many product issuers and sellers will have an AFS licence and thus will be
required to have a dispute resolution system under s 912A(1)(g) if they provide
services to retail clients. However, unlicensed product issuers (or regulated
secondary sellers) are also required to have a dispute resolution system, if the
products they have issued (or sold) are, or have been, available for acquisition by
a retail client (s 1017G).
Advertising can be highly influential in a retail client's decision to acquire a
product. 69 Moreover, it can create special risks because it enables a retail client to
acquire financial products directly, without the benefit of advice. 70 Nevertheless,
it is comparatively lightly regulated. Advertisements of small scale, personal
offers of securities, managed investment and other prescribed financial products
are prohibited (ss 734(1) and 1018B). Prior to lodgement of a disclosure
document with ASIC, offers of unlisted securities may only be advertised with
"tombstone advertisements", that is, advertisements that only include a
statement that identifies the offeror and the securities, a statement that a
disclosure document for the offer will be made available when the securities are
offered and a statement that anyone who wants to acquire the securities will
need to complete the application form that will be in or will accompany the
disclosure document (s 734(5)(b)) . In other circumstances advertisements are
broadly permissible provided they generally set out certain minimal mandatory
content (ss 734(5)(a), 734(6), 1018A(1) and 1018A(2) ) . Of course, the general
consumer protection provisions, especially the prohibition on misleading and
deceptive conduct in s 1041H Corporations Act and s 12DA ASIC Act (see

69 Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia,

Inquiry into Financial Products and Services in Australia (2009), paras [234] - [235].
70 Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia,
Inquiry into Financial Products and Services in Australia (2009 ), paras [ 236] - [ 237].

74 [2.330]
 Regulation I CH 2

[2.340]-[2.342]) impose limits on the nature of the claims that can be made, or
implied, in advertisements. ASIC has issued guidance on the application of these
general consumer protection provisions, to advertisements in ASIC Regulatory
Guide 234 Advertising financial products and advice services (including credit): Good
practice guidance (November 2012) .
Unsolicited offerings (or hawking) of financial products is generally prohibited.
Three different provisions in the Corporations Act attempt to address hawking.
The general provision is s 992A, under which a person is prohibited from
offering financial products for sale or issue in the course of (or because of) an
unsolicited meeting with another person who is a retail client. An offer cannot be
made through unsolicited contact by telephone (or other means prescribed by
regulations) unless certain conditions are satisfied. These include the call being
made within appropriate hours to a person not listed on a "no call" register, who
has been given the opportunity to register on the "no call" register and who has
been given a PDS and informed of its importance. Lack of compliance with these
requirements means that the client has a right of return and refund.
Section 992AA deals with managed investment schemes and precludes an
offer from being made in the course of (or because of) an unsolicited meeting or
telephone call with another, unless the offer is exempted. Exemptions apply
where, for example, the offer is not made to a retail client or where it is a
telephone offer by an AFS licensee in relation to a listed scheme.
Securities (as defined in s 700) are subject to a similar prohibition to managed
investment schemes, with offers in the course of unsolicited meetings or
telephone calls being precluded in the absence of an . exemption (s 736) .
Exemptions apply where, for example, the offer of securities is made to
sophisticated or professional investors or the offer is an offer of listed securities
made by telephone by a licensed securities dealer. Securities issued or
transferred in breach of the prohibition may be returned and their price
refunded (s 738) .

General consumer protection regulation

Introduction
[2.340] One of the main purposes of the Ch 7 conduct and disclosure
requirements set out above is to protect consumers of financial products and
services. 71 These requirements are specific to financial services and products. In
addition, there are a number of general consumer protection provisions in Ch 7
of the Corporations Act and the ASIC Act. These general consumer protection
provisions differ from the requirements discussed above in that they are not
specific to the finance sector. While they are expressed, on their face, to be
limited to financial products and services in some way, the standards they set
down apply to all conduct in trade and commerce. That is, the general consumer
protection provisions in the ASIC Act essentially replicate the general consumer

71 See Corporations Act 2001 (Cth), s 7 60A(a) and [2.050].

[2.340] 75
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protection provisions in Schedule 2 of the Competition and Consumer Act 2010

(Cth) (the Australian Consumer Law (ACL) (Sch 2, CCA) ) . The general consumer
protection provisions in the Corporations Act are more limited but also
essentially reflect standards of general consumer protection in Sch 2, CCA.
This slightly odd situation, in which the provisions in Sch 2, CCA are
replicated in the ASIC Act and, in some cases, the Corporations Act, has caused
some consternation. 72 It has come about largely because of the Wallis Inquiry's
decision to give ASIC exclusive jurisdiction over consumer protection in the
finance sector. The Wallis Inquiry recognised the need for general (or what the
Inquiry called "substantive") consumer protection provisions, such as the
prohibition against misleading and deceptive conduct, to apply in the finance
sector. However, the Inquiry concluded that it was undesirable for the Australian
Competition and Consumer Commission and ASIC to have overlapping
jurisdiction in relation to these general consumer protection provisions. 73 It was
felt that such overlapping jurisdiction would create the potential for regulatory.
duplication in the financial system and detract from ASICs consumer protection
responsibility in the finance sector. 74
While this explains the duplication of Sch 2 of the CCA in the ASIC Act, it
does not explain the incomplete overlap and inconsistency between the
Corporations Act and the ASIC Act general consumer protection provisions.
Some of the Corporations Act and ASIC Act provisions discussed below are very
similar but have crucial differences. For example:
'' as discussed above (see [2. 150t [2.200]), the definitions of "financial service"
and "financial product" in the ASIC Act are broader than those in the
Corporations Act;
the ASIC Act, but not the Corporations Act provisions are limited to conduct
in relation to trade and commerce;
some of the ASIC Act provisions only protect consumers (as defined in s 12BC
of the ASIC Act) 75; and
the remedies available under the ASIC Act differ from, and are far more
extensive than, those available under the Corporations Act. 76

72 See, for example, Wingecarribee Shire Council v Lehman Bras Australia Ltd (in liq) [2012] FCA 1 028,
[947] - [948].
73 Financial System Inquiry Final Report (Canberra: AGPS 1 9 97) (Chair: S Wallis), recommendation 3,
p 248.
74 Financial System Inquiry Final Report (Canberra: AG PS 1 9 97) (Chair: S Wallis), pp 247-248.
75 See Australian Securities and Investments Commission Act 2 0 01 (Cth), s 12DH (referral selling), s 1 2 DJ
(harassment and coercion) and s 1 2 E D (warranties in relation to the supply of financial services).
76 Breach of the s 1 0 41 H of the Corporations Act 2001 (Cth) only gives rise to civil liability (s 10411). Breach
of s 1 041G is an offence and also gives rise to civil liability for loss or damage (ss 1 041 1 and 1311). The
remedies for breach of the general consumer protection provisions in the Australian Securities and
Investments Commission Act 2001 (Cth) are extensive and varied (see Subdivs G a n d G B of Div 2 of Pt 2
of the Australian Securities and Investments Commission Act 2001 (Cth)).

76 [2.340]
 Regulation I CH 2

Corporations Act provisions

[2.341] Section 991A prohibits an AFS licensee from engaging in conduct that is,
in all the circumstances, unconscionable. This provision is unusual in that it
articulates a general consumer protection standard but limits its scope to the
conduct of AFS licensees. The other general consumer protection standards in
the Corporations Act and the ASIC Act are not so limited.
Section 1 041G prohibits a person, in the course of carrying on a financial
services business in Australia, from engaging in dishonest conduct in relation to
a financial product or financial service. Dishonesty is to be determined by
reference to the "standards of ordinary people" and the person must know that
the conduct is dishonest according to those standards. Section 1041H is a general
prohibition on engaging in misleading or deceptive conduct, or conduct that is
likely to mislead or deceive, in relation to a financial product or service.

ASIC Act provisions

[2.342] The ASIC Act general consumer protection provisions are in Div 2 of Pt 2
of the ASIC Act. As noted above ([2.340]) they essentially replicate the provisions
in Sch 2, CCA. In fact, some of the provisions look a bit odd in the financial
services context. For example, s 12DC prohibits false representations and other
misleading or offensive conduct in relation to financial products that involve
interests in land. Key provisions include prohibitions on unconscionable conduct
(ss 12CA and 12CB) and a prohibition on misleading or deceptive conduct, or
conduct likely to mislead or deceive (s 12DA) . These two provisions are
discussed in [6.130] and [6.140] . A relatively new provision is s 12BF which
renders void unfair terms in standard form consumer contracts relating to a
financial service or a financial product (s 12BF and subdiv BA generally) . This
provision is discussed in [6. 150] .

CONSU M ER CR EDIT

Introduction
[2.350] Following an agreement by the Council of Australian Governments
(COAG) in 2008, 77 the consumer credit regulatory regime was significantly
altered by the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) .
This Act saw primary responsibility for consumer credit regulation move from
the States to the Commonwealth. The States' Uniform Consumer Credit Code
(UCCC) 78 was replicated (with some changes) in the National Credit Code (Code)
set out in Sch 1 of the NCCP Act, making it part of Commonwealth law. The
NCCP also introduced a new licensing regime and a responsible lending
ob�gation. ASIC was given responsibility for administration of the new national

77 See Explanatory M emorandum, National Consumer Credit Protection Bi/1 2 0 0 9 (Cth), p 6.

78 The Uniform Consumer Credit Code was enacted in the Consumer Credit (Queensland) Act 1994 (Qid)
and applied in the States a n d Territories from 1996 until the commencement of the National
Consumer Credit Protection Act 2009 ( Cth )
.

[2.350] 77
EVE RETT A N D M CC RACKEN'S BAN KI N G A N D F I N A N C I AL I N STITUTI O N S LAW

consumer credit regulatory regime, adding this responsibility to its existing

jurisdiction over breaches of the general consumer protection provisions in ASIC
Act in relation to credit (see [2. 150], [2.340], [2.342]) .

Licensing
[2.360] Under the NCCP Act people who engage in credit activities are required
to have an Australian credit licence (credit licence), authorising them to engage
in those activities, unless they are a representative of a licensed principal or
otherwise exempted from the licensing provisions (s 29).
Credit activity is defined in s 6 but this deceptively clear definition requires an
understanding of the definitions of "credit", "credit contract" and "consumer
lease" in the Code, and an understanding of types of credit and consumer leases
to which the Code applies. In essence, a person conducts a credit activity if they
carry on a business in Australia 79 of:
providing credit under "credit contracts";
providing "consumer leases";
"' performing the obligations or exercising the rights of a credit provider or
consumer lease provider; or
providing "credit services" (ss 7 - 9), that is, making a suggestion in relation
to a particular credit product, assisting with an application relating to a
particular credit product or acting as an intermediary.
"Credit contract" and "consumer lease" are defined in a way that limits the
scope of the NCCP Act, and hence the licensing regime, to credit provided to
individuals or strata corporations for specific purposes. "Credit contract" is
defined in s 5 of the NCCP Act and s 4 of the Code as "a credit contract under
which credit is or may be provided to which [the Code] applies. " The Code only
applies to credit provided to natural persons or strata corporations, wholly or
predominantly for personal, domestic or household purposes or to purchase,
renovate or improve residential investment property (or to refinance credit
provided to purchase, renovate or improve residential investment property)
(Code, s 5(l) (a) - (b)) . In addition, the Code, and hence the NCCP Act, only
applies if a charge is made for the provision of credit (Code, s 5(1)(b)). In
addition, the Code, and hence the NCCP Act, only applies if a charge is made for
the provision of credit (Code, s 5(1)(c)) . "Consumer lease" is defined in s 5 of the
NCCP Act as a consumer lease to which the Code applies . The Code applies to
consumer leases for the hire of goods by a natural person or strata corporation,
under which that person or corporation does not have a right or obligation to

79 The "carry on a business limitation" is found in the National Consumer Credit Protection Act 2009
(Cth), items 1 (credit contracts) and 3 (consumer leases) in s 6, the definition of "credit assistance" in
s 8, and the definition of "act as an intermediary" in s 9· Additionally, as set out in ss 5(1) and 1 70(1) of
the U niform Consumer Credit Code and, consequently, the National Consumer Credit Protection Act
2009 ( Cth) only applies to credit or consumer leases entered into in the course of, as part of, or
incidentally to a business carried in this jurisdictio n . See also AS I C Regulatory Guide 203 Do I need a
credit licence? (J une 201 0), [RG 203.66]-[203.77].

78 [2.360]
 Regulation I CH 2

purchase the goods (Code, s 169), which satisfy the conditions in s 1 70.
Section 1 70 requires that the goods are hired wholly or predominantly for
personal, domestic or household purposes and that a charge is or may be made
for hiring the goods and the charge, together with any other amount payable
under the lease, exceeds the cash price of the goods.
The scope of the licensing regime is further limited by s 6 of the Code, which
provides that the following types of credit are not covered by the Code:
short-term credit;
credit without express prior agreement;
credit for which only an account charge is payable;
joint credit and debit facilities;
bill facilities;
insurance premiums payable by instalment;
credit provided by pawnbrokers;
credit provided by a trustee of a deceased person's estate;
employee loans; and
margin loans. 80
The exclusion of these types of credit by s 6 of the Code means that contracts
under which these types of credit are provided are not "credit contracts" for the
purposes of the Code, or the NCCP Act, and provision of credit under them does
not trigger the licensing requirement in the NCCP Act.
"Credit activity" is defined in s 6 to also include:
being a mortgagee under a mortgage; and
being the beneficiary under a guarantee.
Finally, the scope of credit activity can be extended by regulation (item 6, s 6).
As stated above, a person who engages in a credit activity is not required to
be licensed if they are a representative of a licensed principal. As with the AFS
licensing regime, there are two types of representatives:
1. employees or directors of the principal or a related body corporate of the
principal; and
2. third-party representatives called credit representatives authorised under
ss 64 or 65 (s 29(3)) .

A s the administrator o f the new consumer credit regulatory regime, ASIC makes
the decision to grant credit licences on the basis of applications lodged with it
(s 36) . ASIC's licensing powers in the NCCP Act vary depending on whether the
applicant is an ADI or not. If the applicant is an ADI, ASIC must grant the
application provided it is in the approved form and includes a statement that the
ADI will comply with its obligations as a licensee (s 38) . In other cases, ASIC

So Margin loans are regulated under the financial services l icensing regime in Ch 7 of the Corporations
Act 2001 (Cth) (see [2.050]-[2.342].

[2.360] 79
EVERETT A N D MCCRACKEN'S BAN KI N G A N D F I NANCIAL I N STITUTI O N S LAW

must (and must only) grant a licence if the application is in the approved form,
the applicant has given ASIC any additional information or audit report it
requests and the applicant satisfies the substantive criteria (s 37). The substantive
criteria are:
• ASIC has no reason to believe that the applicant is likely to contravene the
general conduct obligations that will apply under s 47 (s 37(1) (b)); and
• ASIC has no reason to believe that the applicant is not a fit and proper person
to engage in credit activities (s 37(1) (c)).
In considering these matters, ASIC must have regard to the matters in
s 37(2) - (3). There is also a streamlined, simpler licence application process for
certain general and life insurers. 81

Responsible lending and other obligations

[2.370] Credit licensees must comply with the general conduct obligations in s 47
of the NCCP Act. A credit licensee must also have adequate arrangements for
compensating persons for loss or damaged suffered because of a contravention
of the NCCP Act by the licensee or its representatives (s 48) . These obligations
are summarised in ASIC Regulatory Guide 204 Applying for and varying a credit
licence (March 2012), Table 3.

81 National Consumer Credit Protection Regulations 2010, reg 8. Also s e e AS I C Regulatory G u i d e 204
Applying for and varying a credit licence (March 201 2), [RG 204.1 9]-[RG 204.25].

