Australia's Financial Regulatory System - Managing Conflicts of Interest, Stockbrokers Obligations - Assignment Example

Name Tutor Course Date Financial Services Industry Question.1 AFSL licensing requirements An Australian financial services licensee (AFSL) is a person who holds an AFS license under s913B that authorizes him or her to carry out financial services business in order to provide some financial services. (a) Training and competency requirements that Peter would need If Peter becomes successful in application, he will have to undergo the RG 146- Licensing in the training of financial services or product advisors, RG 104-Licensing in meeting the general obligations and PF209 license conditions 6 and 7. This is a procedure that includes a pro-forma type of training register as well as development plan that can easily be duplicated for each of the representative. This is to acquaint him with the necessary corporate advisory skills and knowledge to maintain the good name of Purple Stock Broking Company that has made a successful business for several years. Such competent skills and knowledge will be critical in addressing the challenges experienced by the company due to the recent global financial crisis (ASIC, 2005). (b) High-level overview of AFSL regime and its application to the business activities practiced by Purple Company In order to have an updated staff induction and training manual, the AFSL regime in regard to the processes undertaken to handle rumors suggests that AFSL holders are required to use onerous written procedures in dealing with their distribution of rumors. Therefore, holders of AFSL must prohibit its staff from the origin of rumors, though, the most reasonable idea concerns the obligations imposed on an AFSL holder on immediate hearing of the rumors that could be circulation. As a result, the AFSL holder should inform its clients on the existence of any rumor provided it is already in a wider circulation and it can be reasonably passed on. Purple company like any other stock broking company, follows an elaborate series of the appropriate procedures that should be taken into consideration each time a stock broking representative becomes aware of any rumor. Such procedures include entering the details of a rumor into a rumor log, ensuring that a rumor is circulated within the firm for a reasonable decision to be made to determine its circulation to other people in the company and to its clients. Purple Company verifies the rumor prior to making the financial decision by a nominated person on whether or not such a rumor is reasonable to be passed on. The core services that are provided under the AFSL regime concern with the financial products and advice. Studies indicate that ASIC holds substantial expertise to the efficient and effective regulation of such core services (Adrian 138). (c) Problems that could arise from Peter’s activities From Peters numerous business opening activities, there will be a problem of providing the needed paper-works so as to be assessed before he can make a successful AFSL applications. As a result, Peter will be denied the opportunity to provide the financial advisory services and meet the required obligations to minimize the menace of global financial crisis. However, Peter is required to pass through the processes illustrated below in order to avoid chances of GFC. (d) A description of two situations where ASIC has taken a keen action Due to AFSL license application change conduct, the Australian Securities and Investments Commission (ASIC) cuts the paperwork for AFSL applicants and has introduced changes that are aimed at reducing the amount of paperwork needed to be submitted as part of the requirement for application for any Australian financial services License by more than 50 per cent (ASIC, 2008). ASIC has also reduced the number of documents that should accompany any initial application for a license to the limit of four documentary ‘proofs’. In other cases, such as Peters’ new businesses, ASIC might ask or need him to have additional paperwork to be assessed before he can process an AFSL application fully. However, for most of the applicants, only four proofs will be satisfactory. This implies that the information that ASIC may require to assess a license application varies, and thus the type as well as the number of documents that ASIC requests are dependent upon its own analysis of a given applicant’s business, the kinds of both products and services he or she plans to provide. As a result, a person or group with any application that is under the current ASIC consideration, or in their final application process, will no longer need to neither resubmit nor change their license application. The most significant idea about the approach of ASIC in its law enforcement is that it focuses on whether there is existence of a case to consider and if in the public interest undertake that action, but not simply winning (ASIC, 2007). Question 2 Australia’s financial regulatory system A speech on the Global Financial Crisis (GFC) Good morning ladies and gentlemen. I am privileged to be invited here today. I have been asked to discuss the alarming idea of global financial crisis. As most of the financial institutions are increasingly becoming globalized and a number of financial activities being conducted across the border, we are forced to observe a shift