## 1. Summary Compliance with the Basel Core Principles—ROSCs (_cr12307) ## Source details **Canonical URL:** [1. Summary Compliance with the Basel Core Principles—ROSCs (_cr12307)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12307.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12307.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12307.pdf.json) --- ### Summary and key findings - Australia has a very high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs). - Strengths: - Strong risk analysis and clear responsibilities of banks’ boards for management and oversight. - APRA intensified supervisory practices after the Global Financial Crisis (GFC) and adopted key aspects of Basel III early and conservatively. - Vulnerabilities and challenges: - Banking system remains vulnerable to aftershocks of the GFC, notably banks’ funding profiles as a conduit of instability. - Continued global fragilities require further development of supervisory standards and firm-based practices in risk management and liquidity. - Implementation challenges from the reform agenda for supervisors and firms. - Some legislative framework aspects need addressing to ensure APRA can act fully effectively and efficiently if weaknesses emerge. ### Recommended supervisory focus (from assessment) - Advance depth and intensity of supervisory approach to liquidity. - Address legislative framework gaps that could impede APRA’s effectiveness in responding to system-wide or institution-specific weaknesses. - Continue conservative and early adoption of international reforms where appropriate. ### Methodology and scope - Assessment completed as part of an IMF FSAP in 2012; reflects framework in place as of completion date. - Assessed against the Core Principles (CP) Methodology issued October 2006 and the revised 2006 BCPs. - Focus on major banks and banking groups given systemic importance. - Assessment team: Michael Deasy and Katharine Seal. ### Institutional, macroeconomic setting and market structure — key statistics - Financial sector assets: 330 percent of GDP. - ADIs hold 60 percent of financial sector assets. - Superannuation funds hold 25 percent. - Non-life insurance sector: 3 percent. - Non-superannuation managed funds: 6 percent. - Stock market capitalization: 80 percent of GDP at end-2011; peak 150 percent in mid-2007. - Aggregated after tax profits of the four major Australian banks: $23.3 billion (year ended June 2011), up from $16.8 billion the previous year. - Return on equity (major banks): 15 percent; for all banks: 14 percent. - Aggregate Tier 1 capital ratio for Australian banks: 10.5 percent of risk-weighted assets as of June 2012 (8.5 percent in 2009). - Total capital ratio: 11.8 percent as of June 2012. - Current account deficit: about 2½ percent of GDP in the first half of 2011 (from an average of 4½ percent for the previous 15 years). - Economy expected to grow close to trend at 3–3.5 percent annually in 2012 and 2013. - Inflation expected to remain within target band of 2–3 percent over the medium term. - Government priority: returning to surplus by 2012/13. ### Preconditions for effective supervision and coordination - Council of Financial Regulators (CFR): RBA (Chair), APRA, ASIC, and Treasury; promotes stability and efficiency but has no separate legal personality or powers. - Trans-Tasman Council on Banking Supervision (TTBC): reciprocal obligations implemented by 2005 legislation; Memorandum of Cooperation on trans-Tasman bank distress (2010); guidance on joint resolution began in 2011. - Legal framework: common law system; Constitution of 1901; High Court final court of appeal. - Accounting: IFRS implemented; AASB issues A-IFRS with force of law; AUASB sets auditing standards. ### Main supervisory findings and recommendations (BCP-focused) - Independence and transparency: - Minister may give APRA a written direction; such directions must be laid before each House of Parliament within 15 sitting days. - Prudential regulations by APRA must be tabled and may be disallowed within 15 sitting days. - Recommendation: explore avenues to ensure unambiguous APRA independence; mandate public disclosure of reasons for termination of APRA Members; split APRA’s Risk Management and Audit Committee so the audit committee comprises external members only. - Licensing and structure: - Non-authorized, non-supervised entities can carry out deposit-like activities (small scale but some major global institutions benefit). - Treasurer (not APRA) approves changes in control for ADIs with asset-size exceeding $1 billion; Treasurer is legally responsible for approving a stake in any ADI in excess of 15 percent. - Recommendation: give APRA a binding right of veto on prudential grounds over changes in controlling ownership of an ADI irrespective of scale. - Prudential regulation: - Australia historically adopts a conservative capital definition; APRA intends to remain super-equivalent to Basel standards under Basel III. - APRA conducts Pillar 2 assessments and reviews ICAAP but places greater weight on PAIRS methodology. - Boards need to improve risk management quality; stress testing practices need further development. - Liquidity and funding: - Significant exposure to overseas wholesale funding at assessment time. - APRA’s liquidity work includes reviewing standards, contributing to Basel III, and intensifying off-site data analysis — efforts need continuation and broader liquidity perspective beyond funding. - Supervisory methods: - APRA uses a risk-based supervisory model supported by PAIRS and IT systems; on-site resource allocation modest; frequency and intensity of on-site supervision increased since the GFC and should be maintained or extended. - Recommendation: increase frequency and duration of formal on-site reviews, especially for liquidity risk management. - Corrective powers: - APRA has wide supervisory tools including issuing directions, appointing investigators, removing directors/senior management or auditors, compulsory transfer of business, and license revocation. --- ### Capital markets, market infrastructure, and ASIC / IOSCO assessment (_cr12307 excerpts) ### Capital market structure and key statistics - ASX responsibilities: trading operator, clearing house, settlements facilitator; oversee compliance with listing rules; promote corporate governance and retail education. - Listed equity market: over 2,200 companies. - Debt market: relatively underdeveloped; OTC market active but small by international standards. - ASX Group: approximately 98 percent of on-exchange equity and derivatives volume; created by merger in July 2006; one of world‘s top 10 listed exchange groups by market capitalization. - ASX market data (year-end 2011): - Domestic listed equity issuers: 1,983 - Foreign listed equity issuers: 96 - Total number of issuers: 2,222 - Domestic market capitalization: USD 1,187 billion (82.2 percent of GDP) - Market capitalization of top 10 companies: $527 billion (37.1 percent of GDP) - Total cash market traded value: USD 1.3 trillion - Average daily turnover: USD 5.4 billion - Number of new publicly listed companies: 133 - Share ownership by Australians: rose from 41 percent in 2008 to 43 percent in 2010 - Foreign sourced investment in Australian shares: estimated in excess of 40 percent ### Trading volumes and market structure (selected figures) - Top 20 Market Participants’ market share at ASX: approximately 90 percent in 2011. - All top 20 Market Participants regulated by ASIC rather than APRA. - ASX Group on-exchange equity trading in 2011: $2.02 trillion. - OTC government bond trading in 2011: $1,483 billion. - Volume in OTC non-government debt securities in 2011: approximately $908 billion. - Total OTC trading (ALL FINANCIAL MARKETS) 2010-11: 129,229 (billion turnover) — 16.7% change since 2006. ### Market infrastructure and competition - Chi-X Australia began operating in November 2011; competition between execution venues initiated in 2010 government policy. - ASIC took over market surveillance in August 2010 and introduced Market Integrity Rules (MIR) including Competition MIRs to address multi-market trading and pre-/post-trade transparency. - Cost of ASIC market surveillance technology is industry-borne on a cost recovery basis. ### ASIC roles, powers, independence and resources (IOSCO assessment highlights) - ASIC statutory objectives include maintaining and improving financial system performance and promoting confident investor/consumer participation. - Concerns: - ASIC operational independence constrained by Minister’s powers (directions, AML and CSFL decisions) and dependence on non-core funding. - ASIC’s proactive supervision limited by resources; supervisory approach historically reactive and desk-based for many entities. - Legal limitations on ASIC’s power to share supervisory information internationally (work in progress with government amendments expected by late 2012). - Recommendations (select): - Government to assess appropriateness of Minister’s powers and secure ASIC’s core funding stability. - ASIC to increase proactive supervision of MIS, REs, market intermediaries, and expand oversight of Wholesale Funds. - Consider extending good fame and character tests to controllers and significant shareholders. - Introduce risk-based capital requirements and periodic capital adequacy reporting for AFSL holders (subject to proportionality concerns). - Consider investor compensation scheme (Principle 32). - Government may simplify two-stage licensing/rule approval for exchanges and CSFLs and consider amending definition of financial market in the Corporations Act. ### Market intermediaries, CIS and disclosure - AFSL framework: - As at April 2012 there were 137 Market Participants. - ASIC authorized 2,991 AFSL holders to access the market through a Market Participant; about 700 Indirect Market Participants actively provide services. - 3,345 AFSL holders authorized to act as investment advisors; ASIC estimates 2,055 can deal on behalf of clients, have custody, or manage accounts. - Collective Investment Schemes (Retail MIS) end-2011 totals: - Listed property trusts: $127.4 billion - Unlisted property trusts: $3.6 billion - Exchange Traded Funds: $4.7 billion - Other listed equity trusts: $29.5 billion - Money Market Trusts: $23.7 billion - Unlisted equity trusts: $54.4 billion - Unlisted mortgage trusts: $3.8 billion - Unlisted other trusts: $16.2 billion - Total: $263.3 billion - Wholesale CIS: no regulatory requirements in some areas; disclosure and custody safeguards for retail CIS may require strengthening. ### Key recommended actions (select highlights from IOSCO and market sections) - Strengthen ASIC’s operational independence and secure stable core funding. - Expand ASIC’s proactive supervision and inspection capacity, including for MIS, REs, market intermediaries, and Wholesale Funds. - Introduce or consider risk-based capital requirements and periodic reporting for AFSL holders where appropriate. - Consider investor compensation scheme and improved client asset protection for self-custody/related-party custody. - Clarify and possibly simplify licensing and rule approval arrangements for exchanges and CSFLs; consider amending definition of financial market in Corporations Act. - Improve international information sharing powers for ASIC to enable effective participation in supervisory colleges. --- ### Insurance sector assessment (Insurance Core Principles — ICPs) (_cr12307 excerpts) ### Main findings — supervisory structure and powers - Responsibilities for insurance supervision shared among APRA, ASIC, Treasury and other agencies; mandates generally clear but some power weaknesses can compromise objectives (e.g., ASIC limited to disclosure powers under Corporations Act 2001 (CA); APRA has not issued disclosure standards beyond capital adequacy). - Concerns about operational independence and funding: - Minister can give directions to APRA and ASIC; APRA and ASIC dependent on Government approval for funding. - ASIC has significant non-core funding; resources for proactive surveillance are limited. - No requirement to publicly disclose reasons for removal of APRA Member or ASIC Commissioner. - APRA has broad inspection and enforcement powers and operates SOARS, PAIRS and risk-based supervision. ### Key supervisory observations (selected ICPs) - ICP 1 / ICP 2: - Legislation and institutional arrangements generally appropriate; recommendations to limit Ministerial directions and strengthen operational independence and funding. - ICP 5 Suitability of Persons: - APRA requires fitness and propriety for responsible persons and significant owners; no explicit requirement for insurers to notify APRA of circumstances materially affecting suitability of significant owners. - Suggest clarification to include "Key Persons in Control Functions". - ICP 7 / ICP 8 Corporate Governance and Risk Management: - Corporate governance requirements extensive; scope to enhance in line with evolving best practice. - APRA emphasizes risk management; some insurers have sophisticated systems, others need development. - ICP 9 Supervisory Review and Reporting: - APRA uses risk-based framework (PAIRS, SOARS), conducts onsite reviews and collects extensive data. - ASIC’s conduct supervision is predominantly desktop-based and reactive; recommendation to empower ASIC to inspect outsourced service providers and increase proactive engagement. - ICP 12 Winding-up and exit: - No formal IA requirement prioritizing general insurer policy liabilities over unsecured creditors; life policyholders have priority within the same statutory fund but complexities remain across multiple funds. - ICP 14 Valuation and ICP 17 Capital Adequacy: - Risk margins specified for general insurance; life insurance risk margins selectable from prescribed ranges so uncertainty may vary. - APRA requires insurers to set solvency control levels agreed with APRA rather than fixed requirements; these levels are not transparent and may not provide consistent intervention thresholds. - ICP 22 AML/CFT: - FATF standards apply at minimum to underwriting/placement of life and investment-related insurance; general insurance subject to Financial Transactions Reports Act but not fully to AML/CFT Act. - ICP 23 / ICP 25 Group-wide and cross-border