80 [2.370]
 Regulation I CH 2

Figure 2 .1 : Where to find AS I C guidance on the general

conduct obligations of credit l i censees 82

l)'
pes of General conduct obligations Where to fin d guidance
ob igation
Licensees' �
En age in credi t activities Section C of Regulatory Gui de
broad ef tcien tly, hon estly and fai rly 205 Credit licensing: General
com pliance conduct obliga tions (RC 205)
obligations Comply with the con ditio n s on I n formati on Sh eet 97
the l i cence Guidance for small credit
businesses (l N FO 97)
lc
Com ly with the credi t
legis ati on
Licensees' H ave risk man agement systems Secti on D of RG 205
i n ternal a
in place for l icensees not
systems regulate by APRA)
H ave arrangem ents for Secti on D of RG 205
ensuring that clients are not
disadvantaged by confli cts of
i n terest
H ave dispute resolution Regulatory Gui de 1 6 5
systems i n p l ace Licensing: Internal and external
dispu te resolution (RC 1 65)
Licensees' Ensure representatives comply Secti on E of RG 205
people with th e credi t l egislation
Ensure representatives are Regulatory Gui de 206 Credit
adequately trained an d are licensing: Competence and
competent training" (RC 206)
M ai n tain the competence to RG 206
engage i n credit activities
Licensees' H ave adequate h um an and Section F of RG 205
resources technol ogi cal resources (for
l i censees not regulated by
APRA)
H ave adequate financial RC 207 Credit licensing:
resources (for l i censees not Financial requirements (RC
regulated by APRA) 207)
Compensati on H ave compensation arrange- Regulatory Guide 210
ments i n place Compensa tion and insurance
arrangements for credit

The introduction of responsible lending obligations was a major feature of the

NCCP Act. Responsible lending is dealt with in Ch 3 of the NCCP Act and
discussed in Chapter 6 Allocation of Risk (see [6.170] ) .
The National Consumer Credit Protection Amendment (Home Loans and Credit
Cards) Act 2011 (Cth) introduced new requirements for Key Fact Sheets (see
[6. 170] ) .

82 AS I C Regulatory Guide 204 Applying for and varying a credit licence, (March 201 2), p 14. The table has
been modified slightly.

[2.370] 81
EVE RETT AN D M CCRACKEN'S BAN KI N G A N D F I NANCIAL I N STITUTI O N S LAW

ASIC's role
[2.380] ASIC is responsible for the general administration of the consumer credit
regulatory regime. As noted above (see [2.360]), ASIC grants credit licences to
applicants that satisfy the statutory criteria. It also monitors compliance with the
credit legislation and, where appropriate, takes criminal, civil or administrative
action to enforce the regime and protect consumers. 83 ASIC may look to the
credit licensee (and its representatives) for assistance in monitoring whether they
are complying with the credit legislation (s 51 of the NCCP Act) . Provided the
requests are reasonable, the licensee and its representatives must comply. A
credit licensee must lodge an annual compliance certificate with ASIC. ASIC may
also require credit licensees to provide it with specified information (s 49) and to
have this information audited (s 49(3)).
ASICs administrative actions under the NCCP Act are: 84
immediately suspending or cancelling a credit licence in certain limited
circumstances (s 54);
suspending or cancelling a credit licence after a hearing (s 55);
banning a person from engaging in credit activities immediately in certain
limited circumstances (s 80(5));
"' banning a person from engaging in credit activities after a hearing (s 80);
varying the conditions attached to a credit licence after a hearing (s 45); and
@ accepting an enforceable undertaking as an alternative to other remedies,
where it considers it appropriate to do so (s 322).
If the credit licensee or a related body corporate is regulated by APRA, ASIC
must consult with APRA before exercising the power to suspend or cancel a
licence or to vary conditions attached to the licence. Moreover, if the credit
licensee or a related body corporate is an ADI the relevant administrative power
may be exercisable by the Minister (ss 46, 56).
ASIC can seek compensation for those who have suffered loss or damage or
commence representative proceedings on behalf of consumers (ss 1 78 - 180).
ASIC can also seek criminal and civil penalties for various breaches of the
licensing and responsible lending obligations and key requirements of the Code.
Other remedies include adverse publicity orders (s 182) and, in appropriate
circumstances, infringement notices (s 331 ) .

National Credit Code

[2.390] As noted in [2.350t the former UCCC has largely been replicated as the
Code in Sch 1 of the NCCP Act. The Code regulates many aspects of the

83 See genera l ly AS I C Regulatory Guide 218 Licensing: Administrative action against persons engaging in
credit activities (N ovember 2010 ), [RG 219.8]-[RG 21 8.11]. The National Consumer Credit Protection Act
2009 (Cth) enhanced the remedies available to enforce consumer credit regulation through the
introduction of, for example, civil penalties and infringement notices: Explanatory Memorandum,
National Consumer Credit Protection Bill 2009 (Cth), p 5·
84 See genera lly ASI C Regulatory Guide 218 Licensing: Administrative action against persons engaging in
credit activities (N ovem ber 2010 ) .

82 [2.380]
 Regulation I CH 2

provision of consumer credit, including upfront and ongoing disclosure

obligations, the form of credit contracts, changes to the credit contract,
enforcement of credit contracts, hardship, advertising, enforcement and
termination of the credit contract and penalties and remedies. 85 (For further
information on the Code see [6.170] .)

Phase 11 reforms
[2.400] When COAG agreed to the transfer of responsibility for consumer credit
from the States to the Commonwealth it agreed that this should happen in two
phases. The NCCP Act and Code represent phase one. Legislation to implement
phase two has recently been made and most provisions will commence on
1 March 2013. The Consumer Credit Legislation Amendment (Enhancements) Act
2012 (Cth) introduces product-specific obligations in relation to reverse mortgages
(including statutory protection against negative equity), enhancements to the
hardship provisions and caps on the maximum amount credit providers can
charge under both small amount credit contracts (often called payday loans) and
all other credit contracts. It also includes additional obligations in relation to
small amount credit contracts. (See further [6.170] ) .

C REDIT REPORTING

Credit reporting under the Privacy Act

[2.410] The Privacy Act 1988 (Cth) (the Privacy Act) was introduced to give effect
to Australia's obligations under the International Covenant on Civil and Political
Rights and to implement recommendations of the OECD (see Preamble to the
Act) . The Privacy Act is generally directed towards the collection and handling
of "personal information" on individuals by Federal and ACT Government
agencies, who are required under s 16 of the Act to comply with specified
information privacy principles as set out in s 14. However, it is the restrictions on
credit providers giving information on individuals, contained in Pt IliA of the
Privacy Act, together with the Credit Reporting Code of Conduct 86 issued under
s 18A of the Act, which are of particular interest to financial institutions as credit
providers within the meaning of the Act. 87 These restrictions aimed at consumer
credit were introduced when the credit industry controversially decided to
establish a system of monitoring consumers' management of their loans. 88

85 lt should be noted that the NCCP Act itself also contains disclosure requirements. For example the
NCCP Act has recently been amended by the National Consumer Credit Protection Amendment (Home
Loans and Credit Cards) Act 2011 (Cth) to introduce new requirements for Key Fact Sheets (see
[6.170]).
86 T h e Credit Reporting C o d e o f Conduct is available at http://www.privacy.gov.au/materials/a·z/
c#Codes-of-Conduct (viewed 15 September 2012).
87 To the extent that they use tax file number information, they are also bound to comply with
Guidelines issued under Privacy Act 1988 (Cth), s 17.
88 See Credit Reporting Code of Conduct, statement by the Federal Privacy Comm issioner, M arch 1 996.

[2.410] 83
EVERETT A N D MCCRACK E N 'S BAN KI N G A N D F I NANCIAL I N STITUTI O N S LAW

The thrust of Pt IliA is towards imposing restrictions on what personal

information a credit reporting agency can collect and how it deals with that
information. It allows for the collection and disclosure of what is called
"negative" credit reporting information, that is, information about a borrower's
credit defaults (eg overdue repayments or dishonoured cheques). Section 18E
sets out the information which may be included in credit information files by a
credit reporting agency. It includes: 89
s a credit provider having sought a credit report in connection with an application for credit,
and the amount of credit sought (inquiry information);

s a credit provider being a current credit provider in relation to the individual (current credit
provider status);

credit provided by a credit provider to an individual, where the individual is at least

60 days overdue in making a payment on that credit (default information);
a cheque for $100 or more that has been dishonoured twice;

a court judgment or bankruptcy order made against the individual; and

'' a credit provider's opinion that the individual has committed a serious credit infringement.

Under the Privacy Act, there are also restrictions on how a credit provider may
use information that has been acquired through a credit reporting agency. In
particular, a credit provider which is in possession or control of a credit report is
obliged to:
take reasonable steps to ensure its accuracy and security (s 18G);
take reasonable steps to ensure that the individual can obtain access to that
report (s 18H);
refrain from using the report for any purpose other than assessing an
application for credit made to the credit provider by the individual except in
limited circumstances (s 18L);
give written notice to an individual if it refuses an application for credit based
on information derived in whole or in part from a credit report. It must
indicate that this is the basis for the refusal, identify the credit reporting
agency, and inform the individual of his or her right to obtain access to the
credit information file kept by the credit reporting agency (s 18M);
refrain from disclosing the information to a third party for any purpose,
except in specified circumstances, which include disclosure to a guarantor
relating to enforcement of the guarantee and to a mortgage insurer for the
purposes of assessing risk (s 1 8N); and
refrain from giving a third party a credit report that contains misleading or
deceptive information (s 18R) .
The Credit Reporting Code of Conduct fleshes out the legislative framework (see, in
particular, Pt 2) and is legally binding. It also requires credit providers to
establish procedures to deal with individuals' requests for dispute resolution
relating to credit providing (see Pt 3) and to ensure staff dealing with this type of
personal information become familiar with the rules.

89 See Explanatory M emorandum, Privacy Amendment (Enhancing Privacy Protection) Bi/1 2012 (Cth ) , p 8.

84 [2.410]
 Regulation I CH 2

The Privacy Commissioner 90 has a range of powers under s 28A of the

Privacy Act in relation to credit reporting, including in s 28A(l )(g) the power to
conduct audits to ensure compliance with the Act.

Proposed changes
[2.420] Parliament is currently considering amendments to the Privacy Act. The
Privacy Amendment (Enhancing Privacy Protection) Bill 2012 (Cth) (the Privacy
Bill) 9 1 represents the first stage of the Government's response to the Australian
Law Reform Commission's Report 1 08 For Your Information: Australian Privacy
Law and Practice (2008) . In recognition of the fact that the current credit reporting
regulation does not sufficiently address the information asymmetry between
credit providers and borrowers, the Bill allows collection of five new kinds of
personal information (data sets), including "positive" credit information which
shows the timeliness of the borrower's repayment history, credit limits and
amounts of credit liabilities. The five new data sets are: 92
1. the date the credit account was opened;
2. the type of credit account opened;
3. the date the credit account was closed;
4. the current limit of each open credit account; and
5. repayment performance history about the individual borrower.

The repayment history information will only be available to credit providers

who are licensed under the NCCP Act and subject to responsible lending
obligations under that Act. According to the Regulatory Impact Statement for the
Bill these amendments will "allow more robust assessments of consumer credit
risk, both in the market as a whole and in relation to individual applications,
which can assist responsible lending and potentially lead to lower consumer
default rates. The economic benefits to industry and individuals alike outweigh
the reduction of privacy protections to these categories of personal
information." 93
Part IIIB of the Bill deals with the Credit Reporting Code of Conduct. The
Government expects the current Credit Reporting Code of Conduct to be
redrafted to provide for the reforms in the Bill. (Under the Bill the Privacy
Commissioner can develop the Code if the industry does not do so as requested

90 The Office of the Australian I nformation Commissioner (OAIC) was established on 1 N ovember 201 0
by the Australian Information Commissioner Act 2010 (Cth). The Privacy Commissioner is now a n
information officer o f t h e OAI C: Australian Information Commissioner Act 2 0 1 0 (Cth), ss 1 2 and 1 4 .
91 The Privacy Amendment (Enhancing Privacy Protection) Bi/1 2012 ( Cth) had its second reading debate i n
t h e House o f Representatives on 2 3 August 2012.
92 See Explanatory M emorandum, Privacy Amendment (Enhancing Privacy Protection) Bi/1 2012 (Cth), p 3·
93 See Explanatory M emorandum, Privacy Amendment (Enhancing Privacy Protection) Bill 2012 (Cth),
p 29.

[2.420] 85
EVE RETT A N D M C C RACKE N'S BAN KI N G A N D FI NANCIAL I N STITUTI O N S LAW

or the Commissioner decides not to register the Code submitted for registration. )
The industry has already begun an independent review of the Credit Reporting
Code of Conduct. 94

PRUDENTIAL REGULATION

I ntroduction

Scope and purpose

[2.430] APRA administers the prudential regulation regime which applies to
authorised deposit-taking institutions (ADis), life and general insurance and
re-insurance companies, friendly societies and superannuation funds (other than
self managed superannuation funds) . Prudential regulation is designed to ensure
that risks taken by these institutions are within reasonable bounds, so that these
institutions are able to meet their obligations to their customers (see [1 .020]) . In
this way, prudential regulation protects the customers of these institutions.
Additionally, because problems in these financial institutions can be transmitted
across the economy, prudential regulation protects the stability of the Australian
financial system and economy as a whole. 95
The prudential regulation regime consists of:
• licensing or other authorisation requirements for entities in the deposit-taking,
life insurance, general insurance and superannuation industries;
• prudential requirements that apply to these entities; and
• enforcement and crisis management provisions that apply if these entities are
unable or unwilling to comply with their prudential requirements.

Legislation
[2.440] The legislative framework for the prudential regulation regime
primarily 96 consists of:
• the Banking Act 1959 (Cth) (Banking Act);
" the Life Insurance Act 1995 (Cth) (Life Insurance Act);
• the Insurance Act 1 973 (Cth) (Insurance Act); and
• the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) .
The scope of each Act is outlined below. As is clear from the names of the Acts,
there is separate legislation for each industry sector subject to prudential
regulation. To a large extent the Acts evolved separately and consequently have

94 See http://www.creditcodeindependentreview.com.au (visited 15 October 2011).

95 See Australian Prudential Regulation Authority Act 1998 (Cth), s 8 and APRA, APRA Brochure available
at http://www.apra.gov.au/AboutAPRA/Publications/Pages/default.aspx (viewed 14 September
2012).
96 Other pieces of legislation, such as the Financial Sector (Business Transfer and Group Restructure) Act
1999 (Cth) and the Retirement Savings Accounts Act 1 9 97 (Cth) are also relevant to prudential
regulation.

86 [2.430]
 Regulation I CH 2

a number of inconsistencies. The Government is looking to reduce the

unnecessary and undesirable inconsistencies. 97
Since reform of the financial sector began in 1998 (see [1.001]), the Banking Act
provides generally for those companies entitled to carry on a banking business
in Australia. Such companies are described collectively as ADis. Although the
Act is entitled the Banking Act, it focuses not on banks as such but rather on
banking business and hence it encompasses not only banks but also other
non-bank financial institutions which carry on banking business, such as
building societies and credit unions. Section 5 of the Banking Act defines
"banking business" as consisting of both taking deposits (other than as
part-payment for identified goods or services) and making advances of money,
as well as other financial activities prescribed by regulations made under the
Banking Act.
Section 70B provides that the Banking Act has effect despite any provision in
the Corporations Act. This means that in the event of an inconsistency between
the two Acts, the Banking Act prevails to the extent of the inconsistency. This
provision is particularly important when APRA is dealing with an ADI in
distress or failure. 98 For example, it means that if APRA gives a direction to a
regulated entity under the Banking Act, it must be complied with and that, in
complying with it, the officers of the regulated entity will not breach directors'
duties under the Corporations Act.
The Life Insurance Act controls the business of life insurance in Australia.
Under s 7 of the Life Insurance Act, APRA has responsibility under Pts 3 - Pt 6 of
the Act for registration, statutory funds, solvency and capital standards and
financial management, together with responsibility under Pts 8 - Pt 9 of the Act
for judicial management and winding up and transfers and amalgamations. 99
The Life Insurance Act also deals with friendly societies. 1 0 0
The Insurance Act controls the business of general insurance in Australia. Its
main purpose is "to protect the interests of policyholders and prospective
policyholders under insurance policies (issued by general insurers and Lloyd's
underwriters) in ways that are consistent with the continued development of a
viable, competitive and innovative insurance industry" (s 2A(l)). APRA is
responsible for the administration of the Insurance Act (s 8).

