Bills Digest no. 49 2011–12
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This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Law and Bills Digest Section
16 September 2011
Date introduced: 18 August 2011
House: House of Representatives
Commencement: Sections 1 to 3 of the Act commence on the day the Act receives the Royal Assent. Schedule 1 commences on the day the Act receives the Royal Assent or
1 January 2012, whichever is the later.
Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/bills/. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.
The Bill amends the Corporations (Fees) Act 2001 (the Fees Act) to provide the legislative basis for regulations which will allow the Australian Securities and Investments Commission (ASIC) to charge the participants in licensed markets such as stockbrokers and derivatives traders, in addition to market operators, fees for the performance of its functions under Part 7.2A of the Corporations Act 2001 (the Corporations Act).
In August 2009, the Government announced its decision to transfer the responsibility for the supervision of Australia's domestic licensed financial markets from market operators to ASIC. This was achieved in August 2010 through amendments to the Corporations Act by the Corporations Amendment (Financial Market Supervision) Act 2010 (the Supervision Act).
The Supervision Act provides for the making by ASIC, with the Minister’s consent, of market integrity rules dealing with:
- activities or conduct of licensed markets
- activities or conduct of persons in relation to licensed markets, and
- activities or conduct of persons in relation to financial products traded on licensed markets.
Previously, the supervision of financial markets in Australia had been co-regulatory in nature, with financial market operators, such as the ASX and IMB Ltd, being responsible for supervising market participants and listed entities, while ASIC was responsible for ensuring that market operators met their statutory obligations.
The Corporations (Fees) Amendment Act 2010 (the Fees Amendment Act) supported the transfer of this supervisory role to ASIC by enabling amendments to be made to the Corporations (Fees) Regulations 2001 to allow ASIC to impose a fee on financial market operators in relation to its new market supervisory functions. The Corporations (Fees) Amendment Regulations 2010 (No. 3) (the Fees Regulations) came into effect on 1 August 2010.
The collection of fees is consistent with the recommendation made by the Wallis inquiry in 1997 that:
The regulatory agencies should collect from the financial entities which they regulate enough revenue to fund themselves, but not more. As far as practicable, the regulatory agencies should charge each financial entity for direct services provided, and levy sectors of industry to meet the general costs of their regulation.
In its report, the Wallis inquiry suggested that:
The [costing] arrangements should involve a mix of direct service fees and annual levies and should distinguish, where possible:
– services provided at the instigation of individual entities, such as authorisations or registrations, for which per-item cost recovery fees are appropriate; and
– regulatory activities undertaken at the discretion of the agency and for the general benefit of customers, such as inspections, enforcement and policy development, for which annual industry wide levies are most appropriate.
Within the bounds of practicality, levies should be related to broad categories of cost, so that those activities which have a low regulatory cost are not charged effectively to cross-subsidise those which have a high regulatory cost.
The Government response to the Wallis inquiry report involved wide ranging reforms to Australia’s financial system including, for example, the establishment of the Australian Prudential Regulatory Authority as an off budget and self-funded through fees or levies set to cover the costs of its operations.
On 31 May 2010, the Government announced its support for competition among markets for trading in listed shares. Competition among financial markets is consistent with the approach recommended in 2009 in a report to Government by the Australian Financial Forum.
This was followed by the release by ASIC on 1 August 2010 of market integrity rules for the ASX, and other market operators. Market integrity rules for the Chi-X market, and for competition in exchange markets, were released by ASIC on 29 April 2011.
On 4 May 2011, the Government granted a licence to Chi‐X Australia Pty Ltd (Chi‐X), as the first market operator to offer an alternative venue for trading ASX‐listed shares. Chi‐X is expected to commence operations from 31 October 2011.
Prior to the commencement of market competition, interim cost recovery arrangements were instituted by the Government for the period 1 August 2010 to 30 June 2011 with respect to the additional costs associated with ASIC’s new supervisory functions.
During this period, costs were recovered in part by fixed quarterly fees imposed under the Fees Regulations on each domestic licensed market, and from excess moneys in the National Guarantee Fund and the Australian Securities Exchange Fidelity Fund.
As market competition had not commenced by 1 July 2011, these interim cost recovery arrangements were extended until 31 December 2011.
This interim arrangement was considered by the Government as:
... suitable in an environment where the markets operated by the ASX Group were the primary financial markets subject to ASIC’s supervision.