supervision: - APRA effective at Level 2 group supervision for general insurers; Level 2 not developed for life insurers; pending Level 3 conglomerate supervision expected to address life insurer groups. - APRA maintains effective cross-border cooperation and can form supervisory colleges where designated group-wide supervisor. ### Recommended actions (select from Table 4) - ICP 1: Amend legislation to permit ASIC to make rules to close conduct-of-business gaps. - ICP 2: Eliminate or restrict Ministerial directions to APRA/ASIC; consider funding arrangements to ensure adequate resources. - ICP 5: Require insurers to notify APRA of circumstances materially affecting suitability of significant owners; define "Key Persons in Control Functions". - ICP 7: Require all insurers to disclose governance practices in annual reports. - ICP 8: Require insurers to designate an officer with overall responsibility for compliance. - ICP 9: Empower ASIC to inspect service providers and equip ASIC with adequate supervisory resources. - ICP 12: Consider legal priority of policyholder claims for general and life insurers. - ICP 14: APRA to specify level of uncertainty to be provided by life insurance risk margins. - ICP 15: Consider additional quantitative investment restrictions for insurers. - ICP 16: Through LAGIC or otherwise, strengthen enterprise risk management requirements and guidance on own risk and solvency assessments. - ICP 17: Increase transparency and consistency of solvency control levels. - ICP 19: Strengthen conduct-of-business regime, training, and empower ASIC on claims handling and servicing obligations. - ICP 22: Periodically reconsider whether general insurance should be subject to AML/CFT Act. - ICP 23: Incorporate group-wide market conduct requirements in Level 2 and Level 3 frameworks. - ICP 26: Require insurers to maintain contingency plans and procedures for going- and gone-concern situations. ### Authorities’ response (summary positions) - Authorities appreciate the FSAP assessment and mostly agree with high-level findings of strong observance, while noting disagreements on some specific assessments. - Authorities emphasize outcomes of supervision and robustness of Australia’s banking and insurance sectors during the GFC. - Authorities indicate willingness to consider and implement relevant recommendations, including funding, legislative amendments, and enhancements to supervision. --- *Source: _cr12307 — IMF Financial Sector Assessment Program (excerpts); canonical URL: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12307.pdf* ### 1. Summary Compliance with the Basel Core Principles—ROSCs ........................................14 ### 1. Summary Compliance with the Basel Core Principles—ROSCs ### Summary and Key Findings - Australia has a very high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs). - Strengths: - Strong risk analysis and a focus on the responsibilities of banks’ boards regarding management and oversight. - APRA intensified supervisory practices following the Global Financial Crisis (GFC) and moved to an early, conservative adoption of key aspects of the international regulatory reform agenda, especially the Basel III capital and liquidity framework. - Vulnerabilities and challenges: - The banking system remains vulnerable to continuing aftershocks of the GFC, including banks’ funding profiles which could be a conduit of instability. - Continued fragilities in the global system mean further development of supervisory standards and firm-based practices in risk management and liquidity are required. - Implementation challenges arise from the reform agenda for supervisors and firms alike. - Some aspects of the legislative framework need to be addressed to ensure APRA can act in a fully effective and efficient manner should weaknesses emerge. ### Recommended supervisory focus (drawn from assessment) - Advance the depth and intensity of the supervisory approach to liquidity. - Address legislative framework gaps that could impede APRA’s effectiveness in responding to banking system or institution-specific weaknesses. - Continue conservative and early adoption of international reforms where appropriate. ### Methodology and Assessment Process - The assessment was completed as part of an IMF Financial Sector Assessment Program (FSAP) in 2012 and reflects the regulatory and supervisory framework in place as of the completion date of the assessment. - The Australian authorities agreed to be assessed according to the Core Principles (CP) Methodology issued by the Basel Committee in October 2006. - The assessment: - Was performed against the revised 2006 BCPs, which emphasize risk management practices and supervisory assessment. - Made qualitative judgments on whether criteria are fulfilled in practice, with effective application of laws and regulations considered essential. - Focused on the major banks and banking groups given their systemic importance. - Information sources and cooperation: - The assessment team reviewed laws, rules, guidance, supervisory documents and files. - Held extensive meetings with officials of APRA, the Reserve Bank of Australia (RBA), and the Treasury, as well as banking sector participants and an industry association representing banks. - The authorities provided a high quality self-assessment and detailed responses to questionnaires. - Assessment team: Michael Deasy and Katharine Seal. ### Institutional, Macroeconomic Setting and Market Structure — Overview - Size and composition of financial sector: - Financial sector assets total 330 percent of gross domestic product (GDP). - Authorized deposit-taking institutions (ADIs), mostly banks, hold 60 percent of financial sector assets. - Superannuation funds (including investment-linked superannuation written by life insurance companies) hold 25 percent. - Non-life insurance sector: 3 percent of financial sector assets. - Non-superannuation managed funds: 6 percent. - Stock market capitalization: - 80 percent of GDP at end-2011. - Peak of 150 percent in mid-2007. - Banking sector structure and risks: - Concentrated sector dominated by four large banks with broadly similar business models and reliance on offshore funding—structural issues that are key medium-term risk sources. - Profitability and capital: - Aggregated after tax profits of the four major Australian banks: $23.3 billion in the year ended June 2011, up from $16.8 billion the previous year. - Return on equity for the major banks over the last financial year: 15 percent; for all banks: 14 percent. - ADIs increasing regulatory capital in advance of Basel III implementation from 2013. - Aggregate Tier 1 capital ratio for Australian banks: 10.5 percent of risk-weighted assets as of June 2012, up from 8.5 percent in 2009. - Total capital ratio: 11.8 percent as of June 2012. - Macroeconomic backdrop (selected indicators and expectations): - Current account deficit: about 2½ percent of GDP in the first half of 2011 (from an average of 4½ percent for the previous 15 years). - Economy expected to grow close to trend at 3–3.5 percent annually in 2012 and 2013. - Inflation expected to remain within the authorities’ target band of 2–3 percent over the medium term. - Government priority: returning to surplus by 2012/13. - Australia retained sizable monetary policy space and output was close to potential. ### Preconditions for Effective Banking Supervision and Institutional Framework - Coordination and cooperation: - Council of Financial Regulators (CFR) is the primary coordinating body for main financial sector agencies: RBA (Chair), APRA, ASIC, and the Treasury. CFR objectives include promoting stability of the Australian financial system and contributing to efficiency and effectiveness of financial regulation. CFR has no separate legal personality or powers. - APRA and the RBA share legal gateways to exchange institution-level data needed for their duties. - Trans-Tasman Council on Banking Supervision (TTBC): includes Australian and New Zealand Treasuries, RBA, RBNZ, and APRA. Legislation passed in 2005 implemented reciprocal obligations requiring APRA and RBNZ to support the other agency in meeting statutory responsibilities for prudential regulation and financial stability. - TTBC and related agencies signed a Memorandum of Cooperation on management of trans-Tasman bank distress in 2010 and began developing guidance on joint resolution of trans-Tasman bank distress in 2011. - Legal and judicial context: - Australian jurisprudence based on the common law system as developed in the United Kingdom. - Federal system with the Constitution of 1901; seven legal systems effectively (six state/territory systems and one federal). - Strict separation of Judiciary from Parliament and Executive; High Court is final court of appeal. - Foreign judgments require recognition and enforcement under common law or statutory regime (Foreign Judgments Act 1991 where applicable). - Alternative dispute resolution options available (mediation, conciliation, conferencing, neutral evaluation, arbitration) but generally not required before court resolution. - Accounting and reporting standards: - Australia has implemented International Financial Reporting Standards (IFRS). - Australian Accounting Standards Board (AASB) issues Australian equivalent A-IFRS with the force of law. - Financial Reporting Council provides oversight of AASB activities. - Auditing standards made by the Auditing and Assurance Standards Board (AUASB), based on the International Auditing and Assurance Standards Board. *Source: _cr12307 - 1. Summary Compliance with the Basel Core Principles—ROSCs; canonical URL: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12307.pdf* ### 20. Australia has a well-developed capital market. The Australian stock exchange ### 20. Australia has a well-developed capital market. The Australian stock exchange ### Capital market structure and activity - The Australian stock exchange (ASX) functions primarily as a trading operator, clearing house, and settlements system facilitator. - ASX responsibilities: oversee compliance with listing rules, promote standards of corporate governance among listed companies, and seek to educate retail customers. - Emphasis on transparency and disclosure. - Capital market corporate governance systems comply with the OECD (Organization for Economic Co-operation and Development) Principles of Corporate Governance. - Listed equity market: over 2,200 companies listed on the exchange. - Debt market: relatively underdeveloped. - Over-the-counter market: active but small by international standards. ### Financial sector safety net - Reserve Bank of Australia (RBA) roles: - Ultimate provider of liquidity to the financial markets. - Foster lower inflation and sustainable growth. - Ensure the payment system is safe and robust. - Play a key role in developing a framework for dealing with financial institutions in distress. - Chair the CFR (Council of Financial Regulators). - CFR main objectives: - Promote the stability of the Australian financial system. - Contribute to the efficiency and effectiveness of financial regulation. - Financial Claim Scheme (FCS): - Established in October 2008 for authorized deposit-taking institutions (ADIs) and general insurers. - Provides deposit protection and prompt access to deposits if an ADI fails. - FCS activation: when APRA has determined that the ADI is insolvent and has applied to the Court to be wound up. - Maximum payout to a depositor: $250,000 (it had been $1 million between 2008 and 1 February 2012 to foster confidence in the banking system). - FCS is ex-post funded: payouts initially come from the Government; any eventual shortfall will be met by a levy on the industry. ### Main findings — objectives, independence, powers, transparency, cooperation (CP1) - APRA responsibilities: clear responsibility for the supervision of banks in Australia. - Potential independence compromises: - The Minister may give APRA a written direction about policies or priorities in performing or exercising any of its functions or powers. Requirements: Minister must give APRA notice in writing and give the Chair adequate opportunity to discuss; any such direction must be laid before each House of Parliament within 15 sitting days. - Prudential regulations made by APRA must be tabled in each House of Parliament and may be disallowed: a notice of motion to disallow may be given within 15 sitting days; if passed within 15 sitting days after the notice, the regulations cease to have effect. - APRA statement: neither provision has ever been invoked and they are not likely to be, but they have potential to compromise independence. - No mandated public disclosure of the specific reasons for termination of appointment of APRA Members (governing body). - APRA’s Risk Management and Audit Committee includes both internal and external members; recommendation: establish a separate audit committee comprising external members only. ### Licensing and structure (CPs 2–5) - Australian law permits non-authorized, non-supervised financial companies carrying out deposit-like activities. - Number of such institutions: small; scale of activities: mostly de minimis. - Some major global institutions benefit from this exemption. - Public offering of deposit-like facilities creates reputational risk for APRA. - Change in controlling ownership of an ADI: - The Treasurer (not APRA) has power of approval for a change in controlling ownership of an ADI whose asset-size exceeds $1 billion. - Treasurer legally responsible for approving holding of a stake in any ADI in excess of 15 percent. - Treasurer has delegated approval authority to APRA when ADI assets are less than $1 billion. - Treasurer takes advice from APRA for ADIs with assets greater than $1 billion. - Recommendation: give APRA a binding right of veto on prudential grounds concerning a change in controlling ownership of an ADI, irrespective of the scale of the entity. ### Prudential regulation and requirements (CPs 6–18) - Capital definition and Basel III: - Australia has historically adopted a very conservative definition of capital. - APRA intends to remain super-equivalent to the Basel standard with the advent of the revised Basel III capital framework. - Implication: capital levels in Australian banks