97 S e e generally Commonwealth o f Australia, Strengthening APRA's Crisis Management Powers:

Consultation Paper (September 201 2), esp pp 1 02-1 56; 1 65-1 66.
98 Commonwealth of Australia, Strengthening APRA's Crisis Management Powers: Consultation Paper
(September 201 2), pp 1 50-1 5 1 . There is no equivalent provision in the other Acts but there is a proposal
to include such a provision in the Life Insura n ce Act and the I nsurance Act: Commonwealth of
Australia, Strengthening APRA's Crisis Management Powers: Consultation Paper (September 201 2),
p 151.
99 APRA also has responsibility for the administration of Pt 1 2 and ss 206 - 210 of the Life Insurance Act
1995 (Cth). ASI C also has responsibilities under the Life Insurance Act 1995 (Cth).
100 Section 1 6 D o f t h e Life Insurance Act 1995 (Cth) provides that t h e Act applies to a friendly society,
subject to the provisions of Pt 2A of Div 2. The specific regulation of friendly societies is not separately
discussed in this chapter.

[2.440] 87
EVERETT A N D MCCRACKEN'S BAN KI N G A N D FI NANCIAL I N STITUTI O N S LAW

The SIS Act deals with the supervlSlon of entities involved in the
superannuation industry. Responsibility for the administration of this Act lies,
largely, with APRA, ASIC, and the Commissioner of Taxation (s 6).
Together these four Acts, the Banking Act, the Life Insurance Act, the
Insurance Act and the SIS Act, are referred to as the Prudential Acts. Other
pieces of legislation, such as the Financial Sector (Business Transfer and Group
Restructure) Act 1999 (Cth) and the Retirement Savings Accounts Act 1 997 (Cth), are
also relevant to prudential regulation.

Authorisation

Introduction
[2.450] A key part of any prudential regulation regime is control over those
entities that can enter the prudentially regulated sectors through licensing or
authorisation. 101 Such control ensures that entities meet minimum standards
while operating in the market. It also makes it easier for the regulator, in this
case APRA, to know and therefore supervise its regulated population. Finally,
licensing or authorisation helps consumers identify which entities are subject to
prudential regulation.
In Australia, the specifics of the licensing or authorisation requirements vary
for each of the prudentially regulated industries.

Deposit-taking
[2.460] Persons other than companies 1 02 are not entitled to carry on banking
business (as defined in s 5 of the Banking Act) in Australia. Furthermore,
companies themselves are prohibited from carrying on banking business in
Australia (s 8), unless they make a successful application to APRA and obtain
specific authorisation (s 9). APRA has issued guidelines to indicate the basis on
which such authorisation may be granted: 103
APRA will only authorise suitable applicants with the capacity and cornmihnent to
conduct banking business with integrity, prudence and competence on a continuing
basis.

APRA may impose conditions relating to prudential matters on an authorisation.

APRA must revoke an authorisation if the ADI requests revocation and APRA is
satisfied that revocation is not contrary to the national interests and the interests
of the ADI's depositors (s 9A(l) of the Banking Act) . APRA may revoke an
authorisation if it is satisfied that:
• the ADI's application for authorisation was materially false or misleading;
• the ADI has breached various of its obligations;

1 01 Commonwealth of Australia, Strengthening APRA's Crisis Management Powers: Consultation Paper

(September 201 2), p 1 03.
102 Banking A c t 1 9 5 9 (Cth), s 7 ·
1 03 APRA, Guidelines on Authorisation of AD/s (April 2008), Art 1 2, available http://www.apra.gov.au/ad i/
Pages/adi-authorisation-guidelines.aspx (viewed 15 September 201 2).

88 [2.450]
 Regulation J CH 2

• it would be contrary to the national interest, national financial system stability

or the interests of depositors for the authority to remain in place;
• the ADI has failed to pay its levy under the Financial Institutions Supervisory
Collection Act 1998 (Cth) or a charge fixed under s 51 of the Australian
Prudential Regulation Authority Act 1998 (Cth) (APRA Act);
• the ADI is insolvent and unlikely to return to solvency within a reasonable
time; or
• the ADI has ceased to carry on a banking business in Australia.

Authorisation also ceases if the ADI ceases to exist (s 9B) .

Approval to operate as an ADI does not mean that the company can use the
description "bank" or, in fact, "building society", "credit union" or "credit
society". Further approval for such use has to be obtained from APRA (s 66) . 104
As at 11 September 2012, 105 ADis in Australia included:
" 18 Australian-owned banks;
• 8 foreign subsidiary banks;
• 39 branches of foreign banks;
• 9 building societies;
• 92 credit unions;
• 2 specialist credit card institutions (SCCis);
• 1 provider of purchased payment facilities; and
• 4 other ADis (being companies run by industry bodies providing services (for
example, payments clearing) to member building societies and credit unions
or an ADI providing other general banking services not falling within other
categories).

Following a recommendation by the Wallis Inquiry, a new category of licensee

under the Banking Act was introduced in 1998, the non-operating holding
company (NOHC). The Wallis Inquiry recommended 10 6 that such a structure be
permitted to facilitate the operations of financial conglomerates, that is, groups
of companies which contain one or more ADis. While recognising the potential
for so-called contagion risk through brand association and for group conflicts of
interest, the Wallis Inquiry saw advantage in a group being able to diversify its
activities across .the various sectors of banking, life insurance, funds management
and securities. Under the previous prudential regime, the RBA had, as a matter
of practice, required the parent company to be a bank and had generally taken,
in the view of the Wallis Inquiry, a conservative approach to diversification

104 See APRA, Guidelines on Implementation of Section 6 6 of the Banking Act 1959 (J anuary 2006),
available at http://www.apra.gov.au/adi/Pages/guidelines-on-implementation-of-section-66-banking­
act-1 959·aspx (viewed 1 5 September 2012).
105 APRA, List o f Authorised Deposit-taking Institutions, available at http://www.apra.gov.au/adi/Pages/
adilist.aspx (viewed 15 September 2012).
106 Financial System Inquiry Final Report (Canberra: AG PS 1 997) (Chair: S Wal l is), pp 344-348 .

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activity. 107 APRA may now authorise the establishment of a NOHC under
s llAA of the Banking Act on the application of a body corporate if APRA
considers it appropriate to do so. As at 11 September 2012, there were two
authorised NOHCs under the Banking Act.

Life insurance
[2.470] Only companies may issue life policies and undertake liability under
them, and then only if registered under the Life Insurance Act (s 1 7) . A company
may apply in writing to APRA for registration. Section 20 of the Life Insurance
Act sets out requirements for applications for registration as a life company and
APRA has published guidelines on the minimum criteria to be addressed by
applicants and the information and documents required to be submitted with an
application. 108 Registration will only be refused if APRA is satisfied that (s 21):
the company is unable, or unlikely to be able, to meet its obligations,
including obligations in respect of business other than life insurance business;
the company is unable, or unlikely to be able, to comply with the Life
Insurance Act or the Financial Sector (Collection of Data) Act 2001 (Cth) (FSCOD
Act);
the company's name is so similar to one already registered that it is likely to
deceive;
any other business the company carries on in addition to life insurance is
contrary to the public interest; or
eo> the company is a subsidiary of a NOHC that is not a registered NOHC.
APRA may impose conditions on the registration (s 22) . Subject to certain
conditions, APRA can cancel the registration of companies that are no longer
carrying on life insurance business in Australia (s 26). APRA can also deregister
a company on its request if APRA is satisfied that no policies issued by the
company remain in force and that the company is not subject to any outstanding
liabilities (s 27) .
NOHCs of companies that conduct life insurance business can apply for
registration under s 28A. 109 Such NOHCs are likely to seek registration because,
as noted above, APRA can refuse to register a company that seeks registration to
conduct a life insurance business if its holding company is not registered as a
NOHC under s 28A. APRA can impose conditions on a NOHC registration
(s 28B) and, in certain situations, may revoke a NOHC registration (s 28C).
APRA must revoke a NOHC registration if the body asks APRA to do so and

1 07 Financial System Inquiry Final Report (Canberra: AG PS 1 997) (Chair: S Wallis), p 345·
108 APRA, Guidelines o n registration o f life companies ( M a y 201 0), available at http://www.apra.gov.au/
lifs/Pages/registration-of-life-companies-an d-non-operating-holding-companies-of-life­
companies.aspx (viewed 14 October 2012).
109 S e e APRA, Guidelines on registration o f non-operating holding companies o f life companies (May
2010 ), available at http://www.apra.gov.au/lifs/Pages/registration-of-life-companies-and-non­
operating-holding-companies-of-life-companies.aspx (viewed 1 4 October 2012).

90 [2.470]
 Regulation I CH 2

APRA is satisfied that revoking the registration would not be contrary to the
public interest or the interests of the policy owners of any life company that is a
subsidiary of a NOHC (s 28D) .
The Life Insurance Act's prudential focus is highlighted by the provisions
(Pt 4, ss 29 - 63) requiring life insurance companies to establish and maintain
independent statutory funds in respect of life insurance business, investment­
linked benefits and ex-Australian business carried on by the company. The Act
also has detailed provisions relating to financial records, auditors, actuaries and
annual returns (Pt 6).

General insurance
[2.480] Subject to any APRA determination to the contrary, under the Insurance
Act only a body corporate or a Lloyd's underwriter is permitted to carry on an
insurance business 110 in Australia (s 9). The body corporate must be authorised
by APRA under s 12 to carry on an insurance business in Australia. (The body so
authorised is called a "general insurer" (s 11).)
APRA has published guidelines on the minimum criteria to be addressed by
applicants and the information and documents required to be submitted with an
application. 111 APRA may refuse an application if the applicant is a subsidiary of
another body corporate that is not an authorised NOHC (s 12(3)) . APRA may
impose conditions on an authorisation (s 13) . APRA also has powers to revoke
authorisation in certain circumstances (s 15) and must revoke authorisation if
requested to do so by the general insurer and APRA is satisfied that the insurer
has no liability in respect of insurance business carried on in Australia and
revoking the authorisation would not be contrary to the national interests (s 16).
NOHCs of general insurers can be authorised under s 18 of the Insurance
Act. 112 APRA can impose conditions on a NOHC registration (s 19) and, in
certain situations, may revoke a NOHC registration (s 21). APRA must revoke a
NOHC registration if the body asks APRA to do so and APRA is satisfied that
revoking the registration would not be contrary to the national interest or the
interests of the policy owners of any general insurer that is a subsidiary of a
NOHC (s 22) .

Superannuation
[2.490] Trustees of registrable superannuation entities (RSEs) must hold a
Registrable Superannuation Entity licence (RSE licence) issued by APRA under
Pt 2A of the SIS Act. Licences can either be granted to corporate trustees or to a

110 " I nsurance business" i s d efined in s 3 of t h e Insurance A c t 1 9 9 5 (Cth) and d o e s n o t include, amongst
other things, life insurance business.
111 APRA, Guidelines on authorisation of general insurers (December 2007), available at http://
www.apra.gov.au/G I/Pages/general-insurance-authorisation-guidelines.aspx (viewed 14 October
2012).
112 See APRA, Guidelines on Authorisation of Non-Operating Holding Companies of Genera/ Insurers
(December 2007), available at http://www.apra.gov.au/G I/Pages/general-insurance-authorisation­
guidelines.aspx (viewed 14 October 2012).

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group of individual trustees where the trustees of a fund are individuals rather
than a company. APRA must grant the RSE licence if the statutory criteria are
met (s 29D) . The statutory criteria include requirements in relation to:
compliance with the RSE licensee law and conditions on the licence, if the
licence were granted;
fitness and propriety;
the risk management strategy (see Div 8 of Pt 2A); and
if it is to be the trustee of a public offer fund, capital requirements.
Section 29E imposes a number of mandatory conditions on an RSE licence,
including (s 29E(1)(d)) a condition that the RSE licensee must ensure that each
RSE of the licensee is registered under Pt 2B or subject to an application that has
not been fully determined. APRA may impose additional conditions (s 29EA) .
APRA can vary or revoke licence conditions (s 29FD) . APRA may cancel an RSE
licence if the RSE licensee (s 29G):
has requested cancellation;
becomes a disqualified person under Pt 15 of the SIS Act;
breaches a licence condition;
" has, in the opinion of APRA, breached a licence condition;
has failed to comply with a direction by APRA; or
will, in the opinion of APRA, fail to comply with a direction by APRA.
In addition, all RSEs must be registered with APRA under Part 2B prior to
commencing operations. An RSE is defined in s 10(1) as a regulated
superannuation fund, an approved deposit fund or a pooled superannuation
trust. Self managed superannuation funds are not within the scope of the
definition. Trustees of superannuation funds must have been granted an RSE
licence before they apply to register an RSE. Applications must comply with
s 29L. APRA must, and must only, grant the application for registration if
(s 29M) :
the application complies with s 29L and includes all required information;
APRA is satisfied that the governing rules of the entity do not conflict with
Pt 6 of the SIS Act;
APRA is satisfied that the entity's risk management plan complies with s 29P
of the SIS Act; and
the applicant holds an RSE licence.
Cancellation of the registration by APRA is dealt with in s 29N.

Prudentia1 standards

Introduction
[2.500] The role that prudential standards play was explained in the Explanatory
Memorandum to the Financial Sector Legislation Amendment (Simplifying Regulation
and Review) Bill 2007 (Cth) (paras [ 1 . 154]-[1. 155]) as follows:

92 [2.500]
 Regulation I CH 2

1 . 154
Prudential standards assist to improve the clarity and certainty of prudential
regulation by providing additional detail on prudential matters set out in the
enabling legislation. Standards complement and reinforce the prudential
requirements set out in the Banking Act, Insurance Act and Life [Insurance] Act by
specifying how the regulatory framework is intended to operate in practice and
APRA's expectations in overseeing that framework. Standards enable key minimum
requirements to be articulated at a level of detail that would not be appropriate
within principles-based, enabling legislation.
1 . 155
Standards introduce greater flexibility into the prudential framework as they can
be more readily adjusted over time to respond to developments in both domestic
and international conditions, industry best practice and broader structural changes
in the market. This enhances the effectiveness of prudential regulation by ensuring
that regulation remains relevant over time.

Deposit-taking, life and general insurance

[2.510] APRA develops and enforces prudential standards for the deposit-taking,
life insurance and general insurance industries. These standards are legally
enforceable legislative instruments 113 made under authority of statute.
Section llAF of the Banking Act gives APRA power to make standards in
relation to prudential matters with which all ADis and authorised NOHCs, a
specified class of ADIs or authorised NOHCs or even one or more specified ADIs
or authorised NOCHs have to comply. "Prudential matters" is defined for these
purposes in s 5 to mean matters relating to:
(a) the conduct by an ADI, an authorised NOHC, a relevant group of bodies
corporate, or a particular member or members of such a group, of any part
of its or their affairs in such a way as:
(i) to keep the ADI, NOHC, group or member or members of the group
in a sound financial position; or
(ii) not to cause or promote instability in the Australian financial system;
or
(iii) not to cause or promote instability in the New Zealand financial
system; or
(b) the conduct by an ADI, an authorised NOHC, a relevant group of bodies
corporate, or a particular member or members of such a group, of its or their
affairs with integrity, prudence and professional skill.

As noted in [1 .330], in making prudential standards in the deposit-taking

industry, APRA is heavily influenced by the standards produced by the Basel
Committee. It should also be noted that regulations may also be made under the
Banking Act requiring ADis and authorised NOHCs to observe requirements in
relation to prudential matters (s llA).