However, the Government’s intention was to review and update the interim arrangement in 2011 ‘to reflect the move to a competitive multi‐operator environment’, at which time:
...it [would] be more appropriate for costs to be recovered from both operators and participants, in order to more closely align ASIC's costs to the entities that have created the need for the costs to be incurred.
In August 2011, the Government released a consultation paper on fee recovery canvassing the proposed allocation of cost recovery fees between market operators and market participants. Comments have been sought in response to the consultation paper by 23 September 2011.
The consultation paper foreshadows a review of the new cost recovery regime within 18 months of implementation. The Treasury has noted in this regard that:
Where adjustments are required, these will be incorporated in the new cost recovery arrangements that will commence from 1 July 2013.
In November 2009, the Government indicated that ASIC’s costs for undertaking its new regulatory functions would be fully recovered from industry.
In its 2011-12 Budget measures, the Government committed to providing funding to develop new market integrity rules and to provide the necessary regulatory framework to support competition between markets for trading in listed shares in Australia. Funding was approved on condition that it would-be fully recovered on behalf of the Government from industry fees.
The Bill was referred on 31 August 2011 by the House of Representatives Selection Committee to the House Standing Committee on Economics for inquiry and report. Details of the inquiry are at http://www.aph.gov.au/house/committee/economics/Corporation%20(fees)/index.htm.
The Senate Standing Committee on the Scrutiny of Bills has indicated that it has no comments on the Bill.
On 25 August 2011, the Senate Selection of Bills Committee deferred consideration of the referral of the Bill to another Senate Committee until its next meeting.
The Australian Financial Markets Association (AFMA) has indicated that:
AFMA members accept that cost recovery is a government policy and are willing to pay their fair share of the costs of ASIC market supervision, commensurate with the need to maintain a fair and efficient market.
However, AFMA has a number of concerns with the policy underlying the Bill. Its principal concern relates to:
...the overall ad hoc nature of the cost recovery process across the financial system and the cumulative effect that a multiplicity of new regulation is having on the efficiency of Australia’s financial markets. New government regulation and charges that increase friction in conducting financial transactions affect how business views the competitive environment and the relative attractiveness of doing business in Australia compared to other jurisdictions. We believe that the government process for establishing and reviewing recoverable costs should fit within a coordinated economic policy framework that takes into account the economy-wide impact of multiple service charges. Cost recovery measures should be subject to effective governance and accountability arrangements to ensure that administrative costs are reasonable and contained over the long term.
Relevant in this respect is the formal cost recovery policy adopted by the Government in 2002, and encapsulated in the Australian Government Cost Recovery Guidelines.
AFMA also notes that the Bill enables the collection of fees from market participants in addition to market operators but that it:
...does not provide for the type of ongoing accountability and stakeholder engagement that we believe to be a sound public policy governance initiative.
AFMA expresses the view that:
...policy consideration should be given to developing a statutory framework that places ongoing consultation on a legislated basis for cost recovery measures across corporate and financial sector regulators.
The Stockbrokers Association of Australia (SA) suggests that:
The Government should allocate sufficient funding to ASIC to ensure the conduct of one of its core functions....
SA considers that:
Fines raised through ASIC enforcement should be applied to the cost of ASIC’s supervisory functions, thereby reducing the amount that needs to be covered.
If cost recovery is to be implemented, than a charge imposed directly on trades and messages would be fairer in respect of any shore of the cost recovery attributable to market participants than imposing the charge on market participants themselves.
SA notes in this regard that this is the regime in operation in Singapore.
In relation to the fairness of the regime, SA has remarked that:
This is a new cost impost on stockbrokers, which has not been levied before. The proportion of the fees to be borne by brokers (84%) and the total dollar amount are, in our submission, excessive and inequitable.
In very difficult market conditions, the initial cost recovery round would entail an average fee based on a figure of 83 market participants in the order of $310 000.
SA also considers that it would not be easy to pass the cost on to clients.
Treasury has presented five arguments in support of extending the fee regime to participants in financial markets as well as to the operators of those markets:
• Fairness: Imposing costs on participants and, indirectly, on investors, alongside market operators, is the fairest way to fund the increased supervision burden that comes with a multi‐operator trading environment.
• Benefits outweigh costs: Introducing competition in trading is likely to lead to significant overall cost reductions for participants and investors, as well as greater choice of services. The overall benefits of introducing competition are expected to significantly outweigh the costs imposed under this cost recovery regime.
