Statutory Framework
1. It is noteworthy that the various frameworks outlined in the question aim to provide effective conditions for regulation. A brief description of the various frameworks along with their potential advantages and disadvantages is carried out below.
The intention behind this framework is to protect the interests of the consumers and simultaneously assure that qualify goods and services are provided to consumers. As the name suggests, this framework is derived from a particular statute and thus has government approval. The prime administrator and enforcer of this particular framework in Australia is the ACCC or Australian Competition and Consumer Commission which acts as an apt example.
- It enables promotion of fair trade policies.
- It also provides the various regulations used in trade
- It minimises the conflict between the shareholders and business management as the necessary rules are to be followed.
- It protects the rights of the consumers through appropriate legislation.
- The framework leads to high penalties whenever business disputes take place and are brought to the notice of the regulator.
- Due to the various trade and legislative regulations, there is incremental trade burden along with licensing feed and hence business limitations are imposed.
As the name suggests, this refers to a regulation framework where the regulator is the same as regulated. The regulations thus formulated are not restrictive to the business interests but rather aim to introduce requisite checks and balances so that wrong business activities can be curbed. An apt example of this particular framework is the privacy protection system by Google. This is because this has been designed by the company only and applicable to the company with the intention of maintaining privacy along with requisite data protection.
- As these are self=framed regulations, hence these are highly flexible and can also be altered as per the demands of the underlying situation.
- Further, there is no requirement of any license and hence any fee paid to the regulator for the same is avoided.
- The regulations tend to have a bias and hence are tilted to promote the business interests of a particular industry.
- This framework tends to reduce competition and lacks adequate rules required for regulation.
As is indicative, in this particular framework the regulations are framed by neither the government or government authorised regulator in isolation but rather both the state and the industry organisations tend to work in tandem so as to lay prudent regulatory framework. An apt example of this system in the Australian background is the regulation of animal welfare.
- Due to participation of industry, the rules drawn are fair and conducive for sustainable industry growth.
- It truly leads to efficient which if materialised in letter and spirit leads to a win-win situation for the industry and the regulators.
- Through these frameworks, the outsiders cannot be bound.
2. A co-regulatory framework which has been exceptionally successful in practical is the regulation of animal welfare in Australia. Various steps have been undertaken so as to ensure the success of this particular framework which are highlighted below (Vandegraaff, nd).
- The co-regulatory relationship forged between the government regulatory agencies and the industry organisations is formalised so as to avoid any confusion later on and clearly outline the responsibility of both the parties. For instance, the industry organisations are expected to provide quality assurance so that the minimum quality standards stated would be adhered to by all the various players,
- Mutual understanding based implementation of MOU which tends to outline the extent of enforcement actions and investigations that would take place which is required to ensure strict compliance without being too obstructive..
- Also, national compliance plan has been worked out in the industry so that the same standards are applicable throughout the country and there are no issues of bias towards the industry located in any particular region. Besides, the regulatory standards are essentially driven not by the government but by the developments in global animal welfare norms.
- The government regulators tend to appoint a committee which evaluates the existing code of conduct and model practices and comments on the adequacy of the same. Further, it through a draft report submits various proposals which need to be introduced. Then, these are thoroughly discussed with the industry organisations to determine which of these need to be implemented in the Australian context keeping the state of industry, existing practices and interest over the long term.
In the above manner, a co-regulatory framework could function and lead to efficient regulation if the interests of both the stakeholders are balanced.
3. Investment may be defined as the monetary allocation to a particular asset with the intention of earning future benefits. This future benefit may be realised when the investment may be liquidated and would give some returns. However, the returns when a particular investment may be liquidated in due course of time would be termed as capital gains but certain return may also be reaped during the holding period in the form of interest or dividend payment. The time horizon in case of investment typically tend to be higher as these are made for significant time periods although short term investments are also done based on the underlying requirements of funds in the future. The total income made from the investment in the form of regular inflows along with capital gains realised at the end would essentially determine the total asset returns. Two examples are investment made in mutual funds or the bonds issue of a company. These are done when the underlying security holder intends to earn money by investing in standard securities whose interest or returns are user controlled.
Self-Regulatory Framework
Risk based financial products tend to represent the system which is quite common and adhered to by lenders in case of mortgages and financial services. The lender evaluates the interest rate applicable on the given loan by taking into consideration the underlying default risk. Besides, a host of other factors such as the risk free rate, economic conditions, risk averseness in the market, performance of capital markets and opportunity costs are all key parameters to be regarded while making a decision. Typically the risk and return here are related as the higher interest rate could be drawn from a higher risky lender while as lower risk lender would tend to pay a lower value of interest. Additionally, the mechanisms such as employment are taken into consideration for evaluating the repayment options. The overall income generating is maximised by assuming prudent risk so as to maintain a fine balance between risk and returns. Two examples of risk based financial products are taking exposure in a new business and indulging in speculation in day trade. It is apparent that in the given case there is significant risk of the investor losing the money but this high risk could also be compensated in the form of higher returns.
4. It is imperative to realise at the outset that Australian Securities & Investment Commission (ASIC) and Australian Prudential Regulation Authority (APRA) are essentially complementary regulatory bodies which tend to work in tandem based on a MOU (Memorandum of Understanding). The key differences between the respective regulation provided by the two regulators is outlined below (ASIC, 2016).
- The objective of APRA is to ensure a prudential supervision of various institutions such as banks, credit unions, insurance companies, superannuation funds and also building societies. Besides, the financial claims scheme is also monitored and regulated by APRA. Hence, through regulation, APRA intends to promote a stability in the financial institutions by safeguarding the interest of various associated investors in the above institutions namely policyholders, depositors and fund members. This is in sharp contrast with the ASIC which is essentially an enforcing agency for the Corporations Law and also the various laws related to financial services, thereby insuring the integrity and consumer interest are safeguard in the financial services sector.