of greater responsibilities to various international institutions. Therefore, the impacts of global financial crisis (GFC) are not limited to only developed countries. The crisis is presenting itself as a human and development tragedy for such countries, and thus progresses into the Millennium Development Goals that is currently in jeopardy. Based on the current global financial crisis, I would support the need to adjust the conceptual framework which underpins securities regulation so as to take into consideration what we have already learnt from the crisis. This is in relation to how agency, network as well as behavioral theories can enlighten our understanding of the markets and their participants. This implies that the main challenges for the regulators concern how to set a realistic definition for the financial stability and involve appropriate ways to achieve it at a very reasonable cost (Turner 69). Global financial crisis, in addition, exacerbated the need for a close collaboration between regulators and the standard setting bodies based on the international level. If we consider the recent financial turmoil, globalization of the financial industries has largely highlighted the significance of systematic risk regulation. This gives the implication that various markets as well as the associated functions are interconnected. Therefore, to properly provide services to the investors and preserve the integrity of all the financial markets, it becomes necessary that sufficient attention has to be given to the continuous development of systematic and important market functions. Such functions can be achieved through the combination of both sound and rigorous regulations at domestic level, cross-border sharing of the information as well as regulatory co-operation formed at the international level. For instance, SFC is considered a stern supporter of the international regulatory organizations that is responsible for uniting various regulators through different techniques and expertise. It is expected to provide diversified perspectives and the required information that can facilitate the early detection of various risks that can pose threat to financial stability. The most significant idea about the approach of ASIC in its law enforcement is that it focuses on whether there is existence of a case to consider and if in the public interest undertake that action, but not simply winning. I believe for the past 20 years we have examined the development of what I would refer to as brand ASIC. It is now a highly respected regulator with own identity. ASIC deserves the opportunity to celebrate for the difference it has made for the past 20 years to include its time as the ASC. Although there is existence of other factors that explain why Australia has made improvements during the GFC than other countries in terms of strong economy and banking sector as well as positive corporate and ethical culture, the strength of its financial regulatory architecture and the role of ASIC in both enforcement and standard improvements are equally important. In case you are a body that is regulated by the Australian Prudential Regulation Authority (APRA), there is really no obligation under the s912A of Corporations Act in regard to adequate resources or the risk management systems. In the same way, such obligations are not considered as AFS license conditions for the bodies regulated by APRA. On the other hand, there are analogous obligations within the Commonwealth legislation that are regulated by APRA as well as in the prudential standards and rules which are determined by APRA under the same legislation. In cases where one is considered as a body regulated by APRA and he or she breaches the APRA prudential standards or rules, this can also be considered as a breach of one’s obligation under s912A(1)(c) in order to comply with the financial services law, however, only if: (a) Compliance with all the prudential standards or the rules is demanded by the Australian Government as recorded in reg 7.6.02A; and (b) Only the breach arises from a conduct when the body or individual is supplying financial services. Cumulatively, such measures together with the regulatory regime make us have a sound position when faced with the GFC. Therefore, let us have a joint endeavor to curb the menace of global financial crisis. Thank you for giving me your humble time to have a successful discussion with you on this global issue that greatly affects our financial sector. Question 3: Managing conflicts of interest and ethics (a) (i) What are the ethical and legal breaches that occurred in the scenario? Management of conflicts of interest is a procedural requirement of s912A (1) (aa) of the Corporation Act. Basically it includes the entire conflicts disclosure requirements that should be dealt with SoAs and FSGs. Ethical and legal breaches such as lack of transparency for purple to deal with its retail derivative investors, and thus there is no clear disclosure of the counterparty risks to investor, for instance Purple that plans to involve in merging with the Magellanic Ltd’s client money in its product disclosure statement. There is no attention paid on the director’s duty to prevent the insolvent trading, yet there is need for Purple as a financial services license to understand the articulated key principals. For example, the beliefs of ASIC that the