113 They are subject to the provisions of the Legislative Instruments Act 2 0 03 (Cth), and hence to the
scrutiny of Parl iament ( Pt 5). Standards which only apply to specified entities are not legislative
instruments: Banking Act 1 959 (Cth), s 11AF(7A); Life Insurance Act 1 9 95 (Cth), s 230A(1 2A); Life
Insurance Act 1 9 95 (Cth), s 32(5).

[2.510) 93
EVERETT A N D M CCRAC KEN'S BAN KI N G A N D F I NANCIAL I N STITUTI O N S LAW

Section 230A of the Life Insurance Act gives APRA power to determine
standards in relation to prudential matters that must be complied with by: all life
companies, registered NOHCs or their subsidiaries; a specified class of life
companies, registered NOHCs or their subsidiaries; or, one or more specified life
companies, registered NOHCs or their subsidiaries.
The purpose of the prudential standards is explicitly stated to be to protect the
interests of policy owners or prospective policy owners of life companies
(s 230A(l)). Currently certain matters of prudential detail (for example, matters
relating to surrender values and paid up policies and matters relating to
transfers and amalgamations of life insurance business) are dealt with by the
Life Insurance Act or regulations made under that Act, rather than by APRA
prudential standards. The Government is proposing to amend the Life Insurance
Act so that these types of matters will also be dealt with by APRA prudential
standards. 114
Section 32 of the Insurance Act gives APRA power to determine prudential
standards that must be complied with by: all general insurers, authorised
NOHCs or their subsidiaries; a specified class of general insurers, authorised
NOHCs or their subsidiaries; or, one or more specified general insurers,
authorised NOHCs or their subsidiaries.
Using these statutory powers APRA has made prudential standards for the
deposit-taking, life insurance and general insurance industries that cover: 115
solvency and capital adequacy;
corporate governance;
fitness and propriety of responsible persons;
asset quality and concentration;
liability valuations;
liquidity;
,, credit risk;
operational risk;
market risk;
'' insurance and reinsurance risks;
contagion risk from related entities; and
outsourcing and business continuity.
These prudential standards are supplemented by prudential practice guides,
which are not directly enforceable but which support and provide guidance to
industry on the prudential standards. 116

114 Commonwealth of Australia, Strengthening APRA's Crisis Management Powers: Consultation Paper
(September 201 2), pp 1 6 5-1 67.
115 S e e APRA, APRA Brochure, p 7 available at http://www.apra.gov.au/AboutAPRA/Publications/Pages/
default.aspx (viewed 14 September 2011). All APRA Prudential Standards are available on APRA's
website: http://www.apra.gov.au.
116 APRA Prudential Practice Guides are available on APRA's website: http://www.apra.gov.au.

94 [2.510]
 Regulation I CH 2

Superannuation
[2.520] Superannuation operating standards are in the SIS Act or the
Superannuation Industry (Supervision) Regulations 1 994. They cover: 117
capital requirements;
risk management;
outsourcing;
adequacy of resources; and
fitness and propriety of responsible persons.
As with the prudential standards for the deposit-taking, life insurance and
general insurance industries, APRA supports these standards through prudential
practice guides.
However, under recent changes to the SIS Act, made by the Superannuation
Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012
(Cth), 118 APRA has been given power to make standards relating to "prudential
matters" for the superannuation industry (SIS Act, s 34C). In giving APRA this
power, the Government has recognised that prudential standards must be made,
and amended, quickly and flexibly in a way that responds to changes in the
superannuation industry. 119
The definition of "prudential matters . . . includes elements from the definitions
applying to banking and general insurance but recognises that different
considerations apply to superannuation, which has accumulation funds (where
liabilities reflect the investment gains and losses) and defined benefit funds
(where there will be defined liabilities)". 120 "Prudential matter" is defined in
s 34C(4) to include the conduct by an RSE licensee of the affairs of the RSE in
such a way as to:
(a) to protect the interests, or meet the reasonable expectations, of the
beneficiaries of an RSE; and
(b) keep itself in a sound financial position and not to cause or promote
instability in the Australian financial system.

The definition of "prudential matters" also includes the conduct by an RSE

licensee, or a connected entity of the RSE licensee, of any of its affairs that are
relevant to the RSE with integrity, prudence and professional skill. Finally, the
definition of prudential matters also includes matters relating to the appointment
of auditors and actuaries and the conduct of audits and actuarial investigations.
APRA was also given a general power to monitor prudential matters (s 34F) .

117 See APRA, APRA Brochure, p 7 available at http://www.apra.gov.au/AboutAPRA/Publications/Pages/

default.aspx (viewed 14 September 2011).
·1 1 8 This Act received Royal Assent on 8 September 2012.
119 Explanatory M emorandum, Superannuation Legislation Amendment (Trustee and Prudential
Standards) Bi/1 2012 (Cth), paras [2.3] - [2.6].
120 Explanatory M emorandum, Superannuation Legislation Amendment (Trustee and Prudential
Standards) Bi// 2012 (Cth), para [2.14].

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APRA has released 12 draft prudential standards for superannuation and

intends to finalise the standards before the end of 2012. 121 The standards are
expected to commence on 1 July 2013. 122 They cover: 123
operational risk financial requirement;
defined benefit matters;
risk management;
outsourcing;
business continuity management;
insurance in superannuation;
" audit and related matters;
governance;
fitness and propriety of responsible persons;
conflicts of interest;
investment governance; and
" MySuper transition.

Enforcement and crisis management

Information gathering and investigation

[2.530] APRA requires information to properly exercise its prudential powers:
" [o]btaining information from a regulated entity is essential to effective
monitoring of the financial condition of the entity and its compliance with
prudential and reporting requirements" . 124 In addition to the powers available
to it under the FSCOD Act (see [2.600]), APRA has information gathering powers
under the Prudential Acts. APRA also has powers to investigate its regulated
entities under the Prudential Acts to determine whether the regulated entities
have breached a statutory or prudential requirement and whether they are in a
sound financial position. It is not possible to discuss all the relevant provisions
but various provisions are outlined below.
The principal information gathering power in the Banking Act is in s 62.
Under this section, APRA may require the provision of information (including

1 21 See APRA, Prudential Standards Frequently Asked Questions, FAQ 2: When will the eleven prudential
standards be finalised?, available at http://www.apra.gov.au/Super/Pages/Prudentiai-Standards­
Frequently-Asked-Questions.aspx#faq3 (viewed September 201 2). See also APRA, MySuper Frequently
Asked Questions FAQ 2: When will the authorisation package and Prudential Standard SPS 410 MySuper
Transition be finalised?, available at http://www.apra.gov.au/Super/Pages/MySuper-FAQs.aspx#faq2
(viewed 1 5 September 2012).
122 See APRA, Prudential Standards Frequently Asked Questions, FAQ 3: When do the eleven prudential
standards commence?, available at http://www.apra.gov.au/Super/Pages/Prudentiai-Standards­
Frequently-Asked-Questions.aspx#faq3 (viewed 15 September 2012).
123 The draft standards are available at http://www.apra.gov.au/Super/Pages/Prudentiai-Standards-for­
Superannuation-Aprii-2012.aspx and http://www.apra.gov.au/Super/Pages/MySuper-Authorisation­
and-Transition-October-2on.aspx (viewed 15 September 2012).
124 Commonwealth of Australia, Strengthening APRA's Crisis Management Powers: Consultation Paper
(September 201 2), p 113.

96 [2.530]
 Regulation I CH 2

access to books, accounts and documents) from an ADI, an authorised NOHC, a

subsidiary of either an ADI or NOHC, (if an ADI is a subsidiary of a foreign
corporation) a subsidiary of a foreign corporation, or any person carrying on
banking business. APRA is not required to issue a notice. Such information
generally excludes information relating to the affairs of a particular customer,
but will include such information if it relates to prudential matters concerning an
ADI or a member of its corporate group. Section 13 of the Banking Act also gives
APRA a power to require information from an Australian ADI relating to the
ADI's financial stability, following the issue of a notice to the ADI. 125
APRA has similar information gathering powers in s 115 of the Insurance Act.
The powers in the Life Insurance Act are more limited. 126 Under s 131 of the Life
Insurance Act, APRA can obtain from life companies and registered NOHCs
information or a copy of a document about the business of the life insurance
company, NOHC or their subsidiaries. However, it cannot obtain information
directly from the subsidiary. Under s 132, APRA can require the production by a
life company or registered NOHC of books, accounts or documents relating to
their business.
Under the SIS Act, APRA may require, by notice, the production of
information from the trustee of a superannuation entity (s 254) or the production
of books relating to the affairs of a superannuation entity (s 255).
There are breach reporting requirements in the Prudential Acts. Under s 62A
of the Banking Act, an ADI, a NOHC and their subsidiaries must notify APRA as
soon as they become aware that they (or another member of the group or the
group as a whole) may not be in a sound financial position. They are also under
an obligation to notify APRA if they become aware that they (or another member
of the group or the group as a whole) has committed a significant breach, or will
commit a significant breach, of a prudential standard, the Banking Act or any
regulation, direction or condition of authority made or granted under the
Banking Act. There are similar provisions in the Life Insurance Act (s 132A),
Insurance Act (s 38AA) and SIS Act (ss 29JA and 106) .
APRA also has powers to require auditors to provide it with information
under the Banking Act (s 16B) . Under the Life Insurance Act (ss 88B and 98B)
and the Insurance Act (s 49), APRA may require auditors and actuaries to
provide it with information. Additionally, all of these persons may provide
information to APRA and, in certain circumstances, are obliged to report
information to APRA. An auditor may provide information to APRA if the
auditor considers it will be of assistance to APRA in carrying out its functions,
whether under the Banking Act or the FSCOD Act (Banking Act, s 16C) .

125 The Government has proposed repeal of s 13 ( 1 ), allowing APRA to rely solely on its wider information
gathering power in s 62: Commonwealth of Australia, Strengthening APRA's Crisis Management
Powers: Consultation Paper ( September 2012 ), p 1 1 1 .
126 T h e Government h a s proposed amending t h e powers in t h e Life Insurance Act to allow APRA to
obtain information and records from subsidiaries a n d to obtain a broader scope of information and
records: Commonwealth of Australia, Strengthening APRA's Crisis Management Powers: Consultation
Paper ( September 2012 ), p 124.

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However, an auditor is obliged to give information to APRA in specified

circumstances under s 16BA of the Banking Act, including, in particular, if he or
she has reasonable grounds for believing that:
an ADI or a NOHC (or a subsidiary of either) is insolvent or there is a
significant risk that they will become insolvent;
the ADI (or NOHC) has failed to comply with a prudential standard, a
requirement of the Banking Act, the FSCOD Act or a regulation, direction or
condition of its authority to conduct banking business (or in the case of a
NOHC, its authority to be a NOHC) and that failure to comply is significant;
or
an existing or proposed state of affairs may materially prejudice the interests
of depositors.
Similar provisions exist for auditors and actuaries under the Life Insurance Act
(ss 88, 88A, 88B, 98, 98A and 98B), the Insurance Act (Pt 4, Div 2) and the SIS Act
(ss 129, 130 and 130A) .
Importantly, and in recognition of the need to encourage reporting of
misconduct or an improper state of affairs within financial institutions, 127 the
Prudential Acts provide protections for "whistleblowers". For example, under
Pt VIA of the Banking Act, disclosure of information made by officers or
employees of an ADI or an authorised NOHC (or a subsidiary of either) or by
their suppliers and their employees will be protected if four conditions are
satisfied (s 52A) :
1. the disclosure is made to APRA, the auditor, a director or senior manager
of the company (or a related company), or to a person authorised by the
company to receive these types of disclosures;
2. the person disclosing the information (the "discloser") informs that
person of his or her name before making the disclosure;
3. the information concerns misconduct o r an improper state o f affairs in
relation to the company and the discloser considers that the information
may assist APRA, the auditor or the other persons referred to above in
performing their functions or duties in relation to the company (or a
related company); and
4. the discloser makes the disclosure in good faith.

If these conditions are met, the discloser will be protected in respect of civil or
criminal liability for making the disclosure, as well as against the exercise of
contractual or other rights (s 52B). The discloser is also protected against
victimisation (ss 52C, 52D) and breach of confidentiality (s 52E). The
whistleblower protections in the Life Insurance Act are in Div 5, Subdiv A of
Pt 7. In the Insurance Act they are in Div 4, Subdiv A of Pt IliA and in the SIS Act
they are in Div 1 of Pt 29A.

127 See Explanatory M emorandum, Financial Sector Legislation Amendment (Simplifying Regulation and
Review) Bill 2007 (Cth), pp 20-21 .

98 [2.530]
 Regulation I CH 2

The investigations powers in the Prudential Acts are reasonably extensive and
they vary between the different Acts. Under the Life Insurance Act (s 135) and
the Insurance Act (ss 52 and 79) APRA has to issue a "show cause" notice to an
insurer before it investigates it. 128 The regulated entity has 14 days to respond to
the notice in writing explaining why in its view APRA should not itself
investigate it or appoint someone else to investigate it. The grounds on which
APRA may conduct an investigation are set out in s 136 of the Life Insurance
Act, s 52 of the Insurance Act, and s 263 of the SIS Act. In the Banking Act the
triggers for an investigation are set out in ss 13A and 61 . Those in s 13A are
limited, whereas s 61 is much broader. Section 61 confers a power to appoint a
person to investigate and report on prudential matters relating to an ADI, an
authorised NOHC, or their subsidiaries, if APRA is satisfied that such a report is
necessary. The company is obliged to give the investigator access to the books
and such information as is required. However, under s 61 APRA can only
appoint an investigator; it cannot investigate itself. Under s 137 of the Life
Insurance Act APRA must conduct the investigation; it has no power to appoint
an inspector. Under the Insurance Act APRA can conduct the investigation or
appoint someone else to do so. The Government has proposed amending and
rationalising these investigations powers. 129

Directions
[2.540] Directions are flexible regulatory tools that enable early intervention in
relation to prudential concerns. 13 0 APRA has comprehensive directions powers
under the Banking Act, Life Insurance Act and Insurance Act. Under s llCA of
the Banking Act, APRA may give an ADI or an authorised NOHC a direction
where APRA has reason to believe that, amongst other things:
the ADI or authorised NOHC has breached (or is likely to breach) a prudential
standard, the Banking Act or the FSCOD Act;
a direction is in the interests of the depositors of an ADI;
the ADI or authorised NOHC is, or is about to become, unable to meet its
liabilities;
there is, or might be, a material risk to the security of the ADI's or authorised
NOHC's assets;
there has been, or might be, a material deterioration in the ADI's or authorised
NOHC's financial condition; or
the ADI or authorised NOHC is conducting its affairs in a way that may cause
or promote instability in the Australian financial system.

128 The Government proposes to remove this requirement: Commonwealth of Australia, Strengthening
APRA's Crisis Management Powers: Consultation Paper (September 201 2), pp 1 1 4-1 1 5 .
129 Commonwealth of Australia, Strengthening APRA's Crisis Management Powers: Consultation Paper
(September 201 2), pp 1 1 4-1 20.
130 Commonwealth of Australia, Strengthening APRA's Crisis Management Powers: Consultation Paper
(September 201 2), p 34·

[2.540] 99
EVE RETT A N D M CCRACKEN'S BAN KI N G A N D F I NANCIAL I N STITUTI O N S LAW

The types of directions that APRA can give include directions that the ADI or
NOHC should, for example:
comply with prudential standards;
order an audit;
appoint or remove a director or senior manager either from office or
management;
remove an auditor; 131
not give financial accommodation to any person;
not accept a deposit;
not borrow;
not accept payment on account of share capital;
not repay any amount paid on shares, or any money on deposit or advance;
not pay a dividend or not pay or transfer an amount or asset to any person;
and/ or
not undertake any financial obligations on behalf of another.

