The effect of harmonisation on the regulator and regulation

An address by Alan Cameron AM, Chairman, Australian Securities and Investments Commission at a Committee for the Economic Development of Australia (CEDA) seminar 'CLERP 6 - Government's blueprint for a single regulatory regime', Sydney, 11 February 2000.



As the principal regulator of financial markets, intermediaries and products, ASIC welcomes the release of the legislation implementing the CLERP 6 proposals. Since 1 July 1998 ASIC has been responsible for monitoring and promoting market integrity and consumer protection across the financial system, which has involved the regulation and administration of the market integrity and consumer protection provisions of various statutes. These statutes contain their own powers of enforcement which differ from each other and from the familiar ASIC Law and Corporations Law models, presenting the Commission with seemingly endless challenges. Harmonisation, whilst it will bring many benefits for the consumer and for business, will bring, for the regulator, a reprieve from some of those challenges. It will also, of course, present us with a fresh smorgasbord of issues, some of which I propose to discuss today.

The changing financial environment

The latest development of the Government's Corporate Law Economic Reform Program (CLERP) will be welcomed by a financial sector that is continually evolving. We have already witnessed the changes brought about by the Wallis structure taking effect and by the adoption of CLERPS 1, 2, 3 and 4 (which became law on 13 March 2000). There have been significant structural changes in the market place, and the recent boom in high technology stocks is certainly exciting ASIC's attention. The public, however, seems more confident about investment in the marketplace than ever before.

Participation in the share market

The latest share ownership survey updated by the Australian Stock Exchange Ltd on Tuesday this week indicates that the proportion of the adult population in Australia owning shares has increased from 40.3 percent to 53.7 percent. The factors contributing to the large number of new entrants to the share market since the last ASX survey include the float of AMP and the second float of Telstra, but also increased access to information about the market and the high number of floats on the market (142 new listings in 1999).

It is not surprising that there has also been significant growth over the last two years in the online broking industry. According to the ASX, online trading makes up about 7.5 per cent of all share trades (in number, not value). [1] It has also been suggested that this figure may have recently jumped to more than 10 per cent of all trades due to the surge in retail investor activity (from mid October) as a result of recent floats. [2] These figures compare to 4 per cent internet transactions a year ago. [3]

Interestingly, the average value of trades originating from the internet is $7,852, [4] yet the average value of a trade on the ASX generally is approximately $20,000. [5]

Anecdotal evidence suggests that typically, online broking clients are retail clients, male and in the 25-45 years age bracket. However online brokers are also seeing increases in the number of clients in the over 50 years age group as internet access becomes easier and internet usage increases.

The increase in online trades and the lower than average trade value suggest that retail investor participation is increasing.

Regulatory responses to the changing financial environment

Regulating in this changing environment is challenging.

Educating investors

First, we have through our Office of Consumer Protection Investor Alerts, and our media activity generally, sought to educate investors about the opportunities, and the risks, of investment in this market. In recent times some examples of the consumer alerts released by the Commission have included:

  • an alert expressing concern at increase in the promotion of margin lending products to retail investors;

  • an alert warning investors not to rely only on tips about shares that they hear or read about in the media;

  • several alerts about the spate of overseas promoters cold calling members of the public encouraging investment overseas;

  • an alert warning investors about offers of free shares in companies advertised on the internet; and

  • several alerts in relation to online share trading which expressed the concern that many investors appeared to be using internet technology for share trading without fully understanding how it works.

We have revived our Investor Forums, and our Consumer Advisory Panel has undertaken research into consumer education generally. We have also told the market that we expect them to tailor their takeover messages to the needs of the new, diverse, less experienced shareholders - using plain English and no jargon. And we are attacking the issue of disclosures to the market occurring through drip feeding of some analysts, rather than the use of company announcements through the ASX.

Monitoring the market

Second, we are well aware that the new high-tech stocks are not behaving like their older, well established, industrial siblings. Take the following short report of the recent results of a company in that sector.



X company Ltd said on Friday that its loss for the 1999 year would be wider than expected, due to disappointing sales of its product and increased marketing and customer service costs. The unaudited results showed a before-tax loss of about $13 million but the year-end cash position was better than expected, thanks to the lower product sales, the company said. The results prompted a change in strategy for the young company, which said it would focus less on the one side of its business and more on another. Shares closed up 3 cents at 88 cents.


You might think that when sales go up, cash would go up; or that when losses go up, the share price would go down. Not so in this market, as most famously shows.

ASIC attempts to meet those challenges in various ways. There is concern about disclosure by these companies, and market movements around the time of, but usually preceding by some weeks, some announcement. The ASX's continuous disclosure rule requires listed companies to disclose immediately any information that could reasonably be expected to affect the company's share price. A breach of the ASX's continuous disclosure requirement may amount to a breach of the Corporations Law.