can appear low relative to peers; importance of strong and comparable disclosure standards. - Pillar 2 and ICAAP: - APRA undertakes a well-structured Pillar 2 assessment. - APRA reviews firms' Internal Capital Adequacy Assessment Process (ICAAP) but does not use it as the sole or main determinant of minimum capital. - APRA places greater weight on its Probability and Impact Rating System (PAIRS) methodology. - Rationale: supervisor view that banks' ICAAP processes are not sufficiently mature or robust. - APRA focuses on improving banks' ICAAP assessments. - Banks required to hold capital above the minimum prescribed by APRA; size of buffer is at the firm's discretion. - Risk management and boards: - APRA's supervisory approach places risk management responsibility with bank boards. - Boards need to improve quality of their institution’s risk management. - Processes embedding good risk management are still developing; not all firms have achieved the same level of expertise. - Firms need to strengthen work on relating risk to capital. - Stress testing practices need further development. - Credit risk and exposures: - Credit risk management, including impaired assets and provisioning, is well developed. - APRA monitors emerging credit risk issues via an industry-wide risk register. - Well-established policy on large exposures under review. - Tension between cautious prudential limits for the interbank market and practical options for institutions in a highly concentrated banking system. - Sovereign risk: not a major feature except domestic exposure; APRA monitors country risk and provided direction during the GFC. - Liquidity and funding: - Significant exposure to overseas wholesale funding in the Australian banking system at the time of assessment. - APRA’s analytical work has focused on funding issues; must guard against too narrow focus on funding dimension of liquidity risk. - Recent work: review liquidity standards, contribute to Basel III, intensify off-site data analysis; these efforts need to continue. - Anti–money laundering / counter-terrorism financing: - Comprehensive regime introduced relatively recently. - Some banks have yet to introduce sufficiently advanced technology systems to eliminate possible errors using less sophisticated means. ### Methods of ongoing banking supervision (CPs 19–21) - APRA supervisory model: - Risk-based supervisory model informed by peer review and supported by extensive and flexible IT systems. - Rating methodology supported by internal guidance and ratings criteria, subject to regular review and update. - Ratings include concrete and judgmental factors; judgmental factors require skilled staff for sound supervisory discretion. - Continued evolution needed to enhance forward-looking dimension. - Cross-sector and conglomerate focus: - APRA issues joint prudential standards where possible (e.g., corporate governance) to embed a common approach to banking and insurance. - APRA is well placed to analyze relationships between sectors; should focus more on this area. - Development of the "Level 3" (conglomerate) approach should stimulate such work. - On-site supervision resources and practices: - APRA conducts well-planned on- and off-site supervision, but resource allocation to on-site reviews is modest. - Frequency and intensity of direct on-site supervision increased since the GFC; heightened level needs to be maintained as a minimum. - Recommendation: consider extending the duration of formal on-site reviews to fully scrutinize risk management practices and ensure sound understanding of risk. ### Accounting, disclosure, and corrective powers (CPs 22–23) - Accounting and auditing standards: - Accounting and Auditing Standards set to a very high standard and based on best international practice. - IFRSs introduced in 2005. - Australia has adopted audit standards promulgated by the International Auditing and Assurance Board. - Corrective and remedial powers of supervisors: - APRA has a wide range of supervisory tools, including: - Seek to resolve problems through standard supervisory actions. - Appoint a person to investigate and report on financial matters. - Issue directions (e.g., direct banks to cease or curtail business). - Remove directors, senior management or auditors. - Effect a compulsory transfer of business. - Revoke a license. ### Consolidated and cross-border banking supervision (CPs 24–25) - APRA meets requirements for effective consolidated supervision: - Oversees group risk management structures. - Informed of breaches of prudential standards on a group-wide basis. - Calculates necessary ratios on a solo and consolidated basis. - Recommendation: consider extending scope of reviews to cover risks unique to non-banking activities within groups (e.g., valuation of assets/pricing of units in fund management). ### Key procedural and statutory numeric details - Listed equity market size: over 2,200 companies. - FCS establishment date: October 2008. - FCS temporary payout level: $1 million between 2008 and 1 February 2012. - FCS current maximum payout: $250,000. - Timeframe for laying directions or prudential regulations before Parliament: 15 sitting days. - Threshold for Treasurer approval vs. APRA delegation: $1 billion (asset-size). - Shareholding approval threshold triggering Treasurer responsibility: 15 percent. - Introduction of IFRSs in Australia: 2005. *Source: IMF Financial Sector Assessment (excerpt).* ### 21. Supervisory reporting ### 21. Supervisory reporting ### Table 2. Recommended Action Plan to Improve Compliance with the Basel Core Principles — Selected Recommendations - Reference Principle 1.2 Independence, powers, transparency and cooperation - The assessment team recognizes the difficulties in seeking to address the independence issue and the fact that removing the relevant provisions would go beyond APRA to involve other statutory authorities. However, operational independence is a key factor in enabling a prudential financial regulator to carry out its function in the best interests of depositors and the financial system as a whole. It is therefore suggested that APRA explore with the Australian Government possible avenues which would ensure unambiguous independence within APRA. - Legal provision should be made to mandate the public disclosure of the reasons for termination of the appointment of an APRA Member. - APRA‘s Risk Management and Audit Committee should be split in two and the new audit committee should comprise solely external members. - Reference Principle 1.3 Legal framework - Provide APRA with sufficient delegated powers, clearly circumscribed to the prudential sphere, to ensure that the supervisor can issue prudential regulations without additional Parliamentary procedures. - Reference Principle 2 Permissible activities - Revise the conditions for exemption from section 11 of the Banking Act for Registered Financial Corporation to ensure, at a minimum, that such exemptions are limited to institutions reliant wholly on wholesale funding. - Reference Principle 3 Licensing criteria - Evaluate proposed directors and senior management as to their expertise and integrity at point of authorization, on a complete and systematic basis, and independently from the information provided by the institution, to ensure the sound judgment of the supervisor that is not based on information that may be at risk of bias. - Reference Principle 4 Transfer of significant ownership - Ensure that APRA has the legal right to prevent a change of control of ownership any ADI on prudential grounds. - (Unnumbered recommendation following 4) - Ensure that requirements are in place for a bank or ADI to notify the supervisor, at a minimum on an annual basis, of major shareholders including ultimate beneficial shareholders. - Reference Principle 7 Risk management - Put in place more guidance or regulation on APRA expectations for enterprise risk management, in particular with respect to capital planning related to risk. Continue to subject banks to regular detailed APRA assessments and feedback to achieve appropriate levels of practice in firms. - Reference Principle 11 Exposure to related parties - Review and amend prudential standards to ensure that all lending transactions with related parties—both entities and individuals—above a threshold (whether on normal terms or not) are approved by the board. - Reference Principle 14 Liquidity risk - Increase the frequency and duration of formal on-site reviews of liquidity risk management. Finalize the program for the enhanced liquidity risk regime, including revised reporting standards to ensure that firms are capable of providing accurate, system-wide comparable data on a daily basis if required. Also, ensure that the general principles of liquidity risk management are applied to and adhered to by all institutions. - Reference Principle 17 Internal control and audit - An explicit requirement should be introduced for banks to have a permanent compliance function. - Reference Principle 18 Abuse of financial services - Banks should be given a deadline within which they must install the necessary technology to enable them to meet effectively the obligations under the AML/CFT legislation. - Reference Principle 24 Consolidated supervision - APRA should extend its onsite supervisory regime to include an examination of risks unique to non-banking activities carried on within the bank/group as a matter of course, e.g., valuation of assets/pricing of units in the case of fund management activity. - Note: "Please note that this table does not contain all recommendations within the report. It highlights the main recommendations only." ### Authorities’ Response to the Assessment - Paragraph 40 - The Australian authorities wish to express their appreciation to the IMF and its assessment teams for their assessment. Australia is strongly committed to the FSAP process and the insights that the FSAP provides into a country‘s financial sector. Australia acknowledges that it is important to continually review and seek to improve the regulatory framework and supervision practices. - Paragraph 41 - The Australian authorities share the view expressed in the report that Australia has a very high level of compliance against the Basel Core Principles. There are some assessments, however, with which the Australian authorities disagree. - Paragraph 42 - Importantly, the Australian authorities consider that any assessment of a country’s supervisory framework should appropriately reflect the outcomes of that framework. The strength of Australia‘s banking system – particularly in the face of the global financial crisis – demonstrates the robustness of Australia‘s supervisory approach. - Paragraph 43 - The Australian authorities consider that there are some principles for which the assessment does not reflect the strengths and performance of Australia’s supervisory approach or where the issues raised are more theoretical than reflective of actual deficiencies in practice or outcomes. ### II. ASSESSMENT OF INSURANCE CORE PRINCIPLES — A. Introduction and Scope - Paragraph 44 - This assessment provides an update on the significant regulatory and supervisory developments in the insurance sector of Australia since 2006. - Australia undertook an initial Financial Sector Assessment Program (FSAP) in 2006, which included a formal assessment of its observance of the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in 2003. The Financial Stability Board has conducted a peer review of the authorities‘ implementation of the recommendations arising from the 2006 assessment and issued its report in September 2011. - Paragraph 45 - The current assessment is benchmarked against the ICPs issued by the IAIS in October 2011. The ICPs apply to all insurers, whether private or government-controlled. Specific principles apply to the supervision of intermediaries. The ICPs are presented according to a hierarchy of supervisory material: - a) ICP statements prescribe the essential elements that must be met in order to achieve observance; - b) Standards are linked to specific ICP statements and set out the key high-level requirements that are fundamental to the implementation of the ICP statement; and - c) Guidance material provides details on how to implement an ICP statement or standard. - Paragraph 46 - The assessment is based solely on the laws, regulations, and other supervisory requirements and practices that were in place at the time of the assessment. Ongoing regulatory initiatives are noted by way of additional comments, e.g., proposed Level 3 supervision of financial conglomerates and the Life and General Insurance Capital Review (LAGIC). A comprehensive self-assessment and other pertinent information (reports, studies, consultation papers, public statements, directives, etc.) provided by the authorities facilitated a meaningful assessment. The assessors also benefited from the valuable inputs and insightful views from meetings with insurers, industry and professional organizations, as well as representatives of the Private Health Insurance Administration Council and the Motor Accidents Authority of New South Wales, which are responsible for overseeing specific segments of the insurance market. - Footnote on assessment team and dates: - The current assessment was conducted by Michael Hafeman (IMF external expert) and Su Hoong Chang (Senior Financial Sector Expert, IMF) from April 30–May 15, 2012. *Source: _cr12307 - 21. Supervisory reporting (excerpt).