Failure to comply with a direction amounts to a criminal offence on the part of

both the ADI or authorised NOHC and an officer whose duties include taking
reasonable steps to ensure compliance (s llCG) .
APRA also has extensive directions powers under the Life Insurance Act
(ss 230AB and 230B) and the Insurance Act (ss 103B and 104) . APRA has only
limited and specific directions powers under the SIS Act. For example, it can
direct an RSE licensee to modify its risk management strategy (s 29HB), remove
an approved auditor or actuary (s 131AA), or comply with a licence condition
(s 29EB). However, the Government is considering giving APRA a broad based
superannuation directions power. 132

Disqualification of directors, managers and auditors

[2.550] The disqualification provisions in the Prudential Acts, together with the
prudential standards about the fitness and propriety of responsible persons (see
[2.510]), are designed to ensure that only appropriate persons are involved in
senior positions in the prudentially regulated industry sectors.
There are two routes to disqualification. A person may be automatically
disqualified or they may be disqualified by court order. Under the Banking Act,
a person will be automatically disqualified if they fall within the circumstances
set out in s 20, namely they have:

131 This is in a ddition to APRA's general power to direct that an ADI remove an auditor where APRA is
satisfied that the auditor has failed to perform adequately and properly, does not meet criteria for
fitness and propriety, or is disqualified (Banking Act 1959 ( Cth), s 17).
132 Commonwealth of Australia, Strengthening APRA's Crisis Management Powers: Consultation Paper
( September 201 2), pp 33-44.

100 [2.550]
 Regulation I CH 2

been convicted of an offence under the Corporations Act (or equivalent Acts),
the Banking Act or the FSCOD Act or, more generally, an offence relating to
dishonest conduct or conduct relating to a company carrying on business in
the financial sector;
become bankrupt (or applied to benefit from a law for relief of insolvent
debtors or compounded with creditors); or
been disqualified under a foreign country's law from participating in the
management of an entity carrying on banking or insurance business or
otherwise dealing in financial matters.
A disqualified person or APRA may apply to the Federal Court for an order that
the person is not disqualified (Banking Act, s 22) .
There are equivalent automatic disqualification provisions in the other
Prudential Acts (Life Insurance Act, s 245; Insurance Act, s 25 and SIS Act,
s 120) . 133
Under the Banking Act (s 21), the Life Insurance Act (s 245A) and the
Insurance Act (s 25A), the Federal Court may disqualify a person, on application
by APRA, if the Court is satisfied that the person is not a fit and proper person
and disqualification is justified. In determining whether a person is fit and
proper, the Court may consider the prudential standards about fitness and
propriety of responsible persons. The judicial disqualification provisions for the
superannuation sector are set out in s 126H of the SIS Act. Under all of the
Prudential Acts the Court has power to vary its orders (Banking Act, s 22; Life
Insurance Act s 245B; Insurance Act, s 26; and SIS Act, s 126J) .
A disqualified person must not act as a director, senior manager or auditor of
an Australian ADI, life insurer, general insurer or authorised NOHC (Banking
Act, s 19; Life Insurance Act, s 245, and Insurance Act, s 24) . Additionally, a
disqualified person must not act as a senior manager of the Australian
operations of a foreign ADI or insurer. Under the SIS Act, a disqualified person
must not act as a trustee, investment manager or custodian of a superannuation
entity or as a responsible officer of one of these bodies (s 126K) . If the person is
disqualified by court order, these bans are all subject to the court order; that is,
the court order determines the exact scope of the disqualification. Breach of these
disqualification requirements is a criminal offence by the disqualified person.
Under the Banking Act, Life Insurance Act and Insurance Act, a corporation also
commits an offence if it employs a person contrary to these bans.

Dealing with distressed and insolvent institutions

[2.560] APRA has broad powers to deal with financially distressed institutions.
The aim of these powers is to allow early and flexible intervention when
institutions are at risk in order to remedy financial difficulties or minimise the
consequences of these difficulties for beneficiaries and the financial system as a

133 The provisions all differ. The Government is proposing to harmonise the provisions: Commonwealth
of Australia, Strengthening APRA's Crisis Management Powers: Consultation Paper ( September 2012 ) ,
pp 146·147-

[2.560] 1 01
EVE RETT A N D M CCRACKEN'S BAN KI N G A N D FI NANCIAL I N STITUTI O N S LAW

whole. The relevant provisions are set out in Div 2, Pt 11 of the Banking Act,
Div 1, Pt 8 of the Life Insurance Act and Div 1, Pt VB of the Insurance Act.
APRA can appoint a statutory manager to an ADI to investigate or take
control of the ADI's business if (Banking Act, s 13A) :
'" the ADI informs APRA that it is likely to become unable to meet its
obligations or that it is about to suspend payment;
• APRA considers that without external support the ADI may be unable to meet
its obligations or may suspend payment;
• the ADI becomes unable to meet its obligations or suspends payment; or
'" APRA considers that without external support the ADI will be unable to carry
on banking business in Australia consistently with the interests of depositors
or the stability of the Australian financial system.
Under s 157 of the Life Insurance Act and s 62K of the Insurance Act, APRA may
apply to the court for the appointment of a judicial manager to a life company or
general insurer. The court may make the order if it is satisfied that:
'" the business of the entity has been investigated and, in light of the results of
the investigation, appointment of a judicial manager is in the interests of
policy holders (Life Insurance Act, s 158; Insurance Act, s 62L); or
• the time taken to complete an investigation would be likely to be such as to
prejudice the interests of policy holders and that one of a number of other
criteria, relevant to the financial condition or the management of the entity, is
satisfied (Life Insurance Act, s 159; Insurance Act, s 62M) .
Once the statutory or judicial management commences, management of the
regulated entity vests in the statutory or judicial manager and the statutory or
judicial manager has the powers and functions of the directors of the entity
(Banking Act, s 14A; Life Insurance Act, s 165; Insurance Act s 62T) . A statutory
manager also has the powers and functions in ss 14A and 14AA of the Banking
Act. A judicial manager also has the powers in ss 168 and 168A of the Life
Insurance Act or ss 62Y and 62Z of the Insurance Act. Using these powers: 134
a range of resolution actions can be implemented . .For example, a statutory or
judicial management enables the implementation of a resolution that preserves the
core business and functionality, and the economic value, of a regulated entity with a
view to the entity's business continuing as a going concern. Equally, statutory or
judicial management can be used to prepare and preposition the entity for an
orderly discontinuation of business.

The commencement of the statutory or judicial management has various effects,

such as the termination of an appointment of an external administrator (Banking
Act, s 15A; Life Insurance Act, s 165A; Insurance Act, s 62U) and a moratorium
on judicial proceedings against the regulated entity (Banking Act, s 15B; Life
Insurance act s 161; and Insurance Act s 62P).

134 Commonwealth of Australia, Strengthening APRA's Crisis Management Powers: Consultation Paper
(September 201 2), p 5 6 .

1 02 [2.560]
 Regulation I CH 2

If the ADI, life company or general insurer is insolvent, or about to become

insolvent, and cannot be rehabilitated in whole or part, APRA has powers to
ensure an orderly liquidation in a manner that protects beneficiaries and
maintains stability of the financial system as a whole. It has the power to apply
to court to initiate winding up proceedings under the relevant Prudential Act, or,
in the case of an ADI and a general insurer, the Corporations Act. Section 14F of
the Banking Act provides that APRA may apply to the court for an order that an
ADI be wound up if a statutory manager is in control of the ADI's business and
APRA considers that the ADI is insolvent and cannot be restored to solvency
within a reasonable period. The winding up is then conducted under the
Corporations Act. Under s 181 of the Life Insurance Act, APRA may apply for an
order that a life company be would up if, in light of an investigation of the
company, APRA is satisfied that it is necessary or proper that the application be
made. A judicial manager of a life company may also apply to the court for a
winding up order (s 175) . 135 The court may make the order if it is satisfied that it
is in the interests of policy holders that the order be made (ss 181, 1 76). A
winding up order on the recommendation of a judicial manager can only be
made if the court is also satisfied it would promote financial system stability in
Australia (s 1 76). A life company can only be wound up by order made under
the Life Insurance Act (s 180).
The relevant provisions in the Insurance Act (ss 62ZI, 62ZJ and 62ZU) are
similar to those in the Life Insurance Act, except that there is no provision to the
effect that a general insurer can only be wound up by order made under the
Insurance Act.
Part II of the Banking Act contains crucial provisions relating to depositor
protection in the insolvency of an ADI. In particular, s 13A(3) gives priority to
repayment of amounts owed to APRA because of the operation of the Financial
Claims Scheme (see [2.570]) and to depositors if the ADI becomes unable to meet
its obligations or suspends payment. However, depositors with foreign ADis in
Australia do not enjoy this protection. Div IB, Pt II of the Banking Act excludes
the protective provisions in relation to foreign ADis and provides only that
assets in Australia are to be available to meet the foreign ADI's liabilities in
Australia in priority to all its other liabilities.

Financial claims schemes

[2.570] Financial Claims Schemes (FCSs) were introduced for Australian­
incorporated ADis and general insurers in 2008. APRA administers both FCSs.

135 N ote, that APRA v ACN ooo 007 492 (in liq) [2011 ] FCA 353 has cast doubt on the ability of a judicial
manager of a life company or general insurer to have the entity wound up under the Insurance Act
1973 (Cth) or Life Insurance Act 1995 (Cth). The Government proposes to amend the legislation to
remove the uncertainty created by this decision and preserve the scheme set out above:
Commonwealth of Australia, Strengthening APRA's Crisis Management Powers: Consultation Paper
(September 201 2), p 74· The Government also proposes to amend the Insurance Act 1995 (Cth) and
the Life Insurance Act 1995 ( Cth) to clarify that, contrary to the decision in APRA v ACN ooo 007 492 (in
liq), the provisions of the Corporations Act 2001 (Cth) concerning voidable transactions apply even if
the winding up order is made under the Life Insurance Act 1 9 95 (Cth) or Insurance Act 1973 (Cth).

[2.570) 103
EVE RETT AN D MCCRACKE N 'S BAN KI N G AN D FI NANCIAL I N STITUTI O N S LAW

The key legislative provisions for the ADI FCS are in Div 2AA, Pt 2 of the
Banking Act and the key legislative provisions for the general insurance FCS are
in Pt VC of the Insurance Act. 136 Broadly speaking, under the ADI FCS the
Minister may declare that the FCS applies in relation to a specified ADI if APRA
has applied under s 14F for the ADI to be wound up . An account-holder with a
protected account or accounts (as defined in s 5) with a declared ADI is entitled
to be paid, under the FCS, an amount equal to the balance of its accounts and
any accrued, but uncredited interest, up to the limit prescribed under the
regulations. From 1 January 2013, the limit is $250 000 (Banking Regulations 1996
(Cth), reg 5(4)). Following payment to the account-holder under the FCS, APRA
is substituted for the account-holder as a creditor of the declared ADI to the
extent of the entitlements paid out of the FCS.
The general insurance FCS only applies to general insurers if the Minister has
made a declaration in relation to the general insurer, the general insurer is under
judicial management or external administration under Ch 5 of the Corporations
Act, and APRA believes the general insurer is insolvent or, in the case of a
foreign general insurer, is unable to pay its liabilities in Australia out of its assets
in Australia. The general insurance FCS then provides compensation to eligible
persons with insurance claims against a declared general insurer. The
compensation is paid to the policy holder before they receive any payment in the
winding up of the general insurer and APRA is then substituted for those policy
holders as a creditor of the general insurer.
The Government is proposing various refinements to both FCSs. 137

Financial assistance for superannuation funds

[2.580] Part 23 of the SIS Act contains financial assistance prov1s10ns under
which regulated superannuation funds can be compensated by the
Commonwealth for money lost through fraud or theft. A trustee can apply to the
Minister for the grant of financial assistance if the loss suffered by the fund as a
result of fraud or loss has caused substantial diminution of the fund leading to
difficulties in the payment of benefits (s 229). The fund cannot be a self managed
superannuation fund at the time it suffered the loss. The Minister may grant
assistance if the Minister considers such assistance to be in the public interest
(s 231 ) . The Minister also determines the amount of the assistance, which cannot
be more than the loss suffered by the fund (ss 231, 232). Money paid out under
this provision is recovered by levy on all APRA regulated superannuation funds
under the Superannuation (Financial Assistance Funding) Levy Act 1993 (Cth) .

136 The Australian Prudential Regulation Authority Act 1998 (Cth), Financial Claims Scheme Levy (ADis) Act
2008 (Cth), Financial Claims Scheme Levy (Genera/ Insurance) Act 2008 (Cth), the Banking Regulations
1966 (Cth) and the Insurance Regulations 2002 (Cth) are also relevant.
137 See, generally, Commonwealth of Australia, Strengthening APRA's Crisis Management Powers:
Consultation Paper (September 201 2), pp 82-93.

1 04 [2.580]
 Regulation I CH 2

DATA COL lECTION

Access to statistical information

[2.600] Access to detailed and accurate statistics is crucial to both prudential
supervision and the wider control of the economy. The Financial Sector (Collection
of Data) Act 2001 (Cth) (FSCOD Act) provides APRA with the legal basis for
collecting information from specified finance sector entities for three purposes
(s 3):
1. assisting it in prudential regulation of financial sector bodies (see
[2.430]-[2.580]);
2. assisting ASIC, the Reserve Bank of Australia, and the Australian Bureau
of Statistics 138 to perform their functions or exercise their powers; and
3. assisting the Minister formulate financial policy.
The FSCOD Act enables APRA to determine reporting standards for financial
sector entities (s 13) . The reporting standards may include matters set out in
s 13(2), such as :
the form of reporting documents and the information to be contained in them;
signatories;
the times at which (or periods to which) the information is to relate; and
the giving of reporting documents to APRA.
Entities must comply with any requirement to give a reporting document to
APRA (s 13(9)) . If an entity (other than a superannuation entity) fails to comply
and thereby commits an offence, the principal executive officer is placed under a
statutory obligation to notify its governing body (s 14) .
APRA collects data from the entities it regulates and from certain other
entities (registered entities) that it does not prudentially regulate. That is, under
the scheme created by the FSCOD Act financial sector entities fall into two major
categories (s 5(2)): 139
regulated entities: that is bodies regulated by APRA (see [2.430]), such as: ADis,
NOHCs authorised under the Banking Act and their subsidiaries; life
companies or NOHCs registered under the Life Insurance Act; general
insurers, NOHCs authorised under the Insurance Act or their subsidiaries;
Lloyd's, or a Lloyd's underwriter as defined in s 3 of the Insurance Act 1 973;
and, trustees of superannuation entities; and
registered entities (often called Registered Financial Corporations (RFCs)): that
is, corporations whose names are entered in the Register of Entities
maintained by APRA under s 8 (see [2.610] ) .

138 The Australian Bureau of Statistics is prescribed as a financial sector agency for the purposes of the
Financial Sector (Collection of Data) Act 2001 (Cth) by Financial Sector (Collection of Data) Regulations
2008, reg 5·
139 Other categories comprise medical indemnity entities (which are Austra lian financial corporations
liable to make payments under medical indemnity arrangements entered into before 1 J uly 2003) and
m utual discretionary funds as defined in s 5(5) - (6) of Financial Sector (Collection of Data) Act 2001
(Cth).