There are limited exceptions to this continuous disclosure rule, which include that a reasonable person would not expect the information to be disclosed and that the information needs to be kept confidential. The ASX issues a price query to companies when it detects unexplained movements in the price or volume of shares traded, seeking an assurance that the market is fully informed of all relevant and necessary information. In many cases, the company's response is a short reply to the effect that the company is not aware of any reason for the price and volume movement.

The ASX and ASIC believe a pattern is emerging where the unexplained price and volume movements continue for a fortnight or so, only to be brought to an end by the release of information to the market by the company. ASIC has responded with the recently launched, continuous disclosure surveillance program. The national surveillance program launched this month is a collaborative project between the ASX and ASIC as a result of both organisations looking for more effective ways to minimise unexplained price and volume movements and ensure compliance with continuous disclosure requirements.

Initially, the program will involve ASIC sending out an audit letter asking the directors of the company to explain in detail the basis for the company's response to the ASX. The audit letter will also request information from the company directors about the extent of trading by people connected with the company during the period of the unexplained price and volume movement.

If ASIC still has concerns after receiving the response to the audit letter, then it will carry out a surveillance of the company. The results of ASIC's audit letters and surveillance action will be released to the ASX to assist it to determine whether the company should be suspended from trading pending release of further information.

If ASIC's surveillance reveals that the company has breached its continuous disclosure obligations or misled the market, the ASX, or ASIC, then enforcement action is likely. There may be cases in which a legitimate difference of opinion between ASIC and a company on the application of the exceptions to the continuous disclosure rule would be referred to the Courts.

Because the surveillance program will target companies in market sectors with high trading volatility, it will inevitably focus on small mining and high technology companies. With many of the companies which currently fit this profile having their home exchanges in Perth and Brisbane, the surveillance program will be centred in those two regions, with smaller scale programs in other regions. ASIC is mainly concerned to prevent trading on the basis of unequal information. Reducing the length of time over which unexplained price and volume movement occurs will reduce the likelihood of trading on the basis of unequal information.

ASIC comments on the CLERP 6 consultation paper

When the CLERP consultation paper was released on March 3 1999, ASIC contributed to the debate, drawing in particular on its knowledge, obtained through the role we play in IOSCo, [6] of established and emerging standards of international regulatory best practice. ASIC commented on several aspects but particularly about the growing pressure on the retail investor. ASIC drew attention to the proposals in relation to wholesale and retail investors that genuinely retail investors might 'opt' to be treated as wholesale investors without the requisite sophistication to fully appreciate the consequences of the rights they forego and the nature of the product in which they might invest.

ASIC also looked closely at the apparent lack of integration of industry codes with the general system of financial services regulation and ASIC's ability to exempt and modify, particularly in relation to licensing and disclosure.

Those comments in relation to the CLERP 6 consultation paper are made more relevant in an environment where more Australians are participating in the share market and online broking is increasing in popularity.

'Opting' - wholesale v retail

One of the strengths of the regulation of the Australian financial system has been the maintenance of a clear distinction between wholesale and retail markets. ASIC was concerned that this proposal may ultimately cause that distinction to become blurred, to the disadvantage of wholesale participants, retail investors and the market itself.

ASIC supports empowerment of consumers. Part of ASIC's statutory brief is to promote the confident and informed participation of investors and consumers in the financial system. [7] But ASIC is also keenly aware of the need to ensure that provisions designed to lead to the empowerment of investors and consumers should not expose them to unacceptable risks of fraud or deceptive conduct.

The CLERP 6 proposal

One proposal in the CLERP 6 consultation paper was the introduction of a capacity for retail consumers to 'opt-up'. That is, retail consumers were to be allowed to waive their various rights in order to enable them to have access to wholesale markets and products. The understandable and commendable motivation for these changes was the desire to empower consumers who possess a sufficient degree of sophistication to participate in wholesale markets. The opting-up proposals stem, at least in part, from Recommendation No 20 in the FSI Report which advocated removal of prohibitions on retail participation in OTC derivatives markets.

Under the proposals in the consultation paper the party opting-up would forego a broad range of rights and protections, including their right to:

  • financial service product disclosure;

  • receipt of a Financial Services Guide;

  • the benefit of a suitability analysis by their adviser;

  • the benefit of mechanisms designed to deter pressure selling; and

  • the benefit of compensation arrangements for fraud or negligence by participants in a

  • financial product market or a clearing and settlement facility.

In ASIC's view, it is appropriate to ask whether the benefits of this proposal outweigh some significant risks which it appears to carry, both for consumers and for wholesale markets.

Risks for consumers

For consumers the main risks appear to ASIC to be these:

  1. A retail investor may lack the assets, qualifications, experience, etc. which would allow them, automatically and objectively, to be classed as a sophisticate.