* ### 47. The assessors are grateful to the authorities for their full cooperation ### _cr12307 - 47. The assessors are grateful to the authorities for their full cooperation ### A. Acknowledgement - "The assessors are grateful to the authorities for their full cooperation and thoughtful logistical arrangements, including the helpful co-coordination of various meetings with industry participants. Technical discussions with and briefings by officials from APRA and ASIC have enriched the analysis in this report." ### B. Main Findings (Summary of Compliance with Insurance Core Principles) - ICP 1 - Objectives, Powers and Responsibilities of the Supervisor - The responsibilities for insurance supervision in Australia are shared among a number of authorities, each with a clearly-defined mandate and objectives. - Instances where a weakness of powers could compromise overall objectives are noted (example: under ICP 20, ASIC does not have the power to impose disclosure requirements beyond those set out in the Corporations Act 2001 (CA) or the accounting standards; APRA has not issued disclosure standards other than on capital adequacy). - ICP 2 - Supervisor - Elements of the regulatory framework need consideration to assess operational independence, accountability, transparency and adequacy of resources of APRA and ASIC. - The relevant Minister has powers ranging from giving policy directions to being in charge of certain supervisory decisions; use generally subject to transparent legislative process and advice of the supervisory agency, but existence of powers remains a concern. - APRA and ASIC are dependent on Government approval for funding. A significant amount of ASIC‘s funding is non-core funding earmarked for specific projects; the relative share of non-core funding has been increasing, with the budget for 2012–13 continuing this trend. - Resources allocated by ASIC to proactive surveillance are very limited; large part of regulated population subject to largely reactive surveillance (see ICP 9). - No indications of political interference currently, but budget approval by elected officials leaves exposure to cutbacks. If an APRA Member or an ASIC Commissioner is removed, reasons are not required to be publicly disclosed. - ICP 3 - Information Exchange and Confidentiality Requirements - APRA empowered to obtain and exchange information subject to confidentiality, purpose, and use requirements; signatory to bilateral MoUs and IAIS Multilateral MoU; close domestic and international collaboration. - Effectiveness could be enhanced by clear internal policies/procedures on notifying other supervisors in advance of action against an insurer. - ICP 4 - Licensing - Insurance activities in Australia can only be conducted by authorized insurers. APRA is licensing authority under the Insurance Act and Life Insurance Act; licensing requirements in line with international best practices. APRA publishes requirements and maintains a register. - Authorities monitor unauthorized foreign insurers (UFIs) and discretionary mutual funds (DMFs) to determine need for prudential supervision. - ICP 5 - Suitability of Persons - APRA requires responsible persons of insurers and NOHCs to meet fitness and propriety criteria; significant owners must have financial soundness and integrity. APRA may direct removal or seek disqualification via Federal Court. - No explicit requirement for insurers to notify APRA of circumstances that may materially and adversely affect suitability of significant owners. - Suggestion to clarify scope of "responsible persons" to include explicit category of "Key Persons in Control Functions". - ICP 6 - Changes in Control and Portfolio Transfers - FSSA sets ownership/control thresholds requiring approval. Treasurer or APRA may approve proposals; APRA assesses proposals like initial license applications. - Insurers not explicitly required to notify APRA of significant decreases in ownership below control level; may be identified through supervision. - Transfers of all/part business require APRA/Federal Court approvals; Minister prior approval required for transferring 15 percent or more of insurer's business. - ICP 7 - Corporate Governance - Corporate governance requirements are extensive and a key element of APRA supervision; scope exists to enhance requirements to reflect evolving international best practices. - Only listed insurers required to disclose comprehensive governance information. - ICP 8 - Risk Management and Internal Controls - APRA has emphasized risk management and internal controls; some insurers have sophisticated systems. In some jurisdictions designation of a compliance officer is required. - ICP 9 - Supervisory Review and Reporting - APRA operates a risk-based framework anchored on PAIRS and SOARS; baseline supervisory program exists; APRA collects extensive regulatory/statistical information and may request ad hoc reports; clear scoping for onsite reviews and formal review reports issued. - APRA empowered to inspect outsourced service providers and has conducted inspections. - ASIC typically monitors insurers’ conduct of business through desktop reviews; onsite reviews mainly in response to suspected misconduct. ASIC does not issue individual reports from thematic reviews but discusses findings. ASIC may exercise compulsory information gathering against outsourced service providers where appropriate. - Industry feedback suggests scope for more proactive ASIC engagement on conduct of business issues; merits in promoting ongoing dialogue and monitoring to prevent breaches. - ICP 10 - Preventive and Corrective Measures - SOARS supports progressive escalation of remedial measures. APRA has wide powers for timely and proportionate measures. - Conduct of unauthorized life insurance business not explicitly an offence under LIA; APRA addresses via indirect means including cooperation with ASIC. APRA may commence civil proceedings and refer criminal matters to DPP. No civil or criminal proceedings for unauthorized insurance activities since 2006. - ICP 11 - Enforcement - In 2008 APRA’s enforcement powers broadened to include issuing directions and appointing judicial managers. Enforcement guided by publicly available Enforcement Manual and a dedicated Enforcement Unit; Enforcement Committee promotes consistency. - APRA has taken enforcement actions against general insurers; no cause to exercise enforcement powers against life insurers since 2006. - ICP 12 - Winding-up and Exit from the Market - Insolvency defined in CA; APRA has powers to require discontinuance and orderly exit. Winding-up based on CA with insurance-specific modifications in IA and LIA. - No formal IA requirement that general insurer policy liabilities be met ahead of other unsecured creditors; requirement that insurer hold assets in Australia equal/exceed liabilities in Australia provides protection, supplemented by Policyholder Compensation Facility. - Life policyholders have priority in same statutory fund; capital requirements per statutory fund. If a fund cannot meet liabilities, policyholders may rank behind unsecured creditors of another statutory fund; Court may consider policyholder interests in surplus distribution. - Authorities may consider resolution measures including use of public funds under LIA to fund transfer of life insurance portfolios. - ICP 13 - Reinsurance and Other Forms of Risk Transfer - Australia's exposure to natural catastrophes makes strong reinsurance essential. APRA reviews reinsurance strategies and assesses exposures of insurers and industry to reinsurers. - ICP 14 - Valuation - Risk margins in general insurance liabilities are calculated to meet a specified level of uncertainty. - Risk margins in life insurance solvency liabilities are calculated using specified assumptions; margins can vary depending on current best estimate assumptions. Life insurance capital adequacy risk margins are explicit but selectable from prescribed ranges, so level of uncertainty provided by margins can vary. - ICP 15 - Investment - Insurers have a very broad choice of investment assets; many requirements are qualitative and principles-based. Responsibility for investment risk management lies with insurer, supported by adverse capital treatment for risky/concentrated investments and rigorous supervisory assessments. - Regime appropriate for developed market, but additional quantitative restrictions might be useful. - ICP 16 - Enterprise Risk Management for Solvency Purposes - Enterprise risk management is evolving. Some insurers have sophisticated systems; others are earlier stage. - LAGIC project intended to strengthen framework relevant to enterprise risk management. - ICP 17 - Capital Adequacy - APRA requires insurers to establish their own solvency control levels, to be agreed with APRA, rather than defining solvency control levels as requirements. - Resulting solvency control levels are not transparent to the market and may not provide consistent intervention thresholds. - ICP 18 - Intermediaries - Regulatory regime for intermediaries is mature and well-understood with broad coverage. ASIC has clear licensing and regulatory guides, including minimum training standards. - ASIC has adequate powers under CA, but limited resources lead to a more reactive supervisory approach (see ICP 19). Scope exists for more comprehensive corporate governance requirements for intermediaries. - ICP 19 - Conduct of Business - Current regime sets high-level principles for fair treatment of customers but should be supported by clearer guidance in line with international best practices; minimum training and competency standards for intermediaries should be strengthened. - Gaps in ASIC‘s legal authority and regulatory requirements may affect ability to supervise insurers’ claim practices and policy servicing and dilute conduct supervision effectiveness. - ASIC supervisory approach predominantly desk-top reviews, relying heavily on self-reporting or third-party notifications due to limited resources. - To enhance policyholder protection, scope exists to broaden ASIC’s authority (supervising claims handling; requirements for servicing policies until expiry; product development) and ensure ASIC is adequately resourced to supervise about 1,560 AFSL holders. - ICP 20 - Public Disclosure - Public disclosure increasingly emphasized internationally. Disclosure requirements in Australia have not kept pace with 2011 ICP 20 revisions. - Some disclosure types required only of listed insurers; some items not required to be disclosed at all. - Gap arises in part from supervisory responsibilities/powers: ASIC cannot impose disclosure beyond CA/accounting standards; APRA has not issued disclosure standards other than on capital adequacy. - ICP 21 - Countering Fraud in Insurance - Fraud in insurance is illegal and punishable. APRA assesses insurers’ fraud risk management frameworks; ASIC may undertake surveillance visits for deficiencies. ASIC and APRA cooperate with other competent authorities including foreign supervisors. - ICP 22 - Anti-Money Laundering and Combating the Financing of Terrorism - APRA and ASIC aware of ML/FT risks and have effective cooperation/coordination with domestic/foreign supervisors/FIUs. - FATF standards apply at minimum to underwriting/placement of life and other investment-related insurance. In some jurisdictions ML extended to general insurance; FATF standards require consideration of applying to non-life where ML/FT risks exist. - In Australia, general insurance is subject to the Financial Transactions Reports Act, but not to more comprehensive AML/CFT requirements prescribed by the AML/CFT Act. - ICP 23 - Group-wide Supervision - APRA has an effective framework for supervision of general insurance groups (Level 2) to understand group risks and address contagion. APRA has powers/flexibility to determine scope of Level 2 groups. - Equivalent Level 2 framework not developed for life insurers; pending Level 3 supervision of financial conglomerates will largely address this. - ASIC’s market conduct supervision is at legal-entity level; no group-wide market conduct requirements. - ICP 24 - Macroprudential Surveillance and Insurance Supervision - APRA has comprehensive processes and tools for macroprudential surveillance and insurance supervision. Plans to increase use of stress testing should strengthen quantitative analysis of industry-wide risks. - ICP 25 - Supervisory Cooperation and Coordination - APRA has coordination arrangements with domestic and foreign supervisors, liaises with relevant agencies bilaterally and at CFR level; formalized some arrangements via bilateral/joint MoUs. - Internationally, APRA shares information with foreign regulators, particularly RBNZ. Where APRA is designated group-wide supervisor, it establishes supervisory colleges and coordination mechanisms. - ICP 26 - Cross-border Cooperation and Coordination on Crisis Management - APRA maintains effective working relationships with foreign home and host supervisors in systemically important jurisdictions. MoU on financial distress management executed by CFR agencies applies to cross-border financial stress. - APRA well-equipped with statutory powers/tools to respond to cross-border insurer crises. No requirement currently for insurers to maintain recovery or resolution plans. ### C. Recommended Actions (Table 4: Recommendations to Improve Observance of ICPs) - ICP 1 - Objectives, Powers and Responsibilities of the Supervisor - Legislation should be amended to give ASIC the power to make rules, helping to close gaps in the current conduct of business framework. - ICP 2 - Supervisor - Authorities should strengthen the ability of APRA and ASIC to exercise functions and powers effectively and operationally-independently by: - a) Eliminating or further restricting the ability of the Minister to give directions to APRA and ASIC on supervisory policy; - b) Eliminating or further restricting Minister involvement in decisions related to individual regulated entities or individuals; and - c) Considering funding arrangements to ensure APRA and ASIC have resources needed to respond to current and emerging supervisory challenges. - ICP 5 - Suitability of Persons - Enhance suitability requirements by: - a) requiring insurers to notify APRA of any circumstances that may materially and adversely affect the suitability of significant owners; and - b) separating "Key Persons in Control Functions" from the definition of "senior manager" under "responsible persons." - ICP 6 - Changes in Control and Portfolio Transfers - Require insurers to notify APRA of any significant decrease in ownership by a person(s) below the pre-determined control level approved by the Minister. - ICP 7 - Corporate Governance - Amend requirements to more explicitly indicate Board responsibility to maintain and enforce policies dealing with conflicts of interest. - Require all insurers to disclose governance practices in annual reports to make information available to stakeholders. - ICP 8 - Risk Management and Internal Controls - APRA should consider requiring each insurer to designate