[2.600] 105
EVERETT A N D MCCRAC KE N 'S BAN KI N G AN D F I NANCIAL I N STITUTI O N S LAW

Registered financial corporations

[2.610] RFCs are financial corporations, other than APRA regulated entities, that
are covered by the FSCOD Act scheme and on the register kept by APRA under
s 8 of the FSCOD Act. Responsibility to register lies with the corporation and
registration is compulsory. Entities must register within 60 days of becoming a
registrable corporation. Australian trading and financial corporations (together
with foreign corporations) are registrable corporations if (s 7): 140
• their sole or principal business in Australia is the borrowing of money and the
provision of finance; or
• their assets in Australia arising from the provision of finance exceed 50% 141 of
the value of their assets in Australia; or
" their business involves the retail sale of goods in Australia and they and their
related corporations hold a minimum of A$25 million (or other prescribed
sum) as assets being debts due to the group as a result of providing finance for
the purchase of those goods.
The Act defines the provision of finance (s 32) as including:
• lending of money (secured or unsecured);
" supply or letting of goods on hire purchase;
" retail sale of goods where payment is extended beyond three months;
" factoring of debts; and
• purchase of bills of exchange, promissory notes, government securities or
company debentures.
Corporations that fit this definition of registrable corporation include:
• retailers which provide in-house finance to customers;
" finance companies, including those involved in hire-purchase and factoring;
and
" money market corporations, including investment banks and those which
acquire debts for securitisation purposes.
Smaller corporations (those with assets of less than A$5 million), and public
authorities, ADis, benefit societies, private health insurers, insurance companies,
trustee corporations, and companies involved only in related inter-company
loans are excluded from the definition of registrable corporation (s 7(2)) .
RFCs include many different types o f non-bank financial intermediaries. They
are grouped into three categories in the register (s 11): 142
• Category D (money market corporations);
---------- -----------------

140 According to Commonwealth of Australia, Strengthening APRA's Crisis Management Powers:

Consultation Paper (September 201 2), (p 130) this definition "captures entities that should arguably
be outside its purview, and in some instances does not capture entities that should ideally fall within
the subsection" and there is a proposal (p 131) to amend it.
141 That percentage may be changed by regulation: Financial Sector (Collection of Data) Act 2001 (Cth),
s 7(1)(b).
142 See APRA, Non-Regulated Entities, available at http://www.apra.gov.au (viewed 1 October 2008).

1 0 6 [2.610]
 Regulation I CH 2

Category other (formerly pastoral finance companies, finance companies and

general financiers); and
Category I (intra-group financiers).
Registration of RFCs under the FSCOD Act is simply for the purpose of
collecting the relevant information. It does not mean that the RFC is subject to
supervision by APRA. Nor does registration convey approval or authorisation
by APRA. A corporation is, in fact, prohibited from advertising or holding out
that it is registered under the FSCOD Act or that it has any special status by
virtue of that registration (s 29) .

CAS H AND TRANSACTION MONITORING

Proceeds of Crime Act

143
[2.650] Although the Proceeds of Crime Act 2002 (Cth) is designed to provide
machinery for depriving persons (whether or not convicted) 144 of the proceeds
and benefits of crime by means of forfeiture and to prevent their reinvestment in
further criminal activities (s 5), the Act has a substantial impact on financial
institutions .
In setting up a scheme under which proceeds of crime may be confiscated, the
Act gives Commonwealth law enforcement agencies significant powers to obtain
information. Five powers are set out in Ch 3 of the Act, three of which are
applicable generally and two of which are directed specifically at financial
institutions (s 8). Financial institutions are defined (s 338) to mean: ADis; the
RBA; State banks; financial corporations 145 (including those which would be
regarded as financial corporations if they were incorporated in Australia);
co-operative housing societies; and trading corporations operating as casinos or
TABs. 146
The three general powers focus on enabling authorities to:
1. conduct examinations about a person's affairs (Pt 3-1);
2. require sight of property tracking documents, such as documents that are
relevant to identifying, locating or quantifying property not only of
convicted persons but also those reasonably suspected of engaging in
criminal or terrorist conduct (Pt 3-2). 147 Specifically excluded, however,
are accounting records used in the ordinary business of a financial
institution (s 202(2) (c)) and;

143 This Act replaces the Proceeds of Crime Act 1987 (Cth), which remains in force only to enable
continuation of matters dealt with under it. New orders and warrants have to be sought under the
new legislation. See Explanatory M emorandum, Proceeds of Crime (Consequential Amendments and
Transitional Provisions) Bil/ 2 0 02 (Cth).
144 Proceeds of Crime Act 2002 (Cth), s 14.
145 The financial corporations referred to in this context are bodies corporate that are financial
corporations within the meaning of the Commonwealth Constitution, s 51 (xx).
146 Totalisor Agency Board, being a State board or authority operating a betting service (Proceeds of
Crime Act 2002 (Cth), s 338).
147 The range of documents and persons targeted is broad: Proceeds of Crime Act 2 0 02 (Cth), s 202.

[2.650] 107
EVE RETI A N D M CCRACK E N 'S BAN KI N G A N D FI NAN CIAL I N STITUTI O N S LAW

3. search for and seize tainted property or evidential material (Pt 3-5),
generally under warrant (Div 1) but without warrant in serious and
urgent circumstances (Div 2) . "Tainted property" is defined as proceeds of
an indictable offence or an instrument of an indictable offence (s 338) .
"Evidential material" is evidence relating to: property in respect of which
action could be taken under the Act; or, benefits deriving from an
indictable offence; or, literary proceeds derived from commercial
exploitation of criminal conduct (s 338) .

The two more specific powers are targeted at requiring financial institutions to
provide particular information or documents relating to accounts (Pt 3-3) and
information about transactions conducted through accounts (Pt 3-4). "Account"
is defined in s 338 to mean facilities or arrangements through which deposits or
withdrawals are made and expressly includes fixed term deposits and safety
deposit boxes.
Written notice 148 requiring the provision of information or documents about
accounts can only be given by an authorised officer (s 213), generally the
Commissioner or the Deputy Commissioner of the Australian Federal Police
(AFP) or a senior executive AFP employee who is a member of the AFP and who
is expressly authorised in writing by the Commissioner. 149 The authorised officer
must reasonably believe that the notice is required for determining whether
action should be taken under the Act or in relation to proceedings under the Act
(s 213(2)).
The information or documents must be relevant to one or more of eight
matters specified in s 213(1); namely
(a) deterrrllning whether an account is held by a specified person with the
financial institution;

(b) deterrrllning whether a particular person is a signatory to an account;

(c) if a person holds an account with the institution, the current balance of the
account;

(d) details of transactions on such an account over a specified period of up to

6 months;

(e) details of any related accounts (including names of those who hold those
accounts);

(ea) deterrrllning whether a stored value card 150 was issued to a specified person
by a financial institution;

( eb) details of transactions made using such a card over a specified period of up
to 6 months;

148 The form is prescribed under the Proceeds of Crime Act 2002 (Cth), s 214.
149 Also entitled are the CEO of the Australian Crime Commission, the I ntegrity Commissioner and an
examiner within the meaning of the Australian Crime Commission Act 2002 (Cth): Proceeds of Crime
Act 2002 (Cth), s 213(3).
150 "Stored value card" is defined in s 3 3 8 o f t h e Proceeds o f Crime Act 2002 (Cth) as "a portable device
that is capable of storing monetary va lue in a form other than physical currency, or as otherwise
prescribed by the regulations."

108 [2.650]
 Regulation I CH 2

(f) a transaction conducted by the financial institution on behalf of a specified

person.

Failure to comply with a notice is punishable by a fine (30 penalty units) and/ or
six months imprisonment (s 218). Disclosure of the existence or nature of the
notice contrary to a prohibition in the notice is treated very seriously, with a fine
(120 penalty units) and/or two years imprisonment (s 217) . False or misleading
statements (or omissions making statements misleading) also incur express
liability: 151 up to 12 months imprisonment and/ or fine (60 penalty units) (s 216).
To obtain information about transactions conducted through an account
during a particular period or made using a stored value card issued to a
particular person by a financial institution, authorised officers of an enforcement
152
agency must apply to a State or Territory Supreme Court for a monitoring
order (s 219) . A court may only make a monitoring order if it is satisfied that
there are reasonable grounds for suspecting either that the account or stored
value card is being used for money laundering contrary to the Commonwealth
Criminal Code (see [2.660]) or that the person in respect of whose account or
stored value card the information is sought, has been (or is about to be) involved
in a serious offence or has benefited (or is about to benefit) from the commission
of a serious offence (s 219(2)).
Failure to comply with a monitoring order is punishable with a maximum
penalty of 6 months imprisonment and / or a fine (30 penalty units, s 224).
Providing false or misleading information renders a person liable to two years
imprisonment and/ or a fine (120 penalty units, s 222). Perhaps of even more
importance is the secrecy provision (s 223) whereby disclosure of the existence or
operation of a monitoring order (or of information allowing that to be inferred)
renders persons liable to conviction and fines (300 penalty units and/ or
imprisonment up to five years). Information about the monitoring order may
only be disclosed to particular persons, such as authorised enforcement agency
officers or members of the Australian Transaction Reports and Analysis Centre
(AUSTRAC) (see [2.680])) to enable them to perform their duties or in connection
with legal proceedings (s 223(4)) . Similarly, such information may be given to
financial institution representatives to enable them to comply with the
monitoring order or to lawyers to enable legal advice in relation to the
monitoring order to be given (s 223(4)) . However, if the recipient of the
information ceases to be entitled to receive the information and records and
discloses the existence or operation of the order, that person will be guilty of an
offence at that later stage, also punishable by 5 years imprisonment and/ or 300
penalty units (s 223(3)).

1 51 See also Criminal Code Act 1995 ( Cth ) , ss 137.1 a n d 137.2 which also penalise provision of fa lse or
misleading information or documentation.
152 Section 338 of the Proceeds of Crime Act 2002 ( Cth ) defines this as including not simply a duly
authorised member of the Australian Federal Police, but also the Integrity Commissioner, the CEO of
the Australian Crime Commission ( and duly authorised examiners or members of staff of the
Australian Crime Commission ) , an authorised customs officer and an authorised member or staff
member of the Australian Securities and I nvestments Commission.

[2.650] 109
EVE RETT AN D M C C RAC KE N 'S BAN KI N G AN D FI NANCIAL I N STITUTI O N S LAW

Statutory protection is given in respect of action taken by the financial

institutions and their representatives in complying with a written notice under
s 213 or a monitoring order made under s 219 (ss 215, 221) .

Criminal Code Act: Money Laundering

[2.660] Money laundering offences, previously contained in ss 81 - 82 of the
Proceeds of Crime Act 1987 (Cth), are now located in part 153 in a strengthened
form in the Criminal Code Act 1995 (Cth), Pt 10.2. The transfer was made on the
basis that these money laundering offences are very serious offences and should
for convenience be located with other serious offences. 154
A series of offences has been created in relation to dealings with money or
other property. Property is widely defined (s 400 . 1 (1)) for these purposes and
means real or personal property whether it is tangible or intangible and whether
situated in Australia or elsewhere and includes an interest in such real or
personal property. To emphasise the scope of the definition, s 400. 1 (2) clarifies
that a reference to money or other property includes "a reference to financial
instruments, cards and other objects that represent money or can be exchanged
for money, whether or not they have intrinsic value. "
A person i s regarded (ss 400.1, 400.2) a s dealing with money o r property and
hence is within the scope of the offences if the person does one of three types of
acts in specified circumstances. The relevant acts are:
1. receiving, possessing, concealing or disposing o f the money or property;
2. importing it into or exporting it from Australia;
3. engaging in a banking transaction relating to it (banking transaction
includes any transaction made at an ADI 155 and any transaction involving
a money order) .

There will be a dealing within the meaning of the section if the money or other
property is the proceeds of crime 156 or could become an instrument of crime 157
in relation to an indictable offence (whether Commonwealth, State, Territory or
foreign) or, alternatively, if the acts take place in the course of importing or

153 Additional offences were created in 2006 under the Anti-Money Laundering and Counter-Terrorism
Financing Act 2006 ( Cth ) ( see [2.680 ]).
154 Explanatory M emorandum, Proceeds of Crime (Consequential Amendments and Transitional) Provisions
Bill 2002 ( Cth ).
155 ADI is defined broadly t o include n o t o n l y a body corporate that is an ADI under t h e Banking Act 1959
( Cth ), but also the Reserve Bank of Australia and a person carrying on State banking: Criminal Code
Act 1995 ( Cth ) , s 400.1(1).
156 "Proceeds of crime" is defined in s 400.1 of the Criminal Code Act 1995 ( Cth ) , to mean "any money or
other property that is wholly or partly derived or realised, directly or indirectly, by any person from
the commission of an offence against a law of the Commonwealth, a State, a Territory or a foreign
country that may be dealt with as an indictable offence ( even if it may, in some circumstances, be
dealt with as a summary offence )" .
1 57 "Money or other property is an instrument of crime if it is used in the commission of, or used to
facilitate the commission of, an offence against a law of the Commonwealth, a State, a Territory or a
foreign country that may be dealt with as an indictable offence ( even if it may, in some circumstances,
be dealt with as a summary offence.": Criminal Code Act 1995 ( Cth ) , s 400.1(1).

110 [2.660]
 Regulation I CH 2

exporting goods, in the course of banking or by means of a "communication

using a postal, telegraphic, telephonic or other like service within the meaning of
paragraph 5l (v) of the Constitution" .
The primary offences o f dealing with money o r other property (ss 400.3 - 400.8)
are graded depending on:
the value of the money or property;
whether the money or property is the proceeds of crime;
whether there is a risk that the money or property will become an instrument
of crime; and
the state of mind of the person dealing with it.
The penalties are generally a term of imprisonment and/ or a fine based on
penalty units. In drawing distinctions between the amounts of the particular
dealings, 158 the legislature intends to provide the courts with a clear signal as to
the penalties it considers appropriate. 159

158 If a person mistakenly but reasonably believes that the value was less than it actually is, that person
may be found guilty of an offence in relation to that l esser amount: Criminal Code Act 1 9 95 (Cth),
ss 400.10, 400.14.
159 See Explanatory Memorandum, Proceeds of Crime (Consequential Amendments and Transitional
Provisions) Bi/1 2002 ( Cth ) .

[2.660] 111
EVE RETI A N D M CCRACKEN'S BAN KI N G A N D FI NANCIAL I N STITUTI O N S LAW

Figure 2.2: Penalties for money l aundering

Value of Money or I n tention Money or Risk for M oney or Risk for

money or property for money p roperty money or p roperty money or
pro erty
h is, and i s or IS property IS property
ilea t w1th bel ieved property proceeds to tiecome proceeds to tiecome
to be, to tiecome of crime an of cri m e an
proceeds an and instru- and instru-
of crim e instru- person is ment of person is ment of
ment of reckless* crim e an d n egl i- crime and
cri m e a s to person i s gent** as person i s
whether reckless to negl i gent
it i s a s t o that whether as to that
proceeds risk i t is risk
of crim e proceeds
of cri m e
$1m or 25 years 25 ears
� 12 years 12 years 5 years 5 years
m ore an i:ljor an or ani:ljor ani:ljor andjor andjor
1500 uni ts 1500 un i ts 720 uni ts 720 uni ts 300 un i ts 300 un i ts
$100,000 20 ears
� 20 ears
� 10 ears
a 10 years 4 years 4 years
or more an or an or an for andjor andjor an djor
1200 un i ts 1200 uni ts 600 uni ts 600 uni ts 240 uni ts 240 un i ts
$50,000 or 1 5 years 15 years 7 years 7 years 3 years 3 years
m ore an djor an i:ljor andjor an djor andjor an djor
900 uni ts 900 uni ts 420 uni ts 420 uni ts 180 un i ts 180 uni ts
$10,000 or 10 ears
a 10 ears
a 5 years 5 years 2 years 2 years
more an for an for an djor andjor andjor an djor
600 uni ts 600 un i ts 300 uni ts 300 un i ts 120 uni ts 120 uni ts
$1,000 or 5 years 5 years 2 years 2 years 12 m onths 12 months
m ore an djor an djor andjor andjor andjor an djor
300 uni ts 300 uni ts 120 un i ts 120 uni ts 60 un i ts 60 un i ts
Any value 12 months 12 months 6 mo n ths 6 mo n th s 10 un i ts 10 uni ts
an djor an djor andjor andjor
60 uni ts 60 un i ts 30 un i ts 30 units
* See Crim inal Code Act 1995 (Cth) s 5.4 for a defi n ition of reckl essness.
** See Criminal Code Act 1995 (Cth) s 5.5 for a defi n i tion of negl i gence.