- From the above, the major difference that can be witnessed is that APRA just like RBA or Reserve Bank of Australia has the authority to frame various regulations and also act in conjunction with other regulators so as to extend other prudential regulations which are considered beneficial for the industry. This is in sharp contrast with ASIC which is mandated to monitor and enforce the Corporations Act provisions along with the relevant clauses of the financial services which might be applicable to a particular situation.
- Also, APRA tends to be governed by a board which comprises of governors and directors. However, ASIC tends to be headed by the executive commissioners while still retaining their daily roles in operations.
- Hence, APRA seems to be a body with much wider mandate which aims to ensure the protection and progress of the industry while maintaining the interest of the stakeholders. On the other hand, for ASIC, the goal is to ensure consumer protection and investor confidence and stabilization of industry tends to be a secondary goal.
5. Based on the given situation, it is apparent that Fred Smiths is acting as the mortgage broker so as to ensure that mortgage is available to the clients i.e. Bill and Mary at a competitive rate. The first step in this process that Fred needs to do is to convince the clients that they should approach ABC Bank for availing mortgage as this particular bank provides various benefits in regards to the interest rate charged. The next step should be to complete the set of requirements related to disclosure that are outlined below (ASIC, nd).
A Credit Guide needs to be provided to the client. This provides preliminary information about the company to the client. Also, it is imperative that the applicable timelines to provide the same need to be adhered.
The next step is to provide a quote which summarises the estimated cost for the consumer for availing the service. No credit assistance is to be provided without providing a quote to the consumer. This needs to be agreed to by the client and should be signed along with the date.
Co-regulatory Framework
Further, a credit proposal document needs to be offered which details the various costs of the loan along with applicable terms and conditions. The various commissions obtained are also clearly outlined in this particular document.
A suitability assessment should also be carried out so as to ascertain whether the given option is suitable for the client or not based on their background, requirements, repayment capacity etc.
Further, it is imperative that Fred must continue to have a sound advisor relationship with the client and thereby assist in the assessment of the loan by giving objective advice. Further, Fred must make a disclosure about the $ 1,000 which would be received from the ABC bank for this particular loan so that there is not underlying conflict of interest.
6. In accordance with the Corporations Act 2001, companies are required to issue a disclosure document if they intend to raise capital. One particular type of disclosure document is the prospectus although there may be various types of disclosure documents that are allowed (Ehrlich, 2013). However, in accordance with Chapter 6d of Corporations Act 2001, formal disclosure may not be required for raising the capital if the following condition as outlined in s708 is fulfilled or satisfied (AustLii, nd).
A body can make personal offers of securities in a financial year without disclosure if two conditions are met namely, that no offer should breach the $ 2 million ceiling related to issue size and also the investor ceiling of 20 must not be breached. If the security is issued to more than 20 investors in a period of 12 months , then there would be a breach of the investor ceiling. Further, if the money raised through these offers is in excess of $ 2 million during the last 12 months, then there would be a breach of size. Further, it is noteworthy that if investor of the following issues would not contribute to the above ceilings and would be exempted (AustLii, nd).
- If there is no requirement of disclosure and the same is driven by any other section except s.708. or
- Offers are received from outside Australia or
- They are accompanied with a disclosure document.
Besides, the above, there are exemptions if offers of security are made to professional investors and also managers in related bodies to the one issuing securities.
7. In accordance with the s. 710, Corporations Act 2001, It is imperative that the requisite prospectus should outline the necessary information which the investor along with the professional advisors may require in making prudent analysis of the financial strength of the issues which may be indicated by the financial statements which include the income statement, balance sheet and also the cash flow statement. Besides, the prospectus would also highlight the associated liabilities and right with the ownership of security and becoming a security holder.
Regulator Using Co-regulatory Model in Australia
If the underlying security is transferable, then it is essential that the prospectus needs to outline the guarantor at any place within the EEA state. Hence, there is no requirement that the prospectus may disclose further information about the guarantor. It is vital that the required information must be put forward in a comprehensive manner which is quite simple to analyse (Copp, & Cronin, 2015). Further, due consideration needs to be paid with regards to the vital and mandatory information. This is required for the transferable securities along with their respective issuer. Besides, the prospectus needs to contain the summary which may not apply in case of transferable securities. The summary should be based on key information and shall be concise and easily understandable by the relevant stakeholders.
8. Insider trading refers to the buying and selling of the securities of the same organisation in which the given individual is employed. While insider trading is widely supposed to be illegal but it is not the case as it may be legal also. Legal insider trading tends to take place when the internal stakeholder such as employee, director or any officer tends to either buy or sell their own company stocks and tends to inform the ASIC about the same (Agrawal, & Cooper, 2015). Illegal form of insider trading tends to take place when the internal stakeholders tend to assume positions in the stock of the company and do not inform the relevant market stock regulator about the same. This results in a breach of the underlying fiduciary duty and violates the trust. Insider trading has been regulated and prohibited by the concerned regulatory agency as these trades tend to violate the integrity and fairness principles based on which the security markets tend to operate. By virtue of their privileged position in the company, the insider stakeholders tend to have access to private information which is known as insider information.
They typically tend to initiate short term trades based on the expected reaction of the stock when the private information would become public and hope to make short term gains. These usually do not intend to invest in their own company stock but rather book gains from private information. One of key exceptions in relation to insider trading is when informed consent has been obtained and the company allows the employees to do so. Another exemption could be when the investment horizon of