directors such as Joe and Henrietta must apply them so as to meet the obligations under Corporations Act in order to prevent the insolvent trading. The Financial Services on the Reform Act 2001 introduced a single AFS licensing regime basically for people within the business of providing the financial services, such as dealing in mostly financial products as well as providing financial advice (ASIC, 2008). AFS licensee must inform ASIC through writing and within 10 business days on any significant breach or a likely breach of one’s own obligations. However, failure to notify about a significant breach or a likely breach, then ASIC may consider that such is in itself is an automatically generated significant breach. Therefore, the concerned body or individual should have a very clear, well-understood as well as documented process to use in identifying breaches. This must be reported to ASIC not only one breaches an obligation, but also when he or she is likely to breach a given obligation. This implies that one is likely to breach a given obligation if, and only if, he or she is no longer able to comply with such an obligation (Beardsley & O'Brien 78). In case a breach or the likely breach considerably reduces own ability or capacity to effective and efficiently supply the financial services that are covered by the owned license, this could be considered to be significant. For instance, it is considered that a breach of the any financial requirements of one’s license conditions can be significant. If such minimum requirements are not well met, one may consider not having the financial ability or the required capacity to continuously supply the financial services that are covered by his or her license. This suggests that breach notifications play a very significant role in the ASIC’s failure to notice of the financial services industry. For example, apart from alerting ASIC to significant breaches of the law, breach notifications also give it valuable information that help ASIC to identify the emerging trends of the non-compliance. Occasionally, ASIC may publish certain information about the trends in its breach reporting task (ASIC, 2008). (ii) What are the arrangements that Purple as a financial services license would need to have in place to prevent such breaches from occurring Purple as a financial services license would need to have some guidance on how to enhance transparency for its retail derivative investors. Based on the ASIC Regulatory Guide 212 on Client money in relation to the deals in OTC derivatives, requires that Australian Financial Services License in this case Purple to identify and manage its client money according to the requirements of Corporations Act. In addition, ASIC requires the licensees such as Purple to have a clear disclosure of the counterparty risks to any investor along with the client money in its product disclosure statement (Jordan 89). Purple also needs to have put in place or acquainted with some guidance on the director’s duty to prevent the insolvent trading. This should be in accordance with ASIC released Regulatory Guide 217 as the Purple’s guide for its directors to consider the feedback and responses of the consultation paper 214 that was released in 2009. The regulatory guide is very important for Purple as a financial services license since it articulates the key principals that ASIC believes the directors such as Joe and Henrietta to apply so as to meet the obligations under Corporations Act in order to prevent the insolvent trading. Furthermore, the guidance details the factors that will be considered by ASIC while deciding to bring the proceedings against the director for permitting a company freely trade while observed to be insolvent (Beardsley & O'Brien 118). Disclosure requirements for both debentures and unsecured notes should be one of the major considerations that Purple ought to have in place. It is the ASIC Regulatory Guide 69 on the debentures and unsecured notes that improves the disclosure for the retail investors as part of its Three Point Plan developing investor disclosure. The regulatory guide also includes the eight disclosure benchmark obligations and information that concerns naming restrictions that Purple needs to apply to the debentures and unsecured notes as a requirement under s283BH of Corporation Act 2001 as the company plans to carry out merging. In regard to the policy on group purchasing bodies, Purple financial services license should be familiarized with the ASIC Class Order CO 10/177 that was released in 2010 emending and the Regulatory Guide of 195 Group purchasing bodies in insurance as well as risk products. As a result of the amendment clarifications, situations where ASIC may consider to grant relief from Australian Financial Services Licensing as well as disclosure regime in relation to the CH 5C of Corporations Act 2001 will be achieved for some group purchasing bodies such as Purple (Tucker 156). (b) What are the consequences if ASIC determines that Purple has failed to comply with the arrangements identified. If ASIC determines that purple did not comply with the arrangements identified, for instance, enhancement of transparency for its retail derivative investors, it implies that Purple as an Australian Financial Services License will have failed to identify and manage its client money in accordance with the requirements of