Ministerial power to regulate financial market operators will be transferred to regulators, under proposed financial market infrastructure regulatory reform.
The Council of Financial Regulators has issued a consultation paper, outlining proposed changes to the regulatory regime for market operators, benchmark administrators, clearing and settlement facilities and derivative trade repositories.
A key finding is that “the extensive role of the Minister in Australia’s licensing and supervisory regimes for Australian market licensees (AMLs) and clearing and settlement facility licensees (CSFLs) is unusual, both in comparison to overseas regimes and with other Australian financial sector regimes.”
Proposed reforms include redistributing current decision-making authority and supervisory powers and giving regulators stronger powers and greater independence. Enhanced supervisory powers would include stronger directions powers and information gathering power.
CFR proposes that the Minister’s powers that are currently delegated to ASIC be transferred from the Minister to ASIC, and to the RBA where appropriate. These powers include licensing, operating rule changes, exemptions, directions and compensation regimes.
“It is critical for the regulators to be able to identify risks in licensed entities as they emerge and to have the ability to intervene effectively before those risks escalate,” the consultation paper says.
Institutions performing “fundamental activities in financial markets” support transactions in securities with a total annual value of $16 trillion and derivatives with an annual value of $150 trillion.
The consultation paper says: “Investors rely on [providers] for access to transparent prices and a safe means of transacting in their investments.
“Clearing and settlement facilities in particular are critically important due to increased central clearing of over-the-counter derivatives.”
In addition to the proposed transfer of ministerial power, the reform package includes a new crisis management regime for clearing and settlement facilities, a fit and proper regime for “key decision makers” and a resolution regime.
The fit and proper regime would include consideration of competence, knowledge and experience, and any current disqualifications.
There is currently no resolution regime for clearing and settlement facility licensees in Australia.
The consultation paper says: “If a CFSL failed, the government would either have to attempt to resolve it without any dedicated powers to achieve resolution, or allow it to be dealt with under general corporate insolvency provisions. Such an outcome would risk disruption to critical clearing and settlement services.”
CFR’s work follows several reviews of Australia’s financial system, including the 2014 Financial System Inquiry and this year’s IMF Financial Sector Assessment Program, which have concluded that the current regulatory regime for financial market infrastructure should be enhanced to increase its effectiveness and align with international best practice.
Earlier reviews found there was a “less than optimal” distribution of decision-making and regulatory powers between the regulators and government.
“A fit-for-purpose regulatory regime ideally aligns the powers available to regulators with their responsibilities under the regime, to provide the most effective means of achieving desired regulatory outcomes. The current distribution of powers between the Minister, ASIC and the RBA in Chapter 7 of the Corporations Act does not fully achieve this objective,” the paper says.