It is also an offence to deal with money or other property where it is

reasonable to suspect that the money or property represent proceeds of crime
(s 400.9). The reasonable suspicion test will be satisfied without further proof in
certain specified circumstances (s 400.9(2)):
• where transactions are structured to avoid reporting requirements under the
Financial Transaction Reports Act 1988 (Cth) (see [2.670]) or the Anti-Money
Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act) (see
[2.680]);
.. where accounts are held with ADis in false names;
• where the conduct amounts to an offence under specified provisions of the
AML/CTF Act relating to providing or receiving a designated service using a
false customer name or customer anonymity (ss 139, 140) or receiving a
designated service using one name when having another name not previously
disclosed (s 141);
'" where the value is grossly out of proportion to the defendant's income and
expenditure over a reasonable period within which the conduct occurs;

112 [2.660]
 Regulation I CH 2

where there has been a significant cash transaction or a threshold transaction

and reporting obligations have been contravened or false and misleading
information has been given; and
"' where a defendant purporting to act on behalf of another does not provide
information enabling that person to be identified and located.
It is a defence for a person to prove that he or she had no reasonable grounds for
suspecting that the money or property were derived or realised from some form
of unlawful activity (s 400.9(5)) .

Financial Transaction Reports Act

[2.670] As part of the Commonwealth Government's initial efforts to control tax
evasion and organised crime, 160 the Financial Transaction Reports Act 1988 (Cth)
(FTR Act), provided until 2006 for the reporting by those who dealt in cash 161 of
certain transactions, namely:
significant cash transactions (that is, those transactions involving the physical
transfer of Australian or foreign legal tender of $10,000 in value or more)
(s 7); 162
transfers of currency over $10,000 into or out of Australia (s 15);
" "suspect" cash transactions of any amount (s 1 6); and
" international funds transfer instructions into or out of Australia by non-
authorised deposit-taking institutions (ss 1 7B - 1 7F) .
The Act also provided for full identification in the form of "account" and
"signatory information" (s 20) in respect of persons opening accounts or safe
deposit arrangements (see s 3(1) definition of "account"; s 18) with banks,
building societies, credit unions, financial services licensees dealing in securities
and/ or derivatives, insurers, bullion dealers, bookmakers and other financial
corporations (see s 3(1) definitions of "cash dealer", "financial institution").
The scope of the Act was significantly restricted, however, upon the
enactment in 2006 of the AML/CTF Act (see [2.680]) . Obligations to report
currency transfers, suspect cash transactions and international funds transfer
instructions were limited in time to the period prior to the commencement of the
equivalent provision in the AML/ CTF Act. Although the primary obligation to
report significant cash transactions remains effective, the obligation no longer

160 Financial Transaction Reports Act 1988 (Cth), s 4(1) - (2). N ote that this legislation was originally
enacted as the Cash Transaction Reports Act 1988 (Cth). The Act's title was changed by the Cash
Transaction Reports Amendment Act 1991 ( Cth ), s 5·
161 Financial Transaction Reports Act 1988 (Cth) in s 3(1) defines "cash dealer" to include ADI ("financial
institution" is technically d efined in s 3(1) as an AD!), building societies and credit unions ("financial
institution"), as well as financial corporations, insurers, financial services l icensees dealing in
securities and/or derivatives, unit trust trustees or managers, bullion traders and those dealing with
cash in a variety of ways, for example bureaux de change and cash delivery services. Bookmakers and
casino operators also fall within the definition. N ote that, since 1 9 9 8, solicitors were also required to
report significant cash transactions (s 1 5A).
162 Financial Transaction Reports Act 1988 (Cth), s 7(1). (See also s 3(1) definitions of "significant cash
transaction", "cash transaction", and "currency").

[2.670] 113
EVE RETT AN D MCCRACKEN'S BAN KI N G AN D FI NANCIAL I N STITUTI O N S LAW

applies to cash dealers entering into transactions after the commencement of

Pt 3, Div 3 of the AML/CTF Act who are required to report under that Act as a
"reporting entity". 163 Consequently, the FTR Act continues to target the small
number of cash dealers who are not reporting entities under the AML/ CTF Act.
The FTR Act is now "designed to operate parallel to" the AML/CTF Act 164
which has become the principal piece of legislation dealing with money
laundering and the financing of terrorism.

Anti-Money Laundering and Counter-terrorism Financing Act

[2.680] The AML/CTF Act, which builds on the FTR Act (see [2.670]), 165 was
introduced to enable Australia to fulfil its international obligations under various
United Nations (UN) Conventions and Security Council Resolutions and to
address matters of international concern expressed by various UN and
inter-governmental organisations in relation to money laundering and terrorist
financing. 166 An important impetus for its enactment was the work of the
Financial Action Taskforce on Money Laundering (FATF), an inter-governmental
body set up in 1989, of which Australia is a founding member. 167 This taskforce
issues Recommendations, which represent sets of measures intended to prevent
money laundering and terrorist financing. 168 In 2005, FATF carried out an
assessment of Australia's compliance with FATF Recommendations. While
acknowledging the "comprehensive and apparently effective" proceeds of crime
confiscation schemes, together with the "comprehensive" money laundering
offences, 169 it found the then overall anti-money laundering legislative

1 63 Financial Transaction Reports Act 1988 (Cth), s 7(1)(f). The transaction reporting obligations under the
AM L/CTF Act came into effect on 1 2 December 2008. See AUSTRAC Guidance N ote 0 9/03 lnternational
funds transfer instruction reporting requirements for items 1 and 2 of section 46 of the AML/CTF Act,
available at http://www.austrac.gov.au/files/gno903_ifti_reporting.pdf (viewed 15 October 2012).
164 Explanatory M emorandum, Anti-Money Laundering a n d Counter-Terrorism Financing (Transitional
Provisions and Consequential Amendments) Bi/1 2006 (Cth), p 1 .
165 Replacement Explanatory M emorandum, Anti-Money Laundering and Counter-Terrorism Financing Bill
2006 (Cth), pp 1 , 1 0 . it notes (at p 10) an overlap with the d uties and obl igations under the Financial
Transactions Reports Act 1998 (Cth), particularly in relation to matters which it classifies under the
headings of customer identification, record keeping, suspicious matter reporting, threshold
transaction reporting and international funds transfer instructions. it identifies (at p 10) new
requirements in the areas of ongoing customer due diligence, transaction monitoring, anti-money
laundering and counter terrorism financing programs and correspondent banking.
166 Anti-Money Laundering and Counter-Terrorism Financing Act 2 0 0 6 (Cth), s 3 ·
167 S e e generally FATF's website a t http://www.fatf-gafi.org (viewed 1 5 October 2012).
168 T h e original 40 Recommendations were issued in 1 9 9 0 and subsequently revised in 1 9 9 6 , 2003 a n d
2012. They have n o w been supplemented by n i n e Special Recommendations on terrorist financing,
eight of which were issued in 2001 a n d one in 2004. Both sets of recommendations are (available at
http://www.fatf-gafi.org/topics/fatfrecommendations/documents/
internationalstandardsoncombatingmoneylaunderingandthefinancingofterrorismproliferation­
thefatfrecommendations.html (viewed 15 October 2012).
169 S e e Summary o f t h e Third Mutual Evaluation Report Anti-Money laundering a n d Combating the
Financing of Terrorism Australia (14 October 2005), p 4, available at http://www.fatf-gafi.org/topics/
m utualevaluations/documents/mutualeval uationofaustralia.html (viewed 15 October 2012). See also
the Replacement Explanatory Memorandum, Anti-Money Laundering and Counter-Terrorism Financing
Bi/1 2006 (Cth), pp 5-6.

114 [2.680]
 Regulation I CH 2

framework deficient. It rated Australia as compliant with 12 of its 40

Recommendations and largely compliant with five of its nine Special
Recommendations. 1 70
Responsibility for advice about, and compliance with, the obligations under
the AML /CTF Act generally lies with the Chief Executive Officer (CEO) of the
Australian Transaction Reports and Analysis Centre (AUSTRAC) . 171 AUSTRAC
was initially established under the FTR Act (see [2.670]) and continues in
existence under the AML/ CTF Act. 172 It describes itself as the country's
"anti-money laundering and counter-terrorism financing regulator and specialist
financial intelligence unit". 1 73
The AML/CTF Act adopts a "risk based approach": 174
[P]rincipal obligations are set out, but businesses will have flexibility to develop
procedures according to different risks which they identify using their own
AML / CTF [anti-money laundering/counter terrorism financing] Programs.

Although the AML /CTF Act is lengthy, the simplified outline provided by s 4
offers a clear overview of its major provisions (see Figure 2.3).

170 Summary of the Third Mutual Evaluation Report Anti-Money Laundering and Combating the Financing of
Terrorism Australia (14 October 2005), pp 1 2-1 8, available at http://www.fatf-gafi.org/topics/
mutualevaluations/documents/mutualevaluationofaustralia.html (viewed 15 October 2012). Of the
remaining 40 Recommendations, it was largely compliant with n ine, partially compliant with 1 0 a n d
non-compliant with n i n e . it w a s partially compliant with three o f t h e remaining Special
Recommendations and non-compliant with one.
171 Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth), Pt 1 6 .
172 Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth), s 209. See generally the
AUSTRAC website at http://www.austrac.gov.au.
173 See the AUSTRAC website at http://www.austrac.gov.au.
174 Replacement Explanatory Memorandum, Anti-Money Laundering and Counter-Terrorism Financing Bill
2006 (Cth), p 1 .

[2.680] 115
EVE RETT AN D MCCRAC K E N 'S BAN KI N G A N D FI NANCIAL I N STITUTI O N S LAW

Figure 2.3: The Anti-Money Laundering and Counter-terrorism

Financing Act 2006 (Cth)
The following is a simplified outline of this Act:
A reporting entity is a financial institution, or other person, who
provides designated services. (Designated services are listed in
section 6.)
A reporting entity must carry out a procedure to verify a
customer's identity before providing a designated service to the
customer. However, in special cases, the procedure may be carried out
after the provision of the designated service.
Certain pre-commencement customers are subject to modified
identification procedures.
Certain low-risk services are subject to modified identification
procedures.
Reporting entities must report the following to the Chief Executive
Officer of AUSTRAC (the Australian Transaction Reports and Analysis
Centre) :
(a) suspicious matters;
(b) certain transactions above a threshold.

Certain international funds transfer instructions must be reported to

the AUSTRAC CEO.
Cross-border movements of physical currency must be reported to
the AUSTRAC CEO, a customs officer or a police officer if the total
amount moved is above a threshold.
Cross-border movements of bearer negotiable instruments must be
reported to the AUSTRAC CEO, a customs officer or a police officer if
a customs officer or a police officer requires a person to make such a
report.
Electronic funds transfer instructions must include certain
information about the origin of the transferred money.
Providers of registrable designated remittance services or
registrable remittance network services must be registered with the
AUSTRAC CEO.
Reporting entities must have and comply with anti-money
laundering and counter-terrorism financing programs.
Financial institutions are subject to restrictions in connection with
entering into correspondent banking relationships.

There are two key, inter-related, concepts critical to understanding how the
AML/ CTF Act operates:
1. a "reporting entity" : a reporting entity is defined in s 5 as " a person who
provides a designated service"; and

116 [2.680]
 Regulation I CH 2

2. a "designated service": a designated service is the subject of s 6. That

section contains four tables, each dealing with a designated service. They
are: financial services (Table 1); bullion (Table 2); gambling services
(Table 3); and prescribed services (Table 4) .

Table 1 is the largest table, containing 60 items, covering a wide range of

financial services, many but by no means all of which may be provided by ADis.
Other financial institutions which are likely to find themselves providing
designated services include insurance providers, superannuation funds, finance
and leasing providers, stockbrokers and remittance dealers. 175 The significance
of identifying the reporting entity lies in the fact that many of the obligations
arising under the AML/CTF Act are imposed expressly on reporting entities,
although some are imposed more broadly on "persons" 176 or more narrowly on
"financial institutions". 1 77
The relevant obligations of reporting entities (unless otherwise stated) include
obligations to:
,,, carry out customer identification verification and monitoring;
comply with various reporting obligations (some of which are imposed on
persons as well as reporting entities);
ensure they are entered on the Reporting Entities Roll maintained by the
AUSTRAC CEO;
establish an anti-money laundering and counter-terrorism financing program
which is designed to identify, mitigate and manage the risk of their products
or services facilitating money laundering or terrorism financing and which
sets out the applicable customer identification procedures for customers of the
reporting entity;
assess correspondent banking relationships (which are imposed on financial
institutions);
" make and retain records (which are also imposed on persons and financial
institutions); and
" keep suspicious matters and suspicions confidential.

Penalties and offences

[2.690] Failure to comply with the Act may result in the imposition of a civil
penalty. In addition, a number of offences have been created. A person who gives
information either to the relevant enforcement agent (whether the AUSTRAC
CEO, a customs officer or a police officer) or to a reporting entity commits an
offence if that person knows that the information is false or misleading or omits

175 Replacement Explanatory Memorandum, Anti-Money Laundering and Counter-Terrorism Financing Bill
2006 (Cth), p 1 0 .
176 Anti-Money Laundering and Counter-Terrorism Financing A c t 2 0 0 6 (Cth), s 5 d efines "person" as a n
individual, a company, a trust, a partnership, a corporation s o l e and a body politic.
177 Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth), s 5 defines "financial
institution" to mean an AD I, a bank, a building society, a credit union or a person specified in the
AM L/CTF Rules.

[2.690] 117
EVERETT AN D MCCRAC KE N 'S BAN KI N G A N D F I NANCIAL I N STITUTI O N S LAW

something without which the information is misleading (s 136). It is also an

offence to knowingly produce false or misleading documents (s 137), to make a
false document intending that it should be produced in a customer identification
procedure or to possess a false document with that intention, or to possess or
make equipment for the making of the false document (s 138) . Other more
general offences include:
providing and/ or receiving a designated service using a false customer name
or customer anonymity (ss 139, 140);
commencing to receive a designated service using one name but having
another name not previously disclosed (s 141); and
conducting transactions to avoid reporting requirements regarding threshold
transactions (s 142) or cross-border movements of physical currency (s 143) .

FINANCIAL MAR KETS

I ntroduction

Recent amendments
[2.700] One of the principal objects of the reforms introduced by the FSR Act (see
[2.050]) is to promote "fair, orderly and transparent markets for financial
products" (Corporations Act, s 760A(c)) . To further this object the FSR Act
introduced a new licensing regime for market operators in Pt 7.2 of the
Corporations Act. The regime requires those who seek to operate a financial
market in Australia to obtain an Australian market licence from the Minister.
Although the licence is granted by the Minister, performance of licensed market
operators is monitored and enforced by ASIC.
As noted in Chapter 1 Regulators (see [1 .320]), in preparation for the
commencement of competition amongst market operators, the financial markets
regulatory regime was significantly modified by the Corporations Amendment
(Financial Market Supervision) Act 2010 (Cth). That Act modified Pt 7.2 and
introduced a new Pt 7.2A into the Corporations Act. The effect of these changes
is to:
., remove the obligation on Australian market licensees to directly supervise
their markets, replacing it with an obligation to monitor and enforce
compliance with their markets' operating rules;
allocate responsibility for direct market supervision to ASIC, thereby ensuring
a single entity is responsible for supervising trading on all domestic markets;
and
give ASIC additional powers to enable it to fulfil its new whole-of-market
supervision role, including the power to make market integrity rules and
additional powers to enforce such rules.

What is a financial market

[2.710] "Financial market" is defined for the purposes of the financial markets
regulatory regime in s 767A of the Corporations Act, as:

118 [2.700]
 Regulation I CH 2

a facility through which:

(a) offers to acquire or dispose of financial products are regularly made or

accepted; or

(b) offers or invitations are regularly made to acquire or dispose of financial

products that are intended to result or may reasonably be expected to result,
directly or indirectly, in:

(i) the making of offers to acquire or dispose of financial products; or

(ii) the acceptance of such offers.

This is a broad definition. However, it specifically excludes the OTC markets.