Corporations Act. As a result, purple will not be licensed to continue with its financial service provision due to the fear of global financial crisis. Furthermore, failure of Purple to have a clear disclosure of the counterparty risks to its investor along with the client money in its product disclosure statement indicates that the financial institution operates as a licensee but against the regulations of ASIC, and thus not legible to be in the financial service industry. Failure to comply with the policy on group purchasing bodies that Purple financial services license need to be familiarized with the ASIC Class Order CO 10/177, shows that the institution does not directed by the amendment and Regulatory Guide of 195 Group purchasing bodies in insurance as well as risk products. Therefore, amendment clarifications in situations where ASIC may consider to grant relief for Australian Financial Services Licensing as well as disclosure regime in relation to the CH 5C of Corporations Act 2001 will not be achieved for some group purchasing bodies such as Purple (Kodres 135). (c) Outline one ethical dilemma that William faces and the actions needed to address the dilemma William is faced with the ethical dilemma of how to eagerly impress his superiors, in this case Joe, concerning his final decision on the exact price of Magellanic. This is because when he came up with the initial price of Magellanic as being $7.90, he emailed the report to Joe who told him to have another look at it. Later, William revised the report and sent it to Joe for review, though, valuing Magellanic at a low cost of $6.10 compared to initial value. Therefore, William is found in ethical dilemma of whether to do the valuing or live it for the public awareness and judgment since it is released to the market. This indicates that there is lack of integrity in the financial sector. (d) Outline two possible consequences in case financial services industry professionals fail to adhere to the high standards of ethical conduct Financial services industry professionals are required to adhere to high ethical standards. This is simply because such standards generate considerable benefits such as market confidence, consumer protection as well as change the perception on financial crime, promotion of public awareness and confidence for all the stakeholders. In order for such benefits to be achieved, financial services industry professionals need to be open, honest, accountable, and responsive and they need to be committed to acting in a competent manner. However, if ethical standards are not or poorly adhered to by financial services industry professionals, detrimental effects occur. This poses risks to the market confidence as well as consumer protection. They can additionally increase the scope or possibility for financial crime, and thus causing a negative impact on the public awareness and confidence. This implies that financial services are a significant industry that affects the lives of majority of the people. Therefore, the industry not only needs to provide the appropriate expertise, but also do with integrity (Èihák 58). The concern of treading carefully shows that misconduct among the financial advisors is not a new issue. In case, it is identified, then the victim may have legal option. Conversely, one of the major challenges is proving that the financial advisory services professional misconduct is in existence. Another challenge that is formidable is determining what type of conduct is and not considered illegal. For example, most of the Securities and Exchange Commission permits brokers who involve in the selling of investment vehicles to keep away from registering as licensed investment advisors. This creates confusion on the issue of both legality and fiduciary responsibility. However, global financial crisis, in addition, exacerbated the need for a close collaboration between regulators and the standard setting bodies based on the international level (Shiller 89). Question 5: Stockbrokers’ obligations and responsibilities Majority of the people have been allured into investing their own hard-earned money on the basis of fake as well as misleading information. As a result, the results are normally dismal and a number of investors have lost huge amount of their life savings. Therefore, it is on a sad not that the financial planning industry is predominated with advisers and brokers who in most cases are eager to deceive their clients or customers for their own personal gain. This identifies the brokerage industry as one being regulated by the federal and state law. Thus, Acts of the professional misconduct or the outright fraud are examined to be illegal (IMF). (a) What obligations to their client Fred have Purple or Gabrielle breached? Gabrielle breached the obligation of Fiduciary Responsibility. This is reflected where Gabriella fails to inform Fred as her client about the purple stocking continuous monitoring of the developments within the IT sector in Australia and across the globe. The report provides the information that the sector is very much vulnerable to the changes within the IT expenditure enabled by both governments and large businesses. In addition, the report brings to light how the current challenging conditions have caused most of the IT infrastructure to be on hold. This was important information that Gabrielle and Purple