Chapter 1 Analysis of the Bill
The Government introduced the Bill into the House of Representatives on
18 August 2011. On 24 August 2011 the Selection Committee referred the
Corporations (Fees) Amendment Bill 2011 to the committee for inquiry and
The Corporations (Fees) Amendment Bill 2011 is a very simple piece of
legislation that allows ASIC to charge market participants (such as
stockbrokers) fees to support its supervision of these markets.
The real issues in the inquiry are rather the fees that ASIC will then
charge under regulations. This is currently the subject of Treasury
consultation. Treasury has issued a comprehensive consultation paper, which
will serve as an appropriate basis for designing the fee structure. Industry
raised legitimate concerns about proposals in the consultation paper. The
committee anticipates that Treasury will respond to these concerns, either
through further explaining its position or by making appropriate changes.
The committee supports the Bill and its detailed reasons are outlined
The Bill amends the Corporations (Fees) Act 2001. The Act imposes
fees for administrative and regulatory tasks conducted by the Australian
Securities and Investments Commission (ASIC) and other matters under the Corporations
The amendments allow ASIC to charge market participants (such as
stockbrokers and derivatives traders) for its market supervision functions. Supervising
a financial market involves tasks such as:
n monitoring the
conduct of participants;
n monitoring real time
trading for signs of breaches of the Corporations Act 2001, such as
n handling commercial
conflicts of interest; and
n enforcing compliance
with the market’s operating rules, which of itself includes:
-> what to
do if there is an error in a trading message;
record keeping; and
Under the Corporations (Fees) Act 2001 currently, ASIC can only
charge market operators for this purpose. The main market operator is the
Australian Securities Exchange (ASX), although Chi-X Australia is expected to
commence trading in competition with the ASX in relation to cash equities at
the end of 2011.
In the second reading speech for the Bill, the Assistant Treasurer and
Minister for Financial Services and Superannuation gave two reasons why the
Government is seeking to levy fees on market participants. Firstly, a
‘significant portion’ of ASIC’s market supervision involves working with
participants. Secondly, charging market participants is also consistent with
the Australian Government Cost Recovery Guidelines.
The Bill does not set out the fees that ASIC would charge market
participants. These are expected to be included in the Corporations (Fees)
Regulations 2001, which already include a large number of fee amounts. On
26 August 2011, Treasury released its consultation paper, Proposed financial
market supervision cost recovery model. The closing date for submissions is
23 September 2011.
The consultation paper contains considerable detail on how the
Government envisages that cost recovery would work. For example:
n ASIC’s regulatory
costs on an annual basis commence at $21.8 million for the second half of
2011-12 and decline to $16.2 million in 2014-15, reflecting ASIC’s higher IT
and regulatory framework development costs at the start of the project;
n in the cash equities
market, 16 per cent will be recovered from operators and 84 per cent from
n among each group,
information technology (IT) costs to be allocated by message count and non-IT
costs to be allocated by trade count;
n fees are calculated
at the end of a quarter based on activity during that quarter, to ensure
amounts are not over or under collected;
n the ASX 24 futures
market will pay $2.3 million from January 2012 to June 2013 while further
consultation is undertaken for this market; and
n the Government
intends to review the system after the first 18 months.
The idea of charging financial firms for the costs of regulating them has
been on the ‘policy radar’ for some time. It was raised in the inquiry into the
financial system in 1997 (the Wallis report). The report stated:
Recommendation 104: Regulatory agencies’ charges should
reflect their costs.
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.
ASIC currently collects its operating costs mostly as fees on industry,
which it returns to consolidated revenue. It then receives funding under the
normal appropriations process. This is demonstrated in the Treasury Portfolio
Budget Statements. The 2011 Budget estimates that ASIC will receive $728.7
million in cash from fees under the Corporations Act 2001 and charges
and unclaimed moneys under the Banking Act 1959 and the Life
Insurance Act 1995. A similar sum will be returned to the Official Public
Account. ASIC’s annual expenses for 2011-12 are estimated to be $391.4 million.