• Expressed preference: Participants have expressed a preference for direct costs, rather than having costs passed through via operators. Direct charging increases the transparency of the fees arrangement.
• Fees will be passed on regardless: While imposing fees directly on participants will result in a substantial change in the incidence of the fees, in effect these fees can be expected to be passed on by operators if participants are not directly charged.
• Lower barriers to entry: This approach lowers barriers to entry for new market operators by reducing the charges that they are directly subject to, and by not increasing their participant’s contribution to ASIC’s market supervision costs according to how many markets they are connected to.
The Explanatory Memorandum states that the proposed amendments will not involve any government expenditure.
From 1 January 2012 to 13 June 2015, the total cost of ASIC’s market supervision functions and the implementation of competition has been estimated at around $62.6 million.
The proposed approach for calculating the proportional fees applying to market operators and market participants trading in ASX-listed securities is outlined in the consultation paper.
Under the proposed scheme, it is proposed that market costs be allocated between market operators and participants by reference to categories of ASIC’s market supervision functions. With respect to the allocation of costs to each market operator and participant, it is proposed that each:
...be charged a proportional quarterly fee based on each entity’s share of the trade count and message count in ASX listed securities during each quarter. Such fees are o be based on the trades and messages received by ASIC’s IMSS and are to be collected quarterly in arrears.
The Government has stated that the amendment proposed in the Bill:
...will not in itself increase the total fees being levied for the purposed of ASIC’s supervision of financial markets. Rather, it allows fees to be levied against market participants and market operators—rather than only market operators.
Item 3 inserts proposed paragraph 4(1)(n) in the definition of chargeable matter in the Fees Act to cover ASIC’s performance of its functions in relation to a participant in a licensed market under Part 7.2A of the Corporations Act.
Item 7 inserts proposed paragraph 7(1)(n) in the fees Act to extend the liability to pay a fee for a chargeable matter to ASIC’s performance of its functions with respect to a market participant in a licensed market, and to provide that the time liability or liabilities incurred for the payment of the fee will be determined in accordance with the regulations.
The Bill is consistent with the recommendation of the Wallis inquiry that regulatory agencies should collect enough revenue from the financial entities which they regulate to fund themselves.
Although a decision is yet to be made by the Government on the fees model that will be adopted, the release of a consultation paper on this issue will provide stakeholders with the opportunity to put their views to Government.
The proposed review of the chosen fees model after 18 months of operation would enable any necessary adjustments to be made.
Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2795
. Explanatory Memorandum, Corporations (Fees) Amendment Bill 2011, p. 3. Part 7.2A of the Corporations Act provides for the regulation of financial markets.
. Under section 761A of the Corporations Act, a licensed market is defined as ‘a financial market the operation of which is authorised by an Australian market licence’. There is a further definition of licensed market in section 767A of the Corporations Act and Part 7.2 relates to ‘Licensing of Financial Markets’.
. Now section 798G of the Corporations Act.
. Australian Government, Proposed financial market supervision cost recovery model, consultation paper, Commonwealth of Australia, August 2011, viewed 12 September 2011, http://www.treasury.gov.au/documents/2138/PDF/Cost_recovery_Consultation_Paper.pdf , See also ASIC, Cost Recovery Impact Statement 1 July 2010, and Cost Recovery Impact Statement 1 July 2011 to 31 December 2011, p. 3, viewed 12 September 2011, http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Market%20supervision%20and%20surveillance#whats-new
. Australian Government, consultation paper, op. cit., p. 4. For further information about the National Guarantee Fund and the Australian Securities Exchange Fidelity Fund see: Australian Securities Exchange, National Guarantee Fund, viewed 12 September 2011, http://www.asx.com.au/products/ngf.htm
. Australian Government, consultation paper, op. cit.
. Australian Government, consultation paper, op. cit. See also ASIC, op. cit. Further details of the consultation paper are located in the ‘Financial Implications’ section of this Bills Digest.
. Department of the Treasury, Submission to House of Representatives Committee, op. cit. p. 4.
. Department of the Treasury, Submission to House of Representatives Committee, 9 September 2011, op. cit., pp. 3 and 4.
. Explanatory Memorandum, op. cit., p. 3.
. Australian Government, consultation paper, op. cit., p. 17.
. Ibid., pp. 24 to 28.
. Explanatory Memorandum, op. cit., p. 9.
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