an officer with overall responsibility for compliance to reinforce accountability and facilitate supervisor communication. - ICP 9 - Supervisory Review and Reporting - Authorities advised to: - a) review effectiveness of ASIC‘s predominantly desktop approach to supervising insurers’ conduct of business; - b) empower ASIC to inspect service providers of functions outsourced by insurers; and - c) ensure ASIC is equipped with adequate supervisory resources, including technical capacity for proactive supervision of insurers’ conduct of business. - ICP 11 - Enforcement - Maintain momentum on harmonizing APRA powers across the financial sector; differences remain (e.g., lack of direct power to revoke life insurer license). - ICP 12 - Winding-up and Exit from the Market - Consider providing legal priority of claims by policyholders of general insurers over unsecured creditors, and greater legal priority of life policyholders’ claims to assets of other statutory funds ahead of unsecured creditors. - ICP 14 - Valuation - APRA should consider specifying the level of uncertainty to be provided for by risk margins in life insurance liabilities. - ICP 15 - Investment - APRA should consider additional quantitative restrictions (e.g., on large exposures, investments with related parties, complex/less-transparent asset classes, investments in markets/instruments with less governance). - APRA should formally extend supervision to life insurance groups, including relevant investment requirements (see ICP 23). - ICP 16 - Enterprise Risk Management for Solvency Purposes - Through LAGIC or otherwise, APRA should enhance enterprise risk management requirements, including requiring insurers to: - (i) document approach to measuring risks; - (ii) establish quantitative and qualitative risk tolerance levels; - (iii) define risk tolerance limits accounting for all relevant material categories of risk and relationships between them; and - (iv) use such limits in business strategy and day-to-day operations. - APRA should provide more explicit guidance on own risk and solvency assessments. - ICP 17 - Capital Adequacy - APRA should increase transparency and ensure consistency of solvency control levels. - ICP 19 - Conduct of Business - Strengthen regime by: - a) implementing enhanced training and competency standards proposed by ASIC; - b) requiring insurance intermediaries to ensure privacy protection of customers; - c) empowering ASIC to establish/enforce regulatory requirements to ensure fair treatment of customers and product development; and - d) ensuring ASIC is adequately resourced to conduct proactive supervision to prevent misconduct rather than the current reactive approach. - ICP 20 - Public Disclosure - APRA and ASIC should cooperate to address disclosure shortcomings including: - a) exemption of small and unlisted insurers from many disclosure requirements; - b) limited details disclosed on capital adequacy of life insurers; - c) need for disclosure of an analysis of sources of earnings; and - d) need for comprehensive disclosures on corporate governance, risks, and risk management. - Authorities should consider requiring all insurers to make audited financial statements and required disclosures available to the public at no cost. - ICP 21 - Countering Fraud in Insurance - ASIC might strengthen oversight of AFSL holders’ fraud controls by adopting a more proactive inspection program (consistent with ICP 9 recommendations). - ICP 22 - Anti-Money Laundering and Combating the Financing of Terrorism - Authorities should periodically reconsider whether general insurance should be subject to the more comprehensive requirements prescribed by the AML/CFT Act. - ICP 23 - Group-wide Supervision - Impending Level 3 supervision of financial conglomerates will formalize group regulatory requirements for life insurers. Authorities should incorporate group-wide market conduct requirements in both Level 2 and Level 3 frameworks. - ICP 26 - Cross-border Cooperation and Coordination on Crisis Management - Authorities should implement requirement for insurers to establish and maintain contingency plans and procedures for going- and gone-concern situations. ### D. Authorities’ Response to the Assessment - (Section present in source; content not provided in the supplied excerpt.) *Source: IMF assessment text provided in the supplied content unit.* ### 48. The Australian authorities wish to express their appreciation to the IMF and its ### _cr12307 - 48. The Australian authorities wish to express their appreciation to the IMF and its ### Australian authorities' response and stance on financial-sector assessments - The Australian authorities express appreciation to the IMF and its assessment teams for their assessment. - Australia is strongly committed to the FSAP process and the insights that the FSAP provides into a country‘s financial sector. - Australia acknowledges it is important to continually review and seek to improve the regulatory framework and supervision practices. - The Australian authorities share the view that Australia has a high level of observance with the Insurance Core Principles, attributing this in part to robust supervision by APRA and ASIC. - The Australian authorities note there are some areas of disagreement with the assessment or where recommendations may not support better regulatory outcomes. - The authorities consider some assessed principles do not reflect strengths and performance of Australia’s supervisory approach or do not reflect actual deficiencies in practice or outcomes. ### IOSCO objectives and principles — executive summary (key findings and concerns) - High level of compliance with the International Organization of Securities Commissions (IOSCO) Principles. - Remaining concerns include some issues identified in the 2006 assessment. - ASIC‘s operational independence and sufficiency of resources are overarching concerns that impair its ability to discharge supervisory functions adequately and effectively across the entire regulated population. - ASIC is primarily a market conduct regulator but also supervises a significant number of market intermediaries, including monitoring compliance with prudential obligations (capital requirements and risk management). - Capital adequacy requirements need to be strengthened to better address risks to various types of intermediaries. - ASIC has responded to the need to focus on systemic and emerging risks; development of the Emerging Risk Committee (ERC) and channelling findings to the Council of Financial Regulators (CFR) should continue. - ASIC shares regulatory responsibility for Clearing Participants with ASX, which sets and monitors their capital requirements; APRA‘s role in their supervision is very limited despite APRA being the primary prudential regulator. - The split in prudential supervisory responsibilities underlines the need to assess whether the current regulatory structure is best suited to current and future challenges. - ASIC is enforcement focused and has enhanced its reputation through high profile and successful prosecutions, but is less focused on proactive supervision, which requires increased attention. - Current legislation hampers ASIC‘s international cooperation efforts; government amendments intended to remove some restrictions and bolster ASIC‘s capacity for international supervisory cooperation were expected to be in place by late 2012. - Good level of protection for shareholders; accounting and auditing standards are high. - Regulatory framework and supervisory practices for collective investment schemes (CIS) need improvement to comply with IOSCO Principles; ASIC has expanded supervision of hedge funds but is constrained by lack of powers on wholesale hedge funds and cross-border supervisory cooperation. - Opening of securities markets to competition in execution venues has catalyzed significant changes in market regulation and ASIC responsibilities. ### Systemic and structural challenges (analysis and implications) - Banking, insurance, and securities regulators face significant regulatory challenges in increasingly complex markets; new risks can arise in traditionally low-risk areas. - Importance of monitoring developments using timely, comprehensive, and robust data. - Need to remain alert to evolving risks and adjust regulatory priorities and responsibilities as necessary to ensure an optimal structure. ### Assessment scope, methodology, and conduct - Assessment of IOSCO Principles in Australia conducted from April 23 to May 11, 2012 as part of the Financial Sector Assessment Program (FSAP). - Assessment used IOSCO Principles and Objectives of Securities Regulation approved in 2010 and the Methodology updated in 2011; Principle 38 was not assessed. - Assessors evaluated legal/regulatory framework and implementation in practice, including inspection programs, cycle, scope, quality, and follow-up including enforcement. - Information sources included: ASIC self-assessment; legislation and ASIC publications; meetings with ASIC, APRA, RBA, Treasury, Financial Reporting Council, Takeovers Panel, Commonwealth Director of Public Prosecutions; meetings with market participants and industry bodies. - Assessment team members: Eija Holttinen (IMF) and Richard Britton (IMF external expert). ### Regulatory structure — roles and responsibilities - ASIC: corporate, markets, and financial services regulator; established under the Australian Securities and Investments Commission Act 2001 (ASIC Act). - ASIC‘s statutory objectives include: - Maintain, facilitate, and improve the performance of the financial system and entities in it; - Promote confident and informed participation by investors and consumers in the financial system; - Administer the law effectively and with minimal procedural requirements; - Enforce and give effect to the law; - Receive, process, and store, efficiently and quickly, information given to ASIC; - Make information about companies and other bodies available to the public as soon as practicable. - APRA: prudential supervision of banks, insurers, and superannuation (pension) fund trustees. - Under s912A Corporations Act 2001 (CA), AFSL holders that are “bodies regulated by APRA” are waived from certain CA requirements because APRA‘s requirements are considered sufficient. - ASIC supervises other AFSL holders, including compliance with prudential-type requirements. - ASX retains a significant role in supervision of Clearing Participants; capital requirements of Clearing Participants still set and monitored by ASX Clear and ASX Clear (Futures), subject to ASIC oversight. - CFR (Council of Financial Regulators) includes ASIC, APRA, RBA, and Treasury; has role in identifying/ addressing overlaps and gaps and advising government on financial system architecture. - RBA: responsibility for monetary policy, payment system oversight, and overall financial stability. - ACCC: administers general consumer protection provisions; financial services and credit consumer protection carved out and assigned to ASIC. - AUSTRAC: responsible for protecting integrity of financial system and countering money laundering/financing of terrorism. - Minister: grants Australian Market License (AML) and Clearing and Settlement Facility License (CSFL) decisions based on ASIC advice; RBA assesses CSFL compliance with Financial Stability Standards. ### Legal framework (key elements) - Principal legislative acts: Corporations Act 2001 (CA) and ASIC Act 2001. - Market intermediaries required to obtain an Australian Financial Services License (AFSL) from ASIC. - Licenses issued for specific itemized activities and financial products despite broad statutory definitions of providing financial services or operating an exchange. - Operators of exchanges require an AML; clearing/settlement facilities require a CSFL. - ASIC recently given power to draft legally enforceable market integrity rules for licensed markets and their participants; market integrity rules require ministerial consent. - Minister proposes regulations under the Corporations Act, made by the Governor-General; ASIC implements legislation, regulations, and market integrity rules. - ASIC issues Regulatory Guides interpreting legislation and regulations. - ASIC has statutory power to grant relief (individual or class) from certain CA provisions; class order relief must be tabled in each House of Parliament and can be disallowed by negative resolution; class order relief must be registered and published on an electronic register maintained by the Attorney-General's Department; most individual relief required by CA to be published by ASIC; ASIC publishes a quarterly report on main themes of recent relief. ### Market structure and key statistics - As at April 2012 there were 137 Market Participants in Australia. - ASIC has authorized 2,991 AFSL holders to access the market through a Market Participant. - ASIC estimates approximately 700 of these AFSL holders, Indirect Market Participants, are currently actively providing services similar to Market Participants under their licenses. - Table 5 (Trading Volume, Market Share, and Regulatory Status of the 20 Most Important ASX Members in 2011) — selected figures (Source: ASIC): - UBS Securities Australia Ltd: Equity Trades ($bn) 407.4; % Share of Total Trades 13.85; APRA Regulation No; ASX Clearing Participant Capital Requirements Yes - Citigroup Global Markets Australia Pty Ltd: Equity Trades ($bn) 407.2; % Share of Total Trades 13.84; APRA Regulation No; ASX Clearing Participant Capital Requirements Yes - Deutsche Securities Australia Ltd: Equity Trades ($bn) 258.1; % Share of Total Trades 8.78; APRA Regulation No; ASX Clearing Participant Capital Requirements Yes - Goldman Sachs Australia Pty Ltd: Equity Trades ($bn) 235.6; % Share of Total Trades 8.01; APRA Regulation No; ASX Clearing Participant Capital Requirements Yes - Macquarie Securities (Australia) Ltd: Equity Trades ($bn) 224.7; % Share of Total Trades 7.64; APRA Regulation Level 2; ASX Clearing Participant Capital Requirements Yes - (Table continues for 20 firms) Total: Equity Trades ($bn) 2,651.4; % Share of Total Trades 90.14 - Table 6 (Funds Under Management (FUM) by 20 Largest Responsible Entities on December 31, 2011) — selected figures (Source: ASIC): - Colonial First State Investments Ltd: APRA Regulated RSEL; Corporate Group CBA; Wholesale FUM ($ bn) 38.49; Retail FUM ($ bn) 30.22; Total FUM ($ bn) 68.71 - Vanguard Investments Australia Ltd: APRA Regulated RSEL; Wholesale FUM ($ bn) 24.42; Retail FUM ($ bn) 1.26; Total FUM ($ bn) 25.68 - Macquarie Investment Management Ltd: APRA Regulated RSEL; Corporate Group Macquarie; Wholesale FUM ($ bn) 10.82; Retail FUM ($ bn) 7.46; Total FUM ($ bn) 18.28 - Perpetual Investment Management Ltd: APRA Regulated No; Corporate Group Perpetual; Wholesale FUM ($ bn) 8.58; Retail FUM ($ bn) 5.24; Total FUM ($ bn) 13.82 - Platinum Investment Management Ltd: APRA Regulated No; Wholesale FUM ($ bn) 11.28; Total FUM ($ bn) 11.28 - (Table continues for 20 firms) - Note: Approximately $4 billion of total FUM is managed by a related entity, Perpetual Superannuation Ltd, which is an RSEL. This $4 billion is retail FUM. *Source: IMF FSAP assessment material as presented in the supplied content.