Scope and conduct of the inquiry
The objective of the inquiry is to scrutinise the technical adequacy of
the Bill and its ability to deliver the policy intent.
Details of the inquiry were placed on the committee’s website. A media
release announcing the inquiry and seeking submissions was issued on Tuesday 31
Three submissions were received which are listed at Appendix A.
A public hearing was held in Canberra on Monday 12 September 2011. A
list of the witnesses who appeared at the hearing is available at
Appendix B. The submissions and transcript of evidence were placed on the
committee’s website at
Government policy to make Australia a financial centre
The amendments have been presented in the general context of the
Government’s reforms to increase competition in financial markets for executing
trades. Until 2010, the ASX had the dual roles of being the sole service
provider in the Australian equity market as well as supervising the market. By
international standards, this is unusual.
In September 2008, the Government established the Australian Financial
Centre Forum to progress the Government's program to position Australia as a
leading financial services centre in the region. The Forum reported in November
The Forum supported the Government’s announcement in August 2009 to
change regulatory arrangements so that ASIC would supervise the equity market.
This would then facilitate the entry of other stock exchanges. The Forum
The Forum’s general position with respect to exchange traded
products — as with all other aspects of the financial markets — is that
openness to new entrants is an essential condition for competition, efficiency
and innovation. Evidence from other countries where traditional exchanges are
now competing with new trading platforms suggests that competition has resulted
in innovation and generally lower transaction costs.
The Forum thus strongly supports the Government’s
announcement and the introduction of competition between market operators.
ASIC took over responsibility for market supervision from the ASX on
1 August 2010. When asked whether this transfer was working well, the
Executive General Manager of Regulatory and Public Policy at the ASX responded,
‘I believe it is’.
Introducing competition between exchanges introduces extra complexity.
In particular, activity on one exchange, even if it has a large share of the
market, will not give a regulator sufficient information with which to judge
compliance standards. Treasury elaborated on this in evidence:
Currently [ASIC] only supervises one market. It is much more
complex to marry together two markets to have whole-of-market oversight. I can market-abuse on ASX equity futures on a Chi-X
instrument or vice versa. I can use Chi-X to market-abuse
on an ASX instrument. Only ASIC will have the whole-of-market perspective to
spot those for the flags to go off. That all costs money, and volumes are going
through the roof because IT is getting cheaper for the participants and the
high-frequency traders are coming in.
The committee supports the Government’s goal in increasing Australia’s
financial profile and acknowledges that the transfer of market supervision to
ASIC is a condition for this.
This policy development is soon to bear fruit. Treasury stated that the
Government had granted licence to Chi-X Australia to provide operator services.
It is expected to commence operating in the fourth quarter this year, subject
to its preparedness and it satisfying final conditions for ASIC.
Chi-X Australia stated that it is ultimately owned by Nomura International, a
Japanese listed financial institution. Chi-X also operates in
Canada and Europe.
The effects of competition
Increased competition in a market theoretically has positive results
through lower prices and improved products and services. For example, the
Australian Shareholders Association gave in-principle support to competition at
the exchange level.
However, the benefits of competition may not always eventuate in
practice or may take time to eventuate. RBS Morgans made this claim in evidence
by arguing that Chi-X Australia’s market scope will be too narrow to make a
difference to those with the least market power:
Yes, the larger companies will benefit from that—the ASX 100
where the liquidity is. As I said in my opening statement, over 70 per cent of
the companies listed—who are all domestic, who employ lots of Australians—all
only have retail investors investing in them. They have the wide bid-ask
spreads. They are not the ones that are going to benefit from the competition
that is being introduced. They will continue to have the wide bid-ask spreads
and all the rest of it. It is those companies that you would like competition
to improve the benefit of it and you are not going to see that.