  2. Retail investors themselves, by definition, may not be well placed to make the judgment. A very large number of Australians now participate directly in the financial markets. Many of those investors will regard themselves as successful investors, and, thus far, that characterisation will largely be correct - many first time investors in recent years will not, at least until very recently with GIO and perhaps Telstra mark2. Whether a successful investor is also a 'sophisticated investor' is a different and more difficult question. It would be natural if some persons were tempted to overestimate their own capacity to participate in an informed and confident way in a wholesale market.

  3. Advisers, for their part, may also not be ideally positioned to make a disinterested and independent judgment of their client's sophistication. They may have a range of incentives to conclude that their clients are fit to opt-up.

  4. Retail investors are often fascinated by the new and the exotic. Those seeking to peddle dubious investments to retail investors - promising disproportionately high returns at disproportionately low risk - sometimes include, as part of their sales pitch, the statement that the particular product is one which is ordinarily only accessed by the 'big players', but which has now become available for small investors. (Such pitches have a history of successfully inducing even those who would not normally be thought gullible to part with large sums of money.) Opting-up mechanisms might appear attractive to sellers wishing to sell on that basis.

  5. Even where there is no fraudulent intent, advisers and sellers may have sizeable incentives to 'standardise' the waiver of their clients' retail rights. A financial service provider who does not have to take account of regulatory measures designed for retail investors will avoid certain costs. The more marginal the operation, the higher will be the incentive to avoid those costs.

Risks for the market

These various risks for consumers create a concomitant and significant risk for wholesale markets. Traditionally, regulation of wholesale markets has been 'light-handed' because of the general confidence that its participants are well-informed and well able to absorb losses. Under an opting-up regime that confidence may dissipate, and closer regulatory oversight of wholesale markets may become necessary. In the event of general losses by retail investors on such a market, the Government and the regulator would be likely to come under pressure to impose tighter controls upon it. Such controls may have adverse consequences for the efficiency of the wholesale market and for the operations of the wholesale participants on those markets. It would be unfortunate if a side-effect of empowering consumers to participate in such a market was the imposition of constraints on the market.

These risks for consumers and wholesale markets cause ASIC to question whether there is the need for a general opting-up mechanism. ASIC agrees that at the margin of the definition of 'retail investor' there will be a small group of investors who have some particular case justifying their participation in one or more wholesale markets. But ASIC does not agree with the view expressed in the paper that:

'…any barriers to retail consumers accessing wholesale markets seem unwarranted.' [8]

In view of the risks inherent in a general capacity for opting-up, ASIC proposes for consideration that the legislation, in its final form, should use purely objective criteria to justify participation in a wholesale market. By expanding the objective criteria delineating a wholesale investor, difficult and inherently problematic subjective judgments may be able to be avoided.

Role of industry codes

ASIC proposed that the opportunity should be taken, in accordance with emerging international best practice, to integrate the use of industry codes with the general system of financial services regulation. This would require that there be capacity for a code to be mandatory for industry participants. There are a number of reasons why ASIC considers that it would be preferable if the legislation did make such provision:

  1. A mandatory code is likely, in many cases, to be the strong preference of industry participants. It seems that under these proposals a mandatory code would not be possible even if an overwhelming majority, or even the totality, of participants in the industry desired it. In such cases, it seems, what might have been contained in a mandatory code will have to be legislated instead, with the various delays and inflexibilities which that entails. Mandatory codes are also able to deal with matters of fine detail in a way which is not usually appropriate in legislation or regulations.

  2. As the paper itself indicates, there are existing codes of conduct which are mandatory or effectively mandatory. [9] To remove the capacity for mandatory codes may be seen as lowering existing standards. Although that is clearly not the Government's intention, there may be some industry participants who will wish to interpret a move away from an existing mandatory code as an invitation to lower their own standards.

  3. If participation in a code is optional, the risk may be run that a proportion of industry participants may choose not to participate at all in the code, or may choose to withdraw from it, perhaps because of some competitive advantage which that entails. Query whether a code which had only partial acceptance in that way could properly be characterised as an 'industry code'. Regulation of the industry would not be harmonised (as FSI principles would suggest is preferable) but would become fragmented.

  4. Codes, if they are to be an effective regulatory tool, need to be backed by some enforcement mechanism. Enforcement of non-mandatory provisions is, of course, always problematical. Those against whom enforcement is most likely to be necessary may also tend to be those who are most willing to abandon participation in the code when it suits their convenience. Such a party could, it seems, simply decline to participate further and yet continue in the industry undeterred, and unregulated by the relevant code.

  5. It is for reasons such as these that industry participants may favour the mandating of code participation. A mandated code can be properly representative of an industry as a whole, and can serve the usual purpose of regularising the industry's interface with consumers. If the code is merely optional then some industry participants can 'free-ride' on the implementation of good practice without themselves incurring the costs associated with that implementation.