* ### 76. The top 20 Market Participants’ market share at ASX amounted to ### _cr12307 - 76. The top 20 Market Participants’ market share at ASX amounted to ### Market concentration and participants - The top 20 Market Participants’ market share at ASX amounted to approximately 90 percent in 2011. - Trading on ASX is dominated by Australian subsidiaries of global investment banks. - All top 20 Market Participants are regulated by ASIC rather than APRA. - For the majority of the top 20 (those that are also Clearing Participants), ASX Clear sets and monitors their capital requirements under the supervision of ASIC. ### AFSL holders and investment advisers - 3,345 AFSL holders are authorized to act as investment advisors and provide personal advice. Some of these advisors are individuals rather than firms. - ASIC estimates that 2,055 of these AFSL holders are permitted to deal on behalf of clients, have custody of assets, or manage client accounts. ### Collective Investment Schemes (CIS) and funds under management - The amount of funds under management in Australian CIS is relatively small compared with funds managed by superannuation funds. - A minimum investment in superannuation funds is compulsory; additional investments are subject to tax benefits up to a yearly limit. - The definition of a CIS (Managed Investment Scheme) is broad. - Details of funds under management in Retail MIS at the end of 2011 (Table 7): - Listed property trusts: $127.4 billion - Unlisted property trusts: $3.6 billion - Exchange Traded Funds: $4.7 billion - Other listed equity trusts: $29.5 billion - Money Market Trusts: $23.7 billion - Unlisted equity trusts: $54.4 billion - Unlisted mortgage trusts: $3.8 billion - Unlisted other trusts: $16.2 billion - Total: $263.3 billion - Note: This table does not include information on investments in Wholesale MIS. ### ASX market structure and key statistics (year-end 2011 unless otherwise noted) - ASX Group is the overwhelmingly dominant exchange market group in Australia, with approximately 98 percent of the total volume of on-exchange trading in equities and derivatives. - ASX Group was created by the merger of the Australian Stock Exchange and the Sydney Futures Exchange in July 2006. - ASX Group is one of the world‘s top 10 listed exchange groups measured by market capitalization. - ASX Group functions as a market operator and clearing house, oversees compliance with its Operating Rules, and promotes corporate governance standards among Australia‘s listed companies. - Market data (ASX markets only): - Domestic listed equity issuers: 1,983 - Foreign listed equity issuers: 96 - Total number of issuers, including listed issuers of debt securities: 2,222 - Domestic market capitalization: USD 1,187 billion (equivalent to 82.2 percent of Australia‘s GDP) - Market capitalization of the top 10 companies: $527 billion (equals 37.1 percent of GDP) - Total cash market traded value: USD 1.3 trillion - Average daily turnover: USD 5.4 billion - Proportion of market turnover by BHP Billiton Ltd and Rio Tinto Ltd (two most actively traded companies): 15.8 percent - Number of new publicly listed companies: 133 - Share ownership by Australians (direct and indirect): rose from 41 percent in 2008 to 43 percent in 2010 - Foreign sourced investment activity in shares of Australian companies: estimated to be in excess of 40 percent of the market ### Derivatives, OTC instruments, and trading facilities - Derivatives are traded on-exchange and over-the-counter (OTC). - Instruments traded on ASX 24: equity and index options, index futures, interest rate futures and options, grain futures and options, wool futures and options, futures and options over a range of energy and environmental products. - Instruments traded OTC: swaps, forward rate agreements, interest rate options, credit derivatives, and currency options. - ASX offers trading in equity warrants and retail-oriented Contracts for Difference (CFD) across equity index, equity, commodity or currency underlyings. - Many managed investment schemes are also quoted on ASX. ### Corporate bond market and non-government debt trading - Corporate bond issuance and trading is limited, though there is scope for expansion. - Government issues little debt along the yield curve; crowding out of corporate issuers is not a problem. - Banks issue residential mortgage backed securities (RMBS); the residential housing market has slowed. - ASX listed debt instruments (in practice): - Corporate bonds: 3 - Floating rate notes: 14 - Convertible notes: 15 - Hybrid securities: 24 - Volume in OTC trading of non-government debt securities in 2011: approximately $908 billion - Government bond trading in 2011: $1,483 billion - On-exchange equity trading in 2011: $2.02 trillion ### Exchange Traded Funds and warrants - Exchange Traded Funds (ETF) market size: around $5 billion. - Equity warrants volumes declined from a peak of $11.2 billion in 2008 to $2.9 billion in 2011. ### Trading volumes by instrument type (2006-07 to 2010-11) — selected figures (billion turnover) - Over-the-counter (OTC): - Government Debt Securities: 772, 716, 792, 928, 1,483 (92.0% change since 2006) - Non-Government Debt Securities: 605, 637, 494, 675, 908 (50.0% change since 2006) - Repurchase Agreements: 4,415, 3,885, 5,147, 5,418, 7,364 (66.8% change since 2006) - Swaps: 4,962, 6,099, 5,725, 5,923, 6,809 (37.2% change since 2006) - Overnight Index Swaps: 2,660, 1,846, 1,031, 3,000, 7,425 (179.1% change since 2006) - Foreign Exchange: 46,690, 45,837, 44,303, 41,436, 44,569 (-4.5% change since 2006) - Total OTC: 70,617, 72,149, 69,825, 67,343, 79,507 (12.6% change since 2006) - Exchange Traded: - Equities: 1,816, 2,199, 1,503, 1,864, 2,020 (11.2% change since 2006) - Futures: 38,259, 41,496, 27,192, 34,338, 47,702 (24.7% change since 2006) - Total Exchange Traded: 40,075, 43,695, 28,695, 36,202, 49,722 (24.1% change since 2006) - ALL FINANCIAL MARKETS total: 110,692, 115,844, 98,519, 103,544, 129,229 (16.7% change since 2006) - Source for table: Australian Financial Markets Association report 2011 ### Competition in trading venues and regulatory changes - In 2010 the Australian Government announced support for competition between exchange markets for trading in listed shares in Australia. - Transfer of market and participant supervision from ASX to ASIC occurred in 2009. - Chi-X Australia completed its license application and began operating in November 2011. - Chi-X operates a trading platform in the 200 shares that comprise the S&P/ASX 200, ASX quoted ETFs, and approximately 12 shares outside the S&P/ASX 200 selected based on participant demand. - In April 2011, an order under the Foreign Acquisitions and Takeovers Act 1975 prohibited the acquisition of ASX by Singapore Exchange Limited (SGX); concerns related to regulatory sovereignty and supervision of ASX's clearing and settlement functions. - Government consulting on CFR proposals to make legislative changes to address supervisory concerns. ### ASIC’s changed role and Market Integrity Rules (MIR) - ASIC assumed market surveillance responsibilities in August 2010 to monitor both ASX and Chi-X in real time. - Objectives for interconnectivity between Chi-X and ASX: - Enable creation of a consolidated (national) best bid and offer price (NBBO) to obtain best execution of client orders. - Require market participants to link to both exchanges. - ASIC introduced seven sets of Market Integrity Rules (MIR): - One set for each domestic market ASIC supervises and one set of Competition MIRs for markets where the same product is traded on more than one market (ASX and Chi-X). - MIRs largely replicate prior operating rules for secondary trading, and Competition MIRs cover best execution, and pre- and post-trade transparency in a multi-market environment. - Legislative changes empowered ASIC to write rules directly applicable to license holders via an amendment to the CA; Ministerial approval remains necessary (except in an emergency), and rules are laid before Parliament and subject to negative resolution. - Cost of ASIC installing and operating market surveillance technology is borne by the industry on a cost recovery basis, not by the taxpayer. ### Legal system and insolvency regime (preconditions for effective securities regulation) - Australia has a federal system: Commonwealth Government, six State Governments, and two Territory Governments. - The Australian Constitution (1901) establishes the Federal government and separation of powers (Parliament, Executive Government, Judiciary). - Proposed legislation must be passed by both Houses of Parliament (House of Representatives and the Senate) to become law. - Australia is subject to the rule of law; English common law and equitable principles are the foundation of Australian laws. - The judicial powers of the Commonwealth are vested in the High Court of Australia. - The Corporations Act governs corporate insolvency with provisions for winding-up, asset realization, distribution to creditors, receivership, reconstruction, arrangements with creditors, and voluntary winding-up. - Three types of external administration of insolvent companies: liquidation, receivership, and voluntary administration. - Directors must consider options for external administration and may be held personally liable for company debts if they fail to cause an insolvent company to cease trading. ### Main findings (summarized regulatory assessment) - Regulator responsibilities: - ASIC has primary responsibility for regulation of securities markets and entities active on them in Australia. - ASIC shares responsibilities with APRA, the RBA, and ASX in some areas. - Cooperation is undertaken through the CFR and bilaterally. - Division of responsibilities for prudential supervision of AFSL holders has created a complex supervisory structure. - Concerns remain about the extent of the powers of the responsible Minister. - ASIC’s independence and sufficiency of resources are hampered by flattening of its overall operating funding over the last three years and dependence on non-core funding. - ASIC has a wide set of powers and focuses on identifying systemic risks and addressing issues outside the regulatory perimeter. - Self-regulation: - No organizations have formal self-regulatory organization (SRO) status in Australia; none have powers formally delegated by ASIC. - Exchanges and clearing/settlement facility operators perform functions resembling self-regulation, with statutory obligations on admission of participants, member monitoring, sanctioning powers, cooperation with ASIC, and oversight by ASIC. - Transfer of responsibility to ASIC for monitoring secondary trading significantly reduced self-regulatory functions of domestic market license holders (except listing and clearing/settlement). - Enforcement: - ASIC’s enforcement powers are long-standing and well understood. - ASIC actively uses its powers and has a well-constructed process for case selection and resource allocation. - Intelligence gathering and analysis work well; investor education is contributing to retail investor protection and reporting. - ASIC has a good record in prosecuting cases and cooperating with the Commonwealth Director of Public Prosecutions (CDPP); its success rate in serious cases is high. - International cooperation and information sharing: - Responsibility for responding under the Mutual Assistance in Business Regulation Act (MABRA) was transferred from the Attorney-General's Department to the Treasury to enable speedy decisions. - ASIC lacks authority to respond under MABRA on its own volition. - Limitations exist on ASIC‘s legal authority to obtain information on behalf of other regulators for supervisory purposes, constraining participation in supervisory colleges. - Government is progressing amendments to the Act and MABRA Regulations to provide ASIC capacity to respond to requests for supervisory information from individual foreign regulators. - Sharing supervisory information in international supervisory colleges remains unresolved. *Source: _cr12307 - 76. The top 20 Market Participants’ market share at ASX amounted to* ### 100. Principles for issuers: ASIC has issued a series of Regulatory Guides on prospectus ### Principles for issuers: ASIC has issued a series of Regulatory Guides on prospectus disclosure to assist issuers and their advisors in producing disclosure documents that help retail investors better assess the offer ### Issuers and disclosure framework - ASIC has issued a series of Regulatory Guides on prospectus disclosure to assist issuers and their advisors in producing disclosure documents that help retail investors better assess the offer. - Australian listed companies and some others operate under a legislative requirement for immediate and continuous disclosure to the public of significant information, with the objective of securing a fully informed market. - ASIC has a long-standing policy of bringing cases to court against companies, company directors, and their professional advisors for breach of their obligations under the continuous disclosure regime. - Recent court decisions in several high profile cases have found in favor of ASIC, usually on appeal. - ASIC is the regulator of corporate conduct, takeovers, and other control transactions. - The Takeovers Panel is a peer-based dispute