While this may certainly be true in the short run, the committee is of
the view that a much wider range of outcomes are possible in the long run as
Chi-X becomes more established and with the potential for other operators enter
the market. The Australian Financial Markets Association was also of this
The debate and the discussions that we have heard from Chi-X
have been that the market is starting at the bigger of the ASX 200 stocks and
initial stocks, which are the most liquid ones at the moment. That is certainly
true. The idea is that over time, as the system becomes more embedded, as there
is more infrastructure developed and as other entrants come in, that will work through
its way. There is an overall hope that by having more market operators there
you might actually find some more liquidity in those less liquid stocks further
down the smaller stocks. That is a part of the desire and the long-term
objectives of competition.
Therefore, the committee concludes that the right approach is to
facilitate market entry and to then see what develops over time. It is
difficult to predict the precise results of increased competition for firms,
but increased competition is almost always for consumers’ benefit.
The committee also notes that the mere threat of entry of a competitor
has caused the ASX to improve its performance, both in terms of price and
service. In its latest annual report, the ASX states:
ASX has been preparing for the reality of domestic
competition and a more complex environment for market services for several
years. According to the Australian Securities and Investments Commission’s
(ASIC) timetable, new entrants could be operating by November this year. We’ll be
ASX has, for example, upgraded to new trading platforms,
reduced headline transaction fees for equity market customers and introduced
new functionality that has reduced market impact costs, enlarged trading
capacity and dramatically quickened execution speed. In readiness for multiple
market operators, ASX has also developed a trade acceptance service that will
clear and settle trades executed on other trading venues in an identical manner
to trades executed on ASX’s own equity market.
ASIC noted in evidence that the ASX has also made price reductions to
the net effect of $23 million in 2010-11 and $21 million in this current year.
Treasury argued that, in order to consolidate these benefits, it is
necessary to continue with the legislation. The committee agrees
with this comment. The threat of competition has already driven the ASX to
reduce its prices and improve its services. These benefits are much more likely
to be retained, and further benefits are likely, by proceeding with the Bill.
Quantum of regulation
The Bill itself is straightforward and applies a charge for a service
that facilitates a commendable policy goal. From this perspective, the Bill is minor.
However, the Australian Financial Markets Association suggested that the Bill is
part of a continuum of regulatory changes in the finance industry that are
developed in isolation without consideration of the total regulatory impact:
AFMA's principle concern with the bill is in the overall, ad
hoc nature of the cost recovery process across the financial system and the
cumulative effect that the 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, which are growing in number.
This is not a new problem. In 2006, the Taskforce on Reducing Regulatory
Burdens on Business reported on the costs and drivers of regulation. It found
that a ‘silo’ approach by agencies meant that businesses could be subject to a
large number of regulations that were rarely considered in total by policy
... each regulatory solution tends to be devised within individual
government agencies. Within such policy ‘silos’, the cumulative impact of
regulation across government is poorly understood and rarely taken into
The scope of regulation of the finance industry is outside the scope of
the inquiry. However, the committee notes that business stated a preference for
a more coordinated approach to regulation.
Should ASIC levy a fee on market participants?
The Stockbrokers Association of Australia argued that the benefits of a
vibrant stock market benefitted the whole country, rather than just market
participants. It therefore concluded that ASIC’s market supervision activities
should be funded through general revenue.
The committee accepts that the community receives a benefit from
well-functioning markets, either as investors or as participants in the general
economy. But as the ASX noted in evidence, it is clear that stockbrokers
receive a greater benefit by being a select group of just under 100 firms that
directly participate in these markets. The committee concludes
that it is appropriate to levy stockbrokers a market supervision fee on the
basis that they are receiving a substantial benefit from it.
Stockbrokers also raised concern that they would not be able to pass on
the costs due to the current tight market. Any costs that they absorb would
come directly off their bottom line. The Australian Financial Markets
Association gave an overview of profitability in the industry:
It is a time when there is, as we have heard, intense
competition—profitability is certainly likely to be down this year, and we are
hearing that brokers are doing it tough ... there is considerable cost pressure
on houses, and it is going to be very difficult to pass these costs through, so
one can see that there is going to be another need for the firms to bear these
costs in the near term. They will find it very hard to pass these through to
the clients in the present environment.