Section 767A(2)(a) excludes from the definition of financial market the following
conduct (unless it is specifically included in regulations) :
[The] making o r accepting [of] offers o r invitations [by a person] t o acquire or
dispose of financial products on the person's own behalf, or on behalf of one party
to the transaction only . . .

The Explanatory Memorandum to the Financial Services Reform Bill 2001 (Cth)
noted (at para 7.15) that this exclusion is directed at the situation where parties
negotiate directly with each other, each accepting the counter-party credit risk.
Hence the Explanatory Memorandum concludes:
[T]his is expected to exclude most transactions which are considered to form part of
the informal "OTC market" .

Also excluded from the definition of financial market are treasury operations
conducted between related bodies corporate (s 767A(2)(b)), the conducting of an
auction of forfeited shares by a person holding an Australian licence relating to
auctioneering (s 767A(2) (c)) and any other conduct prescribed by the regulations
(s 767A(2)(d)).

Current financial markets

[2.720] While in 2002-2003 there were only four authorised financial markets, this
figure has risen to 22. 1 78 These licensed markets include not only domestic
Australian financial markets but also overseas financial markets that have been
licensed to operate in Australia (see s 795B(2) and [2. 730] below) .

Licensing

Obligation to obtain a licence

[2.730] Section 791A of the Corporations Act provides that a person must only
operate, or hold out that they operate, a financial market in Australia if they
have an Australian market licence or are exempt. Exemptions are granted by the

178 See ASI C's website at http://www.asic.gov.au/asic/asic.nsf/byheadline/

Licensed+domestic+financial+markets+operating+in+Australia?openDocument (viewed 15 October
2012) and http://www.asic.gov.au/asic/asic.nsf/byheadline/
Licensed+overseas+financial+markets+operating+in+Australia?open Document (viewed 15 October
2012).

[2.730] 119
EVERETT A N D M CCRACKE N 'S BAN KI N G A N D F I NANCIAL I NSTITUTI O N S LAW

Minister (s 791C) on the advice of ASIC (s 798B) . ASIC has stated that it will only
advise a Minister to exempt a financial market in "rare and exceptional
circumstances" . 179

Australian market licence

[2.740] Only a body corporate can apply for an Australian market licence (s 795A
of the Corporations Act) . The licence application procedure is set out in Pt 7.2
Div 4. Formal power to grant the licence is exercised by the Commonwealth
Government as it is the Minister in whom the power to grant a licence is vested
(s 795B) . The Minister is required, however, to have regard to advice received
from ASIC (ss 795A(2), 798A) .
Section 795B(l) requires the Minister to grant an Australian market licence if
the Minister is satisfied:
(a) the application was properly made;
(b) the applicant will comply with the obligations that will apply if the
licence is granted;
(c) the applicant has adequate operating rules, and procedures to ensure, as
far as is reasonably practicable, that the market will operate in a manner
that is fair, orderly and transparent;
(d) the applicant has adequate arrangements (which may involve the
appointment of an independent person or related entity) for operating the
market, including arrangements for:
(i) handling conflicts between the commercial interests of the licensee
and the need for the licensee to ensure that the market operates in
a manner that is fair, orderly and transparent; and
(ii) monitoring and enforcing compliance with the market's operating
rules;
(e) the applicant has adequate clearing and settlement arrangements for
transactions effected through the market, if the Minister considers that the
applicant should have such arrangements (see Chapter 3 Clearing and
Settlement);
(f) if the market involves participants who provide financial services to retail
clients and those clients entrust money or other property to the
participants (see s 881B), the applicant has compensation arrangements as
required by Pt 7.5 of the Corporations Act;
(g) no unacceptable control situation (see [2. 760]) is likely to result if the
licence is granted; and
(h) no disqualified individual appears to be involved in the applicant (see
[2.760]).

Licences granted under s 795B(l) are often called "domestic Australian market
licences".

179 ASI C Regulatory Guide 172 Australian market licences: Australian operators (March 2002), at [RG
172.51].

120 [2.740]
 Regulation I CH 2

Alternatively, if the applicant is authorised to operate a financial market in the

foreign country in which its principal place of business is located (the home
country), the Minister may grant the applicant a licence to operate that same
market in Australia if the Minister is satisfied of the matters in s 795B(2) . Those
matters are :
(a) the application was properly made;
(b) the applicant will comply with the obligations that will apply if the
licence is granted;
(c) the operation of the market in its home country is subject to requirements
and supervision that are sufficiently equivalent, in relation to the degree
of investor protection and market integrity they achieve, to the
requirements and supervision to which financial markets are subject
under the Corporations Act in relation to those matters;
(d) the applicant undertakes to cooperate with ASIC by sharing information
and in other appropriate ways;
(e) no unacceptable control situation (see [2.760]) is likely to result if the
licence is granted; and
(f) no disqualified individual (see [2. 760]) appears to be involved in the
applicant.

Additionally, if the applicant is a foreign body corporate, the Minister must only
grant the licence if the applicant is registered as a foreign corporation under
Div 2 of Pt 5B.2 of the Corporations Act. Foreign based markets granted a licence
under these criteria in s 795B(2) are generally referred to as "licensed overseas
financial markets". 180
It should be noted that a foreign based market can choose to apply for a
domestic Australian market licence under s 795B(l), provided it is registered as a
foreign corporation under Div 2 of Pt 5B.2 of the Corporations Act (s 795B(3)).
The Minister has power to impose conditions on an Australian market licence,
to vary the licence and to suspend the licence or indeed cancel the licence
(ss 796A, 797A - 797G). Suspension and cancellation can take effect immediately
where, for example, the licensee becomes subject to external administration
(s 797B). However, the more usual procedure would be for the Minister by
written notice to require a licensee in breach of its obligations to show cause at a
hearing (s 797C). For such a process to be instigated, it is only necessary for the
Minister to "consider" either that the licensee has in the past breached an
obligation as licensee or that it is currently in breach of such an obligation
(s 797C) .
In making a decision to grant an applicant an Australian market licence, or to
impose, vary or revoke conditions on such a licence or to suspend or cancel such
a licence, the Minister is directed to have regard, in particular, to certain specific
matters, including: the market's structure, the market's size and activities; the

180 See generally, AS I C Regulatory Guide 177 Australian market licences: Overseas operators (October
2003)-

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market's technology base; the nature of the financial products traded; the type of
participants; and the public interest (s 798A(2)) . While ASIC may generally give
advice to the Minister in relation to matters concerning financial markets
(s 798B), the Minister is actually directed to take such advice into account in
relation to matters concerning dealings with the licence (s 798A(2)(h)).
Holding an Australian financial markets licence does not prevent the market
licensee from being included in the market's official list (s 798C) . The Australian
Securities Exchange (ASX) reportedly became the first stock exchange to list on
its own exchange. 1 8 1 The market licensee must, however, make arrangements
with ASIC to address potential conflicts of interest flowing from its products
being traded on the market and to ensure integrity of trading in those products
(s 798C(2)) . Further, its listing rules have to specify that it is ASIC rather than
itself which has to determine its admission to and removal from the list and any
halt to trading in its products (s 798C(4)) . Since 2007, its operating rules have
also had to make provision for avoiding conflicts of interest in situations where a
related entity of the market licensee is listed on the market or where the market
licensee (or a related entity) is in competition with other entities listed on the
market (s 798DA) .

Obligations of a market licensee

[2.750] A market licensee is required to comply with certain statutory obligations.
The Minister has power to make directions to promote compliance if he or she
considers there to be a lack of compliance (s 794A). The Minister may also
request a licensee to give ASIC (and through it, the Minister) a special report on
specified matters (s 794B) .
At the head of the list of general obligations is a very broad requirement
under s 792A(a) to do, to the extent that it is reasonably practicable, "all things
necessary to ensure that the market is a fair, orderly and transparent market".
Amongst the additional obligations of market licensees specified in s 792A are
those requiring the licensee to:
have adequate arrangements for operating the market;
have sufficient resources (including financial, technological and human
resources) to operate the market properly;
if required to have compensation arrangements, ensure it has approved
compensation arrangements; and
take all reasonable steps to ensure that no disqualified individual becomes, or
remains involved, in the licensee (see [2.760]) .
If the licensee i s a licensed overseas financial market, authorised under s 795B(2),
it has an obligation to remain authorised to operate a financial market in its
home country and to obtain approval from the Minister before it changes its

181 ASX Annual Report 1 9 9 9 , available at http://www.asxgroup.eom.au/media/PD Fs/annual_report_

1999.pdf (viewed 1 5 October 2012).

122 [2.750]
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principal place of business. Market licensees must also notify ASIC of various
specified occurrences, with a view to alerting ASIC to potential market
difficulties (s 792B) .
Domestic Australian market licensees, authorised under s 795B(l), must also
have operating rules (including listing rules) dealing with the matters prescribed
by regulation 7.2.07 of the Corporations Regulations (s 793A). Under s 793B,
operating rules have effect as a contract under seal between the participants in
the market themselves and as between the participants and the licensee.
Operating rules may be enforced not only by ASIC, the licensee or the operator
of a clearing and settlement facility in conjunction with the licensee but also,
more broadly, by "a person aggrieved by the failure" to comply with or enforce
the rules (s 793C). Changes to the operating rules have to be approved by the
Minister (ss 793D, 793E).

Monitoring of voting power and character

[2.760] Such is the importance of licensed financial markets 182 to the operation
of the finance sector that voting power in certain licensees (and their holding
companies) is monitored and the character of individuals involved in licensees is
open to scrutiny. Accordingly as noted in [2. 750] among the obligations imposed
on licensees by s 792A are obligations to take reasonable steps to ensure that an
unacceptable control situation does not exist and that no disqualified individual
becomes or remains involved in the licensee.
The Corporations Act uses the term "widely held market body" to describe
licensees and their holding companies which are prescribed in reg 7.4.01 of the
Corporations Regulations as bodies to which Div 1 of Pt 7.4 applies and to which
the voting control provisions apply (s 850A). There is said to be an "unacceptable
control situation" where a person's voting power in relation to such a widely
held market body is more than 15% (or any higher percentage that may have
been previously approved or, in respect of the ASX, any higher percentage
prescribed by regulation) (s 850B).
If an unacceptable control situation arises, the court is given the power to
make such orders as it considers appropriate to ensure that such a situation
terminates, such as orders to dispose of shares or to prevent the exercise of rights
attaching to shares (s 850D) . A court cannot, however, make an order if it would
result in a breach of the Commonwealth Constitution, being an acquisition of
property on other than "just terms" (s 852A) . There is also a strict limit on who
can request the court to act. Action can only be instigated by the Minister, ASIC,
the widely held market body itself or a person who has voting power in that
body (s 850D(2)) . Anti-avoidance provisions operate to enable the Minister to
direct a person to cease to have particular voting power, where that voting
power was increased under a scheme for avoiding the application of the 15%
limit (s 852B) .

182 These rules also apply to licensees of clearing and settlement facilities (see Chapter 3 Clearing and
Settlement).

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The voting power limit in a widely held body (other than the ASX) may be
surpassed with approval of the Minister, but the grant of approval is dependent
upon the Minster being satisfied that such increase over and above the 15% is in
the national interest (ss 851A 851B, 851E) . The Minister may also initiate a
change, if satisfied that it is in the national interest to do so (s 851E) . The
Minister also has power to revoke the approval (s 851F) . Generally, the Minister
must act within 30 days of receiving the application for approvat but this period
may be extended to 60 days (s 851H) .
Individuals targeted by the disqualified person requirements include those
who are "involved in a market licensee" (s 853B). They are defined as directors,
secretaries and senior managers of licensees (or applicants for a licence) and of
their holding companies, together with those who hold more than 15% of the
total voting power in such companies.
ASIC has the power under s 853C to declare that individuals involved in an
Australian market licensee (or in an applicant for such a licence) are disqualified
if two conditions are satisfied:
1. that the individual is unfit to b e involved in the licensee o r applicant; and
2. that there is consequently a risk that the licensee or applicant will breach
its obligations if the declaration is not made.

It is character that is of crucial importance in determining the unfitness of an

individual. Section 853C(3) provides that when deciding whether an individual
is unfit ASIC must take into account:
such matters as the individual's fame, character and integrity, rather than his or her
competence, experience, knowledge or other such attributes.

This disqualification power is only exercisable by ASIC after written notice has
been given to the applicant or licensee (with copies to the relevant individual
and the Minister), setting out the grounds for the declaration and requiring the
applicant or licensee and the relevant individual to show cause why the
declaration should not be made at a hearing to be held at a reasonable time and
place (s 853D) .
Individuals will also be regarded as disqualified if they have been disqualified
from managing a corporation under the Corporations Act, s 260B or if they are
on the Register of Disqualified Company Directors and Other Officers maintained
by ASIC under s 1274AA (s 853A) .
It is an offence for a disqualified individual to become or remain involved in
the licensee (s 853F) .

Supervision of fin an cial m arkets by ASI C

ASIC's role
[2.770] Section 798E provides that ASIC is responsible for supervision of markets
licensed under s 795B(1). That is, ASIC is the supervisor of trading activities and
conduct of business by market participants on domestic licensed Australian

124 [2.770]
 Regulation I CH 2

financial markets. As noted in the Explanatory Memorandum to the Corporations

Amendment (Financial Market Supervision) Bill 2010 (Cth) (at para 2.9):
this function involves ASIC utilising systems t o monitor the trading o f financial
products on domestic licensed financial markets. Having this function will allow
ASIC to more easily detect and enforce the market misconduct provisions in the Act
as well as enforce the new rules which it will make.

Part 7.2A establishes a regime under which ASIC can set rules (called market
integrity rules) in relation to domestic Australian market licensees and enforce
compliance with those rules using a variety of enforcement tools.

Market integrity rules

[2.780] Section 798G gives ASIC power to make market integrity rules that deal
with:
• the activities or conduct of domestic Australian licensed markets;
• the activities or conduct of persons in relation to those markets; and
• the activities or conduct of person in relation to financial products traded on
domestic Australian licensed markets.
Except in emergency situations, ASIC must obtain the Minister's consent in
writing before making a market integrity rule (s 798G(3)). In emergency
situations, ASIC may make a rule without the Minister's prior consent but must
justify the rule in writing to the Minister on the following day and revoke or
amend the rule if so directed by the Minister (s 798G(4) (5)) . -

Operators o f domestic Australian licensed markets and participants o n those

markets are required to comply with the market integrity rules (s 798H) . Breach
of a market integrity rule will give rise to a civil penalty of up to $1 million.
ASIC may set the penalty (up to this amount) for the breach of a particular rule
(s 998G(2)). Additionally, breach of the market integrity rules can give rise to
compensation orders (s 1317HB) . However, the market operator is not liable to
provide compensation (s 1317HB(2)) . The Explanatory Memorandum to the
Corporations Amendment (Financial Market Supervision) Bill 2010 (Cth) notes (at
para 2.20) that market operators are potentially open to claims from all
participants in the financial market and allowing compensation orders against
market operators could create systemic risks. Infringement notices and
enforceable undertakings are also available for breaches of the market integrity
rules as alternatives to civil proceedings (including civil penalty proceedings)
(see s 798K and Corporations Regulations, Pt 7.2A).
ASIC has made market integrity rules for a number of domestic Australian
licensed markets. 183 ASIC' s market integrity rules operate alongside the

183 These are available at http://www.asic.gov.a u/asic/asic.nsf/byheadline/Market+integrity+rules?

open Document#asx-mirs (viewed 15 October 2012).

[2.780] 125
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markets' operating rules but if there is any inconsistency between the market
integrity rules and operating rules, the market integrity rules prevail. 184
Finally, ASIC has power to issue directions to an entity to suspend dealings in
a financial product or class of financial products (or some other direction in
relation to dealings in the financial product or class of financial products) if ASIC
is of the opinion that such a direction is necessary, or in the public interest, to
protect people dealing in the financial product or class of financial products
(s 798J) .

1 84 Explanatory M emorandum, Corporations Amendment (Financial Market Supervision) Bi/1 2010 ( Cth) (at
2.14).

126 [2.780]