at large have denied Fred. Therefore, as a financial advisor has breached the legal fiduciary responsibility to the client. It also indicates that Gabrielle and Purple as the financial advisor could have acted in accordance with Fred or client's best interests so as to eliminate the conflict of interest that occurred. This implies that financial advisors are often lured to place their client's money into the investments that are not or poorly suited for them. For instance, Gabrielle’s placing Fred's account into a volatile IT stock was identified to be disastrous, and thus being considered as a breach of duty on the side of the financial advisor. Avoiding to misrepresent facts was also an obligation that breached by Purple which is in the financial security industry was at first not willing to admit or to provide a prediction that there is a major downturn within the Australian IT development sector is. This was until Fred came to realize that his shares were less than half the actual price that he bought them for and were sold at a down pay of $ 3.30. This implies that financial advisors may decide to misrepresent the facts about market shares, a company's earning or market prospects with the aim of convincing a client to buy their stock. Additionally, if a given client has a substantial investment in any security, an advisor can purposefully neglect to let the client know of an impending problem in the company. This is particular with stocks that are often promoted by the advisor's own investment company (Jordan 56). (b) What are the possible consequences of such breaches? The breaches created the understanding that financial advisors are often lured to place their client's money into the investments that are not or poorly suited for them. For instance, Gabrielle’s placing Fred's account into a volatile IT stock was identified to be disastrous, and thus being considered as a breach of duty on the side of the financial advisor. The failure to avoid the misrepresent the facts also caused a bad impression that financial advisors may decide to misrepresent the facts about market shares, a company's earning or market prospects with the aim of convincing a client to buy their stock. This makes the stocking companies to loose integrity of their client. For instance, the secret incident of a downturn in the Australian IT sector made Fred to shatter his confidence in the Purple stock broking, and thus having the option to terminate his engagement with company. (c) Measures that Purple would need to have in place to deal with such situations Purple as a financial advisory service institution could have put in place the obligation of Fiduciary Responsibility and Avoiding to misrepresent facts to effectively and efficiently practice it as a corporate social responsibility. This could have solved the problem where Gabriella sells Fred’s shares at a very low cost that he bought them and the failure to inform Fred about the purple stocking continuous monitoring of the developments within the IT sector in Australia and across the globe. As a result, there would controllable widespread understanding that financial advisors may decide to misrepresent the facts about market shares, a company's earning or market prospects with the aim of convincing a client to buy their stock (Zingales 128). Works Cited Adrian, Tobias & Shin, Hyun Song. The changing nature of financial intermediation and the financial crisis of 2007-09. Federal Reserve Bank of New York Staff Report no. 439, 2010. ASIC. Financial Services Reform Act 2001. Retrieved July 5, 2011, from Australian Government Attorney-General's Department: Comlaw.2005. Retrieved July 2011 5 from, ASIC. ASIC. Retrieved July 2011 10, from RG 146: Licensing: Training of financial products adviser.2008. ASIC. RG 36: Licensing: Financial Product Advice and Dealing.2007. Retrieved July 2011, from ASIC: Beardsley, C., & O'Brien, J. R. The Financial Services Reform Act 2001: Impact on systemic risk in Australia. Reading UK: ICMA Centre - The University of Reading. 2005. Èihák, Martin. How do central banks write on financial stability? IMF Working Paper, no. 06/163. International Monetary Fund, Washington, 2006. IMF. Global Financial Stability Report', Chapter 2, Meeting new challenges to stability and building a safer system. International Monetary Fund. Washington, 2010. Jordan, Cally. Does 'f' stand for failure: the legacy of the Financial Stability Forum? University of Melbourne Legal Studies Research Paper, no. 429,2009. Kodres, Laura. Redesigning the contours of the future financial system', KDI/IMF conference on Reconstructing the World Economy, Seoul, Korea. International Monetary Fund. Washington, 2010. Shiller, Robert. The new financial order: risk in the 21st century. Princeton University Press, 2003. Tucker, Paul. Shadow banking, financing markets and financial stability. Bank of England, speech at a BGC Partners Seminar, on 21 January, London, 2010. Turner, Adair. The Turner Review: a regulatory response to the global financial crisis. UK Financial Services Authority, 2009. Turner, Adair. Examining the causes of the financial crisis. UK Financial Services Authority, speech to The Economic Club of America and National Journal Group. 2009. Zingales, Luigi. The future of securities regulation. Journal of Accounting Research. University of Chicago Booth. 47(2). 114-345. 2009. Read More