The committee accepts that some parts of the finance industry are very
competitive and that stockbrokers may not initially pass on the ASIC
supervision fees. However, it is possible that firms may pass on the fees when
the market is growing. The Australian Shareholders Association stated that ‘Any
increased costs would always be passed on’. It also said that the
industry is profitable over the long term:
Certainly when competition becomes tighter it is harder for
some people to compete and therefore there is more pressure not to pass on the
costs. I worked at Macquarie Bank for quite a while and spent quite a bit of
time with the brokers downstairs and I never really felt much concern that
anybody there was struggling because costs were not being passed on.
It appears to the committee that, while the industry may well have to
absorb the fees in the short term, it could pass them on in the medium term.
The final and perhaps the most important reason for charging market
participants relates to barriers to entry for market operators. If a market
participant is operating in one exchange it can expect that some of the fees
the operator pays to ASIC will be passed on to it. If the participant decides
to transfer some of its business to a second exchange, it faces the risk of
paying higher total fees because this second exchange will also be passing on
some of the fees that it pays to ASIC. The option for the second exchange is
not to pass on the fees at the expense of profitability. Treasury stated in
One of the disadvantages of charging fees to operators alone
is that new participants would potentially be disincentivised from trading on
an alternative venue. If we accept the proposition that we want to encourage
competition between the trading venues, if you were charging fees solely to
operators rather than basing it on the activity of the individual participants,
there would be a disincentive and this would therefore potentially increase the
barriers to entry for operators. That is one
of the key pieces of information.
Chi-X Australia also gave evidence that imposing a fee on the operator
and giving it discretion in how it passes on the fee can distort competition.
This especially occurs when operators have different business lines and they
can potentially cross-subsidise them. This has led to mandated pass-through in
... my understanding is that in Canada they have acknowledged
the point that is being made about market operators and the inefficiencies of
indirect fee imposition and to an extent it is acknowledged that while a
category of fee may be imposed on an operator it is on the basis that it is
passed through directly to participants so that there can be no competition or
arbitrage in those areas.
The committee concludes that allowing ASIC to charge market participants
is important in promoting competition among market operators and is a further
reason to support the Bill.
The Bill is scheduled to commence on 1 January 2012. Industry provided
evidence that this was very soon, given that the consultation paper was
released at the end of August. The Australian Financial Markets Association
stated, ‘the details and the quantum have as quite a surprise to industry’.
RBS Morgans gave some of the detail about how they plan their operations and
how the Bill has made this more difficult:
We need to give our branches and our clients full visibility
and certainty around what they will be paying—that transparency. We even start
the process of effectively setting our own budgets and forecasts at least six months
before the beginning of the new financial year ... So if you are being levied
or you are unable to accurately forecast and you know that it will change
quarter by quarter, the variability could be quite high, given that they are
looking at a straight pass through of asset like costs. I think that would make
it very difficult to appropriately price those services, particularly around
our business model. It is not only brokerage for clients but contract notes for
our managed branches out there in the network and it becomes a very difficult,
uncertain thing. Ideally, you would want to build in a lot of buffer but that
is a very difficult thing for us to do when you are working in a very
The committee accepts that stockbrokers face uncertainty about the fees.
However, this needs to be kept in perspective. In the first instance, the
committee expects that brokers have a reasonable idea of what their fees will
be. The Australian Financial Markets Association acknowledged that firms were
working with estimates and CommSec stated that their fees would be
approximately $1.3 million annually. Further, the proposed
system will bed down over time and firms will be able to more closely estimate
their fees as they develop experience with how the system works.
The committee acknowledges that stockbrokers face increased risk from
the Bill and its timing, but is of the view that these risks can be managed and
that they will diminish over time as the system beds down.
Discipline on fee levels
During the hearing, stockbrokers raised the question of whether ASIC
would be subject to sufficient discipline in relation to the amount of fees it
levies, or whether it would be able to be able to freely increase its revenues
through the fees. RBS Morgans stated:
Given the knowledge that the funds will be recovered, how
confident can we be that those budget requests will be subject to that
appropriate challenge and scrutiny? Will there be that frank and fearless
review of requests for funding et cetera if it is subject to that full cost
Similarly the Stockbrokers Association of Australia was also concerned
about cost discipline on ASIC, but from the perspective of the quality of its
outputs. In particular, it suggested that ASIC may seek ‘to build a Rolls Royce
solution, when only a Holden was needed’.
