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Regulator - September 2009

This edition of Regulator comes to you one year after the collapse of Lehman Brothers on 15 September 2008. Given this anniversary, it is perhaps fitting that September 2009 is emerging as a critical one for the future shape of financial markets regulation, with a number of key developments taking place this month both globally and locally.

Ahead of the G20 Finance Ministers’ meeting in London last week, the US Treasury released its proposals for the reform of US and international regulatory capital for banks and the Basel Committee outlined its five key measures to strengthen the regulation of the banking sector, each of which paved the way for APRA to issue last Friday its version of capital and liquidity requirements for Australian ADIs.

Meanwhile, IOSCO released its Final Report on the regulation of both securitisation and credit default swaps, which we analyse in articles by Paul Smith and Jeremy Green. The key issue now is for Australia to implement the recommendations in a way which recognises market practice in this country and ensures its continued and efficient access to these global markets. (For market practitioners, it was also pleasing to note that the Report reaffirmed the importance of securitisation to the global economy and the role played by the CDS market.)

A question of balance

The Lehman anniversary has been notable in another respect: It has heightened the calls for reform and the noise levels from commentators who are cynical about the reform process.

For example, the G20 outcomes got a thumbs down from Theo Francis and Peter Coy writing in BusinessWeek, who predicted that Pittsburgh would likely lead to "a package of worthy but lukewarm reforms that leave the global financial system … exposed to another costly bust some years down the road”. New York Times columnist, Paul Krugman marked the Lehman anniversary by giving modern economics a slap, arguing in his widely cited New York Times essay last week that economists “have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds” .

For his part, President Obama noted yesterday: “The growing stability from these [government] interventions means we are beginning to return to normalcy. But what I want to emphasise is this - normalcy cannot lead to complacency.”

Mallesons agrees entirely; but we stress that any global reform to capital and liquidity rules, and any changes in Australia, need to balance the level of regulation and control, the need for effective supervision and oversight and an organisation's ability to conduct its business and generate acceptable outcomes for all of its stakeholders.

Governments and regulators should resist the temptation to pull on the reins too tightly. As Mark McFarlane and Damien Richard note in their article on ASIC’s new market regulatory powers, ineffective over-regulation - as occurred with Sarbanes Oxley - risks stifling our markets at a time of intense financial sector innovation.

Also this month

Among other articles in this edition, Scott Farrell writes on the draft US legislation for regulating the over-the-counter derivatives industry, John Canning reviews the Personal Properties Securities reforms, warning that banks and financial institutions will need to be fully prepared or risk diminished value through loss of security and Katherine Forrest provides an update on the consumer credit law reforms. We believe it is crucial for financial institutions and others to consider these reforms as a package, to ensure they obtain the maximum long-term benefits for their businesses and that operational disruptions and implementation costs are minimised.

On the other side of the Atlantic, UK authorities have been similarly active over the last month, with director disqualification orders in competition cases now under review by the Office of Fair Trading. Dave Poddar and James Marshall contribute this month with an analysis of the OFT review and its implications for directors in Australia facing competition law issues.

We round out this edition of Regulator with a brief update from Tim Bednall on recent legislative developments in relation to the executive remuneration reform proposals. As it was at the G20, reform of compensation practices and corporate governance remains a frontline issue for the Rudd Government.

Enjoy. As always, we welcome your feedback.


Mallesons is co-sponsoring the annual AFR Chanticleer luncheon in Sydney in October, which will feature a panel of Australia’s leading chairmen providing perspectives on the major issues currently facing business and sharing opinions on the economic outlook.

The panellists at this year’s event are Catherine Livingstone AO, Leigh Clifford AO, Kevin McCann AM and Dr John M Schubert.

For those located in Sydney on 15 October, we recommend this event as one to attend.

Click here to view the PDF flyer.



 Local contact(s)

Key developments in financial sector regulation


Future regulation of securitisation markets - IOSCO report handed down

The International Organisation of Securities Commissions (IOSCO) recently released the Final Report of the Task Force on Unregulated Markets and Financial Products (TFUMP), following a Consultation Report in May. The Final Report gives Australia a clear mandate to implement changes in a way which recognises the particular features of market practice in Australia. Read more

Important role for CDS market recognised by IOSCO report

The recent Final Report of the International Organisation of Securities Commissions (IOSCO) Technical Committee in respect of the Task Force on Unregulated Markets and Financial Products (TFUMP) makes for encouraging reading at a time when it can be very difficult to find a positive word said about the CDS market. Read more

Proposed US derivatives legislation is not so novel… to an Australian

The US Treasury Department has delivered draft legislative language to Capitol Hill with proposals on regulating the “over-the-counter” (OTC) derivatives industry in the United States. These proposals have attracted significant comment in the US, not in the least because of their breadth and apparent novelty. However, all but one of the fundamental principles of these new US regulatory proposals are unlikely to surprise market participants already familiar with derivatives regulation in Australia. Read more

ASIC's new role sensible, but beware a regulatory straitjacket

The move of market trading supervision from the ASX to ASIC makes a good deal of sense but if the change is to realise its potential benefits for our financial system, then the Government and ASIC will need to keep the end game in sight. Read more

Personal Property Securities - be prepared or risk losing out

Personal Property Securities reform, set for introduction in May 2011, will be one of the most important legislative reforms to affect the financial services industry for decades. Major changes will be required in the systems, processes, policies, procedures and documentation of financial institutions and others. Read more

Consumer credit protection - a process in need of reform

The first phase of the national consumer credit protection reform process is nearing completion, with the National Consumer Credit Protection Bill through the House of Representatives and introduced into the Senate on 7 September.

The process has been notable not only for the major change it represents to the regulation of credit in Australia but for the lack of broad-based consultation and the haste with which the Bill was drafted. Read more

United Kingdom Office of Fair Trading Discussion Paper on wider use of director disqualification orders in competition law cases

On 18 August 2009, the United Kingdom Office of Fair Trading (OFT) released proposed changes to its guidance on director disqualification orders in competition law cases. Currently, a company director can be disqualified from acting as a director for up to 15 years if their company is involved in a contravention of competition law and a Court finds they are unfit to be involved in the management of a company as a result. Read more

IN BRIEF - Executive Remuneration & Employee Share Schemes

The Federal Government's proposed legislation capping termination payments for directors and executives at 1x base salary has been passed by the House of Representatives and recommended by the Senate Economic Committee with only one change. The Bill is being debated in the Senate this week, and could become law within days. Read more