15 banking and finance © oxford university press, 2007. all rights reserved

15

Banking and Finance

© Oxford University Press, 2007. All rights reserved.

Banking & Finance

Learning Objectives:• Understand how banks are regulated in Australia;• Understand the role of APRA in the prudential supervision of Australian

financial institutions;• Explain the role of the Council of Regulators, whose membership includes

the Reserve Bank of Australia (RBA), Australian Prudential Regulatory Authority (APRA), Australian Securities and Investments Commission (ASIC) and Treasury in regulating Australia’s financial sector;

• Explain how cheques and negotiable instruments are regulated;• Understand the product disclosure requirements for an issue of securities;• Understand the product disclosure requirements for other financial

products;• Explain how and why Australia’s financial markets and financial services

are licensed under the Corporations Act.

Banking & Finance cont ...Australia’s Banking System: Constitutional Framework

• The Commonwealth Parliament derives its law making powers from the Commonwealth Constitution.

• Section 51(xiii) of the Commonwealth Constitution provides the Commonwealth Parliament with the power to make laws with respect to “currency, coinage and legal tender”.

• Section 51(xii) of the Commonwealth Constitution provides the Commonwealth Parliament with the power to make laws with respect to “Banking other than State Banking”.

• The Constitutional provisions on banking are concurrent powers.

• See: Bourke & Ors v State Bank of NSW (pg 251 of Law and Business text).

Banking & Finance cont ...

Prudential Supervision: Council of Financial Regulators

• The Council of Financial Regulators is armed with the responsibility of providing prudential and regulatory supervision over the Australian financial sector. The Council of Financial Regulators is the coordinating body for Australia’s financial regulatory agencies which include:- RBA, APRA, ASIC and Treasury.

• See: Figure 15.1 Council of Financial Regulators (pg 252 of Law and Business text).

Banking & Finance cont…

Bank & Customer Relationship

• The relationship between bank and customer is essentially contractual and not fiduciary.

• The relationship is normally governed by the terms of agreement made between the two parties. The agreement between the bank and its customers can be supplemented by additional terms such as implied terms (common law and statute) as well as customs and usage.


Cheques and Negotiable Instruments

Cheques and negotiable instruments are principally regulated by the Cheques Act 1986 (Cth) and the common law. Cases dealing with the issue of cheques provide the court’s interpretation of the provisions contained in the Cheques Act

Banking & Finance cont ...Two types of negotiable instruments

which are available:-

• Bills of exchange &

• Promissory Notes


• The primary function of negotiable instruments is to provide transferability from the original party to the new party is one of the essential characteristics of a negotiable instrument.

• Rules relating to the how cheques are regulated (eg: presentment and dishonour; acceptance and delivery of negotiable instruments) are discussed in pgs 262-263 of the text


Financial Products and Financial Services Regulation

• Prospectus Disclosure: Chapter 6D Corporations Act


• A listed company may choose to issue shares to the public with a view of raising capital. When a company chooses to raise funds from the public, the company must comply with the fundraising disclosure provisions in Chapter 6D of the Corporations Act.

• Under s.707 of the Corporations Act, a company must provide a prospectus if it is intending to raise capital from the public (retail investors).


CONTENTS OF A PROSPECTUS

A prospectus must ordinarily contain the following information:-• Rights and liabilities attaching to the securities or options;• Assets and liabilities, financial position and performance, profits and

losses and future prospects of the company that the issue relates to;• Terms and conditions of the offer;• Interest and fees and payments and benefits of directors, promoters

and underwriters;• Application for the securities to be admitted to quotation on the ASX;• Expiry date of the offer;• Details of lodgment of the prospectus with ASIC;• Any other regulations the prospectus is required to comply with.


Misleading or Deceptive Prospectus: Section 728 Corporations Act• An investor that has been misled due to a

misleading prospectus may claim compensation for the loss or damage that he/she has suffered from the person making the offer.

• Each director of the company whose securities are being offered, the underwriter to the issue and any other person who made a statement in the disclosure document.


Defences for misleading or deceptive prospectus:-• Due diligence (reasonable enquiries and

reasonable belief) by the maker of the statement;• Lack of knowledge;• Reasonable reliance on information given by

someone else;• Limitation of actions (six years).


Retail/Wholesale Client & Disclosure: Sections 761G Corporations Act

The distinction between “retail” and wholesale” was a key initiative of the changes brought to the Corporations Act and is central to the delineation of disclosure obligations for financial advisers and issuers.


• A “wholesale client” is defined in s 761G of the Corporations Act to mean an individual who satisfies either of the following tests:-

• Product value: Threshold limit of $500,000 for the price of a financial product or service;

• Small business: business manufacturing goods employs more than 100 people, or 20 people in all other circumstances;

• Individual wealth: net assets of least $A 2.5 million or income for the last two financial years of $A 250,000.


Product Disclosure Statement (PDS): Part 7.9 Corporations Act

• Retail clients must receive a product disclosure statement (PDS) before acquiring a financial product. The PDS is to be offered to the retail client at the point of sale


Significant features of a financial product including:-

• investment risks,

• explanation of key benefits and costs,

• any commissions payable by the client and

• any other information likely to influence the client’s decision whether or not to invest.


Financial Services Guide (FSG): Part 7.7 Corporations Act

• Retail clients are also required to receive a Financial Services Guide (FSG)

• A Financial Services Guide (FSG) is required to be provided to a retail client when he/she is supplied with a financial service. An FSG is a disclosure document that aims to provide retail clients with information regarding any financial services that are provided by a financial institution or financial adviser.

15 banking and finance © oxford university press, 2007. all rights reserved

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