The committee put this issue directly to ASIC, who responded that they
are subject to the discipline of the Budget process:
I think it goes to some of the points that Mr Chisholm
referred to: the reviews that we are going through. So, through this process,
in putting forward our allocations or appropriations, we have to go through the
appropriation process to outline those, then on an ongoing basis we are
audited, and through this review process we will continue to be reviewed, so we
intend to be as transparent as possible about our costs ...
That is not true [being able to easily increase staff]
because any additional costs that we incur for supervision can only be
appropriated if we go through the appropriations process.
This issue involves two sort of discipline. The first is the discipline
on ASIC to control its costs. This is driven by the efficiency dividend, which
requires portfolios to find annual savings (1.5 per cent in 2011-12) after
their expenses are indexed for inflation. It is also driven by the scrutiny of
the Expenditure Review Committee of Cabinet when agencies seek extra funds and in
Parliament when the Treasurer tables the resulting Budget legislation.
The second discipline relates to keeping fees low. This is driven by ASIC
keeping its spending down. It is also driven by the scrutiny of the relevant
Minister, who must present new regulations in the Parliament, and that of the
Parliament itself, which has the opportunity in either chamber to disallow
proposed regulations under the Legislative Instruments Act 2003.
ASIC faces multiple layers of scrutiny over any decisions to increase
fees and so the committee considers that there is sufficient discipline on ASIC
to ensure that fees are maintained at a reasonable level.
Issues in the consultation paper
While the consultation paper is not strictly within the committee’s
terms of reference, it provides important context to how the Bill is likely to
work in practice. Having the consultation paper publicly available has improved
the transparency of the inquiry.
The committee also appreciates the large amount of work that went into
the consultation paper. Industry also took this view. The Australian Financial
Markets Association stated at the hearing:
We are not actually criticising the quality of the current
paper; we think that is quite commendable. The Treasury—compared to, maybe,
some other recent government consultations on cost recovery—has done a very
But as might be expected in most consultations, industry did raise
concerns about some of the detail. These matters are described below. The
committee does not make any particular comments or conclusions about them,
except that they raise important issues that warrant consideration by Treasury.
The committee has itself also raised the issue of risk sharing at the end of
Higher initial costs
RBS Morgans raised concerns in evidence that the consultation paper
proposed ‘to immediately pass through significant, one-off, asset-like project
costs’. The Australian Financial
Markets Association agreed, noting that businesses would spread the costs over
three to five years:
... an initial reaction has been concern about the upfront
attribution of the IT costs of the system. That is not normal, from business
practice. It is quite normal to amortise those costs. We recognise that the
government has to build system capacity to deal with the issues that you get
when you have got a large number of participants—it is commendable, in fact,
that it is doing that—but in normal accounting practices it would be normal to
amortise those over three to five years rather than taking most of the hit
upfront. I think that is what is driving a lot of the early initial costs in
When the supervision proposals were announced in 2009, the Mid Year
Economic and Fiscal Outlook listed total one-off capital costs for ASIC of
$6.1 million from 2009-10 to 2010-11. The consultation paper
details the costs over the first three and a half years as in table 1.1.
Table 1.1 Total estimated costs for ASIC’s market
supervision and competition functions ($m)
Transfer of supervision
Reforms to the supervision of Australia’s financial markets: Exposure draft and
consultation paper, December 2009, p. 17, <http://www.treasury.gov.au/documents/1673/PDF/
consultation_paper_20091201.pdf> viewed 7 September 2011.
On an annualised basis, the consultation paper proposes that ASIC would
recoup over $12 million of its competition costs in 2011-12. The fees for this category
would effectively halve by 2014-15 to a little over $6 million.
Incentives for high levels of compliance
The consultation paper proposes that ASIC’s fees should be calculated on
volumes of messages and trades because these drive its costs. It also gives a
breakdown of the activities that ASIC will be funding through the fees:
n market supervision,
including real time surveillance;
n participant supervision;
n regulatory framework
and market structure analysis;
n investigations and
n markets disciplinary
n ASIC shared services.
Some of these costs appear to be very general and that would apply
across the industry, such as market supervision and information technology.
Others would appear to be specific to firms, such as investigations and the
disciplinary panel. These costs may have less relation to volumes. The
Australian Stockbrokers Association stated that this cost structure represents
a missed opportunity to give brokers incentives for high standards of compliance.
One thing we saw as being absent from this whole regime was a
way in which you could encourage compliance as a matter of public policy by
ensuring that those who have invested in good compliance and have a clean
record do not then pay the same share of the levy as everyone else. In our
view, there needs to be some incentive to bring that out.
These firms are also termed ‘indirect brokers’ or ‘white labellers’.
They are entities which hold an Australian financial services licence that allows
them to provide broking-type financial services to clients. However, they are
not ASX market participants, so are not able to execute, clear and settle
client trades themselves. Instead, they use the services of a market
participant to execute, clear and settle client trades on their behalf.
Shadow brokers are subject to the same requirements as other financial
service licence holders and ASIC regulates them in the same way as it does
other financial service licensees.
RBS Morgans stated in evidence that they did not believe that there was
a level playing field between market participants and shadow brokers and that
the latter group enjoy a ‘free ride’. They also stated that shadow brokers have
lower compliance standards than market participants and that their conduct has
knock-on effects to market participants with professional indemnity insurance.
This then raises the question of whether market participants would be better
off as shadow brokers. The Stockbrokers Association of Australia commented:
There are obviously already incentives to leave a very
expensive, well-regulated sector of the market and to go to an area where you
are not faced with the same sorts of costs. It has been happening already and
our association has been highlighting that for quite some time now. I think a
significant regulatory response is needed ...
Obviously it would be a difficult decision for a firm to
take. To be a market participant entitles you to call yourself a stockbroker
and there is a prestige behind that. I am not suggesting that members would
jump ship willy-nilly—and I would like to think that they would not—I am just
highlighting the cost incentives may be too much to bear.
Chi-X Australia stated that, under the UK regime, shadow brokers are
directly billed by the Financial Services Authority because they have an
obligation to report directly to the Authority.
In the ASIC Market Integrity Rules, shadow brokers are treated no
differently than a market participants’ other clients. This matter is subject
to review. In a consultation paper in November 2010, ASIC posed a question regarding
whether the scope of the Market Integrity Rules ought to be extended to other
financial services providers, examples being shadow brokers and fund managers.
In its response in April 2011, ASIC reported that there was widespread industry
support for this proposal.
The consultation paper puts forward options for cost recovery. The
preferred option allows ASIC to calculate costs and apportion them amongst
industry according to some form of volume calculations. The advantage with the
model is that it avoids over recovery and the adjustment in fees that would
follow. It provides certainty for ASIC and Government as fees charged are based
on actual costs. For participants and operators, there is some uncertainty in
estimating likely costs for the coming quarter, but there are benefits in not
being undercharged or overcharged.
Alternative options include the application of a fixed fee, which may improve
certainty for business. ASIC would then face the risk of potentially over or
under recovering costs with a resulting adjustment in fee to ensure accurate
cost recovery. This would again create uncertainty and risk for business.
There is no easy solution to apportioning risk under full cost recovery.
But it is important to note that the various options carry different levels of
uncertainty for the various parties.
The Bill should pass because it is an appropriate way of funding ASIC’s
market supervision activities. Transferring these activities to ASIC is a
necessary condition for introducing competition in exchange markets. The
prospect of competition has led to lower transaction costs and improved
services from the ASX. The Bill is not the centrepiece of the shift to
competition, but it is informed by competition principles and will be an
important part of the ‘competition infrastructure’. The Bill should pass.
||The House of Representatives pass the Corporations (Fees)
Amendment Bill 2011.
Julie Owens, MP
20 September 2011