  6. A mandatory code can give an industry association the kind of leverage which it needs to monitor its industry effectively and to deter bad practice that damages the industry as a whole. Without the capacity for a mandated code, industry associations may lose some of their ability to be influential. ASIC considers that in mature industries a form of self-regulation by industry associations should be encouraged.

  7. In comparable overseas jurisdictions allowance is made for a full range of types of codes, including mandatory codes. [10]

  8. ASIC envisages codes primarily as a means of 'fleshing out' existing legislative obligations rather than as a means of creating new obligations. A code (mandatory or non-mandatory) can provide industry participants with a 'template' for conduct which the regulator and the industry will regard as adequate and reasonable compliance with the law. In that way the code can remove uncertainties about what will be adequate compliance, and so can facilitate business. Compliance with the code can become evidence for compliance with the law.

  9. A mandatory code can leave room for flexibility to deal with special cases. For example, it might be a term of a mandatory industry code that ASIC could grant exemptions from its requirements in exceptional cases.

  10. One objection to mandatory codes may be that they can be seen as inconsistent with principles of Parliamentary sovereignty. If that is an objection, that objection could generally only be made where such a code sought to impose completely new obligations. In those sorts of cases any such objection may be able to be overcome by requiring a mandatory code to be a disallowable instrument. The mandatory code would thereby become subject to the Parliamentary scrutiny allowed for by the

    Acts Interpretation Act 1901.

  11. Not all codes need to be mandatory. But where the industry and the regulator have considered the matter in full, consulted in the appropriate fashion, and otherwise engaged in the kind of impact analysis which forms part of regulatory best practice, it is difficult to see what strong objection could remain to the possibility of a mandatory code.

Exemption and modification powers

The CLERP 6 proposals 'bundle' a very wide range of financial services sector activities into a unified regime, so that regulation can be harmonised for the benefit of business and consumers. However, a feature of such 'bundling' will inevitably be that there will be various unintended mismatches between a general legislative provision or regulation and a particular financial service or activity to which that general provision or regulation applies. Such mismatches occur frequently at the moment. They will certainly also occur under the CLERP 6 proposals, particularly if, as expected, the legislation is drafted in purposive rather than closely prescriptive terms. In that light ASIC suggests it will be in the interests of business and consumers if ASIC is generally provided with comprehensive powers of exemption and modification, so that the general policy of the reforms can be maintained while minimising unintended or inappropriate side-effects. The only available alternative would seem to be to embed every obligation applying across all activities and sectors in detailed legislation. That would not seem consistent with FSI goals such as the desire for functional regulation and flexible administration to accommodate financial sector innovation and change.


I should say before concluding that ASIC's role in the CLERP 6 process has been, and is, quite limited. The CLERP 6 proposals are not proposals of ASIC; they are the Government's proposals. ASIC will, ultimately, be the administrator of any legislative provisions that result from this process and has the closest, the widest and most detailed knowledge of how the Law presently operates - admittedly from only one perspective. As such, ASIC has an obligation to contribute to the law reform debate. But ASIC is merely one of many participants in that debate. It is for the Government and the community to decide what the regulatory framework will be, not ASIC. CLERP 6 is very important; it is the substance of Wallis; to date, we have only had the form. In this context, it would have been unhelpful at best, irresponsible at worst, if we had not made our contribution, and we have done so publicly; you can always visit our home page to see our views in full.

I understand we will all shortly see the Government's legislative proposals. The final form of the legislation will determine, ultimately, whether the expected benefits of Wallis will flow, and whether the proposals will be amenable to efficient administration. ASIC looks forward to commenting in detail on the draft legislative provisions in due course.


[1] Quote of Richard Humphrey from G Holloway, 'All the way to Wall St by mouse', The Australian, 21 October 1999.

[2] L Johnstone, 'Online brokers claim 10pc', Sydney Morning Herald, 24 November 1999.

[3] J Wasiliev, 'Bank majors set for online trading', Australian Financial Review, 20 September 1999.

[4] Address by Richard Humphry from ASX at Online Broking: Opportunity or Threat Conference, 20 September 1999.

[5] R Bowerman, 'Trading Their Way to Oblivion', Personal Investor, September 1999.

[6] International Organisation of Securities Commissions.

[7] Paragraph 1(2)(b) of the ASIC Act.

[8] Page 16.

[9] Among others the paper mentions the 'Code of Practice for Advising, Selling and Complaints Handling in the Life Insurance Industry' and the 'General Insurance Code of Practice', each of which is mandated for relevant industry participants.

[10] See, for example, p.13 of the UK Financial Services Authority paper 'Meeting our Responsibilities' (August 1998).

Last updated: 11/02/2000 12:00