resolution mechanism with the courts as the final backstop. - Australia has adopted a comprehensive body of accounting standards, which follow the International Financial Reporting Standards (IFRS). - The annual accounts of a listed company must be audited, with the half-yearly reports subject to either review or audit. ### Principles for auditors, credit rating agencies, and information service providers - Australia has adopted auditing standards based on the International Standards on Auditing. - Cooperation appears effective among ASIC (which supervises auditors and enforces standards), the Financial Reporting Council (FRC), the AUASB, the Companies Auditors and Liquidators Disciplinary Board (CALDB), and the auditors‘ professional bodies. - The regime for licensing and supervising credit rating agencies (CRAs) is fully operational. - CRAs are required to meet all the requirements set out in the IOSCO Code of Conduct Fundamentals for CRAs. - Research report providers are regulated as AFSL holders, which ensures that they are subject to comprehensive requirements to manage any conflicts of interest. ### Principles for collective investment schemes (CIS) - All CIS operators are required to be authorized and are subject to conduct of business, capital, and organizational requirements. - Retail CIS need to be registered with ASIC and comply with the requirements set out in the CA and ASIC regulatory guides. - There are no regulatory requirements on Wholesale CIS. - ASIC‘s proactive supervision is currently limited. - The assets of a CIS have to be adequately segregated, but self-custody or related party custody is allowed subject to certain additional requirements that do not appear to be sufficiently stringent. - Initial, ongoing, and periodic disclosure requirements apply, but there are no standardized formats for all disclosures. - There are requirements on valuation and pricing of CIS units. - The regulatory framework for CIS applies to hedge funds and their operators, but ASIC lacks certain powers needed for effective oversight and cooperation. ### Principles for market intermediaries - Market intermediaries need to hold an AFSL specifying the services and products they are authorized to provide. - The licensing process appears thorough; however, the assessment of the applicant does not extend to its controllers. - Capital requirements are largely not risk-based. - Intermediaries are subject to a suite of prudential, organizational, and conduct of business requirements, whereas internal controls are addressed only indirectly. - There is no general statutory requirement to act in the best interest of clients; however, there are specific requirements for certain market intermediaries relating to best interest type duties. - Even though a significant number of intermediaries may still remain uninspected for extended periods of time, ASIC has expanded its supervisory reach during the past few years. - ASIC, jointly with other CFR members, has plans in place to deal with the failure of a systemically important financial institution. - ASIC‘s own plans address the possible failure of non-systemic entities. *IMF Country Report content unit _cr12307 - 100.* ### 104. Principles for secondary markets: The power to grant licenses to exchanges and ### Principles for secondary markets: The power to grant licenses to exchanges and clearing and settlement facilities and to approve their operating rules resides with the Minister ### Regulatory responsibilities and institutional roles - The power to grant licenses to exchanges and clearing and settlement facilities (CSFL holders) and to approve their operating rules resides with the Minister. - ASIC processes license applications and all rule changes prior to submitting them to the Minister with a recommendation. - The primary regulator of clearing and settlement facilities is the central bank (RBA), which uses continuous assessment of a CSFL holder‘s performance against the Financial Stability Standards (FSS). - The transfer of responsibility for surveillance of secondary trading activity to ASIC in August 2010 has reduced the role of exchanges in market surveillance, although exchanges retained rules and procedures on participant admission, order types, trading arrangements, and continued responsibility for listing and monitoring compliance by listed entities with continuous and periodic disclosure obligations. - Prudential regulation of off-exchange business, where AFSL holders are not regulated by APRA or as Clearing or Market Participants, is identified as a source of weakness. ### Summary assessment against IOSCO Principles (high-level findings) - Table 9 presents a detailed implementation assessment of the IOSCO Principles across multiple areas of regulatory responsibility and market functioning. - Key cross-cutting findings: - The sharing of supervisory responsibilities between ASIC, APRA and operators of the ASX Group‘s clearing facilities has created a complex supervisory structure. - The Minister retains certain responsibilities for AML and CSFL holders; the RBA is involved in setting standards for clearing and settlement facilities. - Cooperation arrangements between authorities have been established. - ASIC‘s oversight of exchanges is effective; however, some supervisory functions are relatively weaker in proactive supervision compared with enforcement. ### ASIC powers, independence, resources and governance (Principles 1–6) - Principle 1: ASIC responsibilities are clearly set out in the CA and ASIC Act; ASIC has wide powers to provide relief and exemptions under the CA and exercises them transparently within legal constraints. - Principle 2: Certain features of the CA and ASIC Act could impact ASIC‘s independence, notably the responsible Minister‘s powers to give directions, express expectations, and decide on AML and CSFL matters. No evidence of Ministerial interference in day-to-day decision making was found. ASIC‘s operational independence is constrained by increased dependence on non-core funding. Accountability measures, requirement to provide reasons for decisions, and appropriate review mechanisms exist. - Principle 3: ASIC has a wide set of powers but funding, while sufficient for current tasks, does not enable the level of proactive supervision necessary; dependence on non-core funding allocated to specific regulatory tasks persists. ASIC has been able to retain and attract staff with varying backgrounds; governance practices and investor education are strong. - Principle 4: ASIC has a well-developed consultation process subject to regulatory impact analysis; its website includes extensive policy-making information; procedural fairness requirements apply. - Principle 5: Commissioners and staff are subject to a code of conduct on conflicts of interest, trading restrictions for relevant staff, strict confidentiality and data protection requirements, and sanctions for non-compliance. - Principle 6: ASIC has an internal Emerging Risks Committee (ERC) to deepen understanding of emerging risks, including systemic risks, and works with other domestic regulators primarily through the Council of Financial Regulators. ### Regulatory perimeter, information sharing and international cooperation (Principles 7, 13–15) - Principle 7: The ERC monitors the appropriateness of the regulatory framework in light of financial innovation; specific regulatory actions based on ERC work remain limited. - Principle 13: Legal limitations on ASIC‘s power to share information for supervisory purposes bilaterally and in colleges of supervisors risk isolation from international supervisory cooperation. Government amendments to law and regulations are progressing and are expected to be in place by late 2012 to remove some limitations; the issue of sharing supervisory information in international supervisory colleges currently remains unresolved. - Principle 14: ASIC is at the forefront of regulators improving information sharing (subject to limits in Principle 13). Arrangements with Hong Kong and New Zealand to encourage cross-border offerings of securities and CIS are noted as innovative. - Principle 15: ASIC has a demonstrably good record in providing assistance to foreign regulators, subject to the limitations in Principle 13. ### Market conduct, disclosure, accounting and auditing (Principles 16–22) - Principle 16: ASIC Regulatory Guides on the disclosure regime for public offerings have elevated the regime; ASIC‘s increased success in court cases has improved enforcement of the corporate disclosure regime. - Principle 17: Separation of powers between ASIC (regulates conduct of takeovers) and the Takeovers Panel (peer-based dispute resolution) works effectively and has widespread acceptance. - Principle 18: The standard-setting process for accounting is high quality; Australian standards remain fully consistent with IFRS; ASIC‘s role in securing compliance works well. - Principles 19–21: ASIC has significant powers over auditors and audit practices; Australia has adopted auditing standards based on the International Standards on Auditing (ISA) and maintains oversight through the AUASB. - Principle 22: ASIC implemented the IOSCO Code and imposed a supervisory program on CRAs; concern noted that restricting retail access to CRA ratings (five of six CRAs opted for “wholesale only” licenses) may be ineffective in practice. ### Collective investment schemes, valuation, hedge funds and intermediaries (Principles 23–32) - Principle 23: Research report providers must hold an AFSL and are subject to regulatory requirements including conflicts of interest; ASIC has issued guidance to research report providers and experts. - Principle 24: All CIS operators must be authorized as AFSL holders with conduct and organizational requirements; Retail CIS require registration with ASIC and additional criteria for REs; Wholesale CIS are not subject to regulatory requirements. ASIC supervision is focused on reactive and desk-based activities rather than full on-site inspections. - Principle 25: Retail CIS constitutions must be lodged with ASIC; assets must be segregated but may be held in custody by the RE or a related entity, where safeguards are not strong enough. - Principle 26: Retail CIS investors require a Product Disclosure Statement (PDS); from June 2012 a Simple CIS PDS must comply with a standard eight page format. Wholesale CIS are not subject to disclosure requirements. ASIC can intervene when a PDS is filed with ASIC. - Principle 27: Retail CIS constitutions must set valuation rules; ASIC and APRA have issued guidance; independent auditors assess compliance; subscription, redemption rights, pricing errors and suspension of redemptions are addressed. - Principle 28: Retail hedge funds and their REs are subject to the same requirements as other Retail CIS; ASIC can collect information from hedge fund operators subject to sharing restrictions in Principles 13 and 15; hedge fund operators have recently become subject to increased ASIC supervision. - Principle 29: Market intermediaries must hold an AFSL specifying authorized services and products; ASIC applies a comprehensive desk-based licensing process; controllers, significant shareholders and those with significant voting power are not assessed as part of licensing. - Principle 30: Initial and ongoing capital requirements apply to all AFSL holders but, except for APRA-regulated bodies and direct market/clearing members, are not risk-adjusted and lack periodic reporting other than annually. Additional reporting applies in deteriorating conditions; annual reports must be audited. Capital requirements do not account for risks from unlicensed affiliates. ASIC is undertaking a progressive review of financial resources requirements; compliance of envisaged new requirements with Principle 30 was not assessed. - Principle 31: AFSL holders must maintain appropriate risk management and compliance systems; there is no general statutory requirement to act in the best interests of clients, though specific best interest duties exist for certain intermediaries. No specific statutory requirement for sufficient internal controls. Client asset protection rules, KYC, record-keeping and key conduct-of-business requirements apply. Direct market participants face a risk-based supervisory program with a three year cycle; ASIC is extending proactive supervision to important indirect participants and, to a lesser extent, investment advisers. - Principle 32: ASIC and other CFR members have plans to deal with failure of systemically important institutions; ASIC has plans for non-systemic entities and powers including immediate cancellation of a license in case of insolvency. Market operators must maintain a guarantee fund for participants. Other AFSL holders must hold professional indemnity insurance. No investor compensation scheme exists in Australia. ### Market infrastructure, trading systems and transparency (Principles 33–35) - Principle 33: The CA definition of a financial market is very broad but fails to capture some trading systems that should be regulated; regulation of market infrastructure providers may not be sufficiently efficient given innovation and growing inter-connectivity. - Principle 34: Exchange competition has existed only since November 2011 and is viewed as a transitional phase not yet completed. Uncertainty remains about whether responsibility for monitoring and enforcing particular rules falls to ASIC or the relevant exchange, creating potential compliance uncertainty for licensees. - Principle 35: The regulatory framework includes requirements for timely pre- and post-trade transparency, subject to standard derogations. ASIC‘s analytical work on dark pools, dark liquidity and high frequency trading is well regarded by the industry. *Source: _cr12307 - 104. Principles for secondary markets: The power to grant licenses to exchanges and clearing and settlement facilities and to approve their operating rules resides with the Minister* ### conclusions to date, there appears to be a ### _cr12307 - conclusions to date, there appears to be a ### Assessment of market integrity and enforcement - There appears to be a consistent view that the work is based on a sufficient amount of accurate data and has been properly and impartially carried out having regard to ASICs regulatory priorities to secure fair, orderly, and transparent markets. - Principle 36: Regulation should be designed to detect and deter manipulation and other unfair trading practices. - Australia has a comprehensive legal framework to deal with market manipulation, insider dealing, and other types of market abuse, supported by dissuasive sanctions. - ASIC has employed a range of systems and human resources to monitor markets and detect possible offenses. - The working relationship between ASIC and the office of the Commonwealth Director of Public Prosecutions (CDPP) appears to be effective and efficient. - The CDPP and the judiciary appear fully cognizant of the need to pursue white-collar crime as vigorously as other forms of crime. - Principle 38: Securities settlement systems and central counterparties should be subject to regulatory and supervisory requirements that are designed to ensure that they are fair, effective and efficient and that they reduce systemic risk. - Not assessed. ### Identified gaps and risks - Principle 37: Regulation should aim to ensure the proper management of large exposures, default risk and market disruption. - There are no rules governing the proper management of large exposures, default risk, and market disruption that arise from bilateral transactions involving AFSL holders that are not supervised by either APRA, ASX as Clearing Participants or ASIC as Market Participants. - Some questions have been raised about the legal provision concerning the powers of the clearing facility operator to transfer client positions from a failing firm to a viable one. ### Recommended Action Plan (select highlights from Table 10) - Principle 1 - ASIC, APRA, and ASX are encouraged to continue to further develop their cooperation mechanisms to ensure appropriate supervision of jointly supervised entities. - The Government and the supervisory authorities should assess whether the current regulatory set-up continues to best ensure the protection of investors and the reduction of systemic risk. - The Government and ASIC should consider the continued appropriateness of the legal prohibitions against publication of certain individual relief instruments. - Principle 2 - The Government should consider the continued appropriateness of the extent of the powers assigned to the Minister to ensure sufficient independence of ASIC, with particular attention to the role of the Minister in relation to licensed markets and clearing and settlement facilities. - The Government should explore ways to secure the stability of ASIC‘s core funding. - Principle 3 - The Government should ensure that ASIC‘s core funding will be sufficient to meet the future regulatory and supervisory challenges, also in light of the global regulatory commitments. - ASIC should aim at allocating more resources to reach sufficient levels of proactive supervision of all types of entities under its supervision. - Principles 6 and 7 - ASIC is encouraged to continue to develop the ERC and to ensure that its focus on emerging and systemic risks is maintained. ASIC could consider using it as a vehicle to identify risks from existing regulatory gaps. - Principle 9 - ASIC should continue to refine its oversight role to focus on those areas where the functions undertaken by the exchanges are key to effective implementation of ASIC‘s objectives. - Principle 12 - ASIC should reinforce its initiative to develop proactive supervision as regards MIS, REs, and market intermediaries including investment advisors. - Principles 13 and 15 - The Government should complete the legislative process to expand ASIC‘s powers to share supervisory information with foreign regulators on the basis of participation in supervisory colleges as well as bilaterally. - Principle 24 - ASIC should allocate more resources to the proactive supervision of REs and MIS. - ASIC and APRA should cooperate to ensure that all REs, independent of their primary prudential regulator, are subject to similar supervision of risks arising from their role as fund manager. - ASIC should gain access to sufficient information on the Wholesale Funds sector to ensure it is subject to appropriate regulation that takes into account the risks to investor protection and financial stability. - Principle 25 - The Government and ASIC should increase safeguards to ensure sufficient client asset protection in case of self-custody and related party custody by, for example, requiring the custodian to hold a higher amount of capital, by providing additional guidance on operational safeguards, and by requiring independent verification on the robustness of the custodial arrangements. - Principle 26 - The Government and ASIC should seek further harmonization of the content and format of all disclosure documents to assist investors in comparing various investment opportunities. - The Government and ASIC should consider the continued appropriateness of the lack of disclosure requirements for Wholesale Funds. - Principle 29 - The Government should extend the good fame and character test to controllers, other significant shareholders, holders of a significant amount of voting power, and those that are otherwise in a position to materially influence a license applicant. - Principle 30 - ASIC should introduce risk-based capital requirements and periodic capital adequacy reporting for all AFSL holders to simplify and harmonize the current complex regime. - Principle 31 - The Government and ASIC should introduce appropriate requirements for internal controls for all AFSL holders, and require adequate periodic evaluation of these controls and risk management arrangements. - The Government should ensure that a requirement for AFSL holders to act in the best interest of clients applies to all market intermediaries. - ASIC should extend its proactive supervision program to sufficiently cover all types of market intermediaries. - Principle 32 - The Government should consider the additional investor protection benefits that an investor compensation scheme would bring. - Principle 33 - The Government may wish to consider whether the current two-stage process of licensing and rule approval for exchanges and clearing and settlement facilities should be simplified and the powers transferred to ASIC. - The Government may wish to consider amending the definition of a financial market in the CA to provide a better tool with which to regulate the evolving structure and diversity of financial markets in Australia. - Principle 34 - ASIC should give priority to eliminating any remaining overlaps and ambiguities emerging from the transfer of responsibility to ASIC for market surveillance and the supervision of non-clearing ASX members. - Principle 37 - ASIC should extend the large exposure requirements to all AFSL holders whose license conditions potentially enable them to acquire large exposures relative to their capital base. - The Government and ASIC should analyze any issues concerning the powers of ASIC or the clearing facility operator to transfer client positions from a failing firm to a viable one and seek appropriate remedies, if necessary. ### Authorities’ response — key positions and planned actions - General - The Australian authorities welcome the comprehensive assessment and consider the assessment tough but fair. - The authorities welcome the IMF’s assessment that the Australian legal and regulatory framework reflects a high degree of compliance with the IOSCO objectives and principles of securities regulation. - Australia is already taking steps to implement some of the IMF’s recommendations and will carefully consider the others. - Independence of the Regulator (Principle 2) - The Australian authorities do not consider that the Minister’s power to direct ASIC impedes ASIC’s independence in any way. - ASIC has complete independence in relation to the performance of its functions and exercise of its powers under the corporations legislation. - The Minister‘s power to issue a direction to ASIC with respect to policies and priorities is limited and has only been exercised once and then some 20 years ago; the power to revoke a direction given by ASIC has never happened. - The authorities agree there could be room to streamline the licensing process for exchanges and clearing and settlement facilities and will consider how best to respond (Principle 33, Recommendation 1). - Funding of the Regulator (Principles 2 and 3) - The Government’s overall approach to fiscal policy has ensured adequate funding and sustained fiscal responsibility. - Funding for ASIC has grown since the FSAP was last conducted in 2006, with total forecast operating revenue rising from $261.3m in 2007-08 to peak at $360.6m in 2010-11 (reflecting temporary funding to assist ASIC to deal with a spike in work flowing from the financial crisis) to $352.7m in 2012-13, and is projected to remain at roughly this level across the forward estimates. - The Government will continue to ensure the stability of ASIC‘s funding. - The authorities agree it will be important to ensure ASIC’s funding continues to be sufficient to meet regulatory and supervisory challenges, in light of global regulatory commitments. - Transparency and cooperation - The authorities will consider the continued appropriateness of laws prohibiting the publication of certain individual relief instruments; ASIC publishes a quarterly report providing an overview of circumstances in which ASIC has exercised or refused to exercise its exemption or modification powers. - The authorities welcome the endorsement of the Council of Financial Regulators (CFR) as a forum for cooperation and collaboration. - The authorities will continue to work towards furthering cooperation mechanisms to ensure appropriate supervision of entities subject to supervision by both APRA and ASIC. - The authorities appreciate encouragement for ASIC’s Emerging Risks Committee and will work to ensure it continues to focus on emerging and systemic risks. - Investor protection and collective investment schemes - The Government is currently reviewing the costs and benefits of a statutory investor protection scheme and will consider the IMF recommendation on Principle 32 based on that review. - ASIC has begun work on a program designed to standardize its approach to surveillance and will refine its approach to proactive supervision (Principle 3, Recommendation 2; Principle 12; Principle 24, Recommendation 1; Principle 31, Recommendation 3). - The Government is progressing amendments to allow ASIC to collect information in response to foreign regulator requests in a broader range of circumstances and will consider permitting collection and sharing for supervisory colleges (Principles 13 and 15). - The authorities agree ASIC should collect data on the wholesale sector to ensure appropriate regulation, and will consider the appropriateness of disclosure requirements for wholesale funds and further harmonization of disclosure content and format (Principles 24 and 26). - ASIC is reviewing custody standards, including financial requirements, applying in relation to custody (including self custody) of property in retail collective investment schemes. - Authorization and ongoing obligations of AFSL holders - The authorities will consider recommendations to extend the good fame and character test, introduce internal control requirements with periodic evaluation, and apply a best-interests requirement to all market intermediaries, noting scope and recent reforms under the Future of Financial Advice which introduced a duty for financial advisers to act in the best interests of clients (subject to a ̳reasonable steps‘ qualification) and place clients’ best interests ahead of their own when providing personal advice to retail clients. - Risk-based capital requirements (Principle 30) - ASIC has commenced a review of capital requirements for all entities it licenses, in line with IOSCO Principles. - The authorities consider that risk-based capital requirements and periodic capital adequacy reporting are not necessarily appropriate for all AFSL holders, noting some AFSL holders are very small entities that do not hold client assets or are not significant enough to warrant such requirements. - Market oversight and large exposures - The authorities welcome positive comments about ASIC’s oversight of exchanges and Australia’s framework for dealing with market abuse. - ASIC will continue to refine its market oversight role and give priority to eliminating overlaps and ambiguities from the transfer of market surveillance and supervision of non-ASX members. - The authorities will consider amending the definition of financial market in the Corporations Act to better regulate evolving markets (Principle 33, Recommendation 2). - The authorities will analyze any issues concerning the powers of ASIC or the clearing facility operator to transfer client positions from a failing firm to a viable one and seek remedies if necessary (Principle 37, Recommendation 2). - The assessment recommends extending large exposure requirements to all AFSL holders whose license conditions enable them to acquire large exposures relative to their capital base; the authorities assess the current risk as small because only a very small proportion of OTC derivative transactions are conducted by AFSL holders supervised neither by APRA nor by a clearing and settlement facility operator. - G20 requirements for reporting OTC derivative transactions to trade repositories and draft legislation (for public consultation) to implement G20 reforms may assist; under the draft legislation, ASIC could write rules imposing mandatory reporting obligations on persons, including AFSL holders that undertake specific OTC derivatives transactions. - After first-stage implementation, remaining material gaps in monitoring or regulation of large exposures could be assessed. - Summary position - The authorities will continue to evaluate, and as appropriate, implement, the FSAP’s recommendations and look forward to continuing dialogue with the IMF to enhance Australia‘s regulatory and supervisory framework. *Source: _cr12307 - conclusions to date, there appears to be a (IMF FSAP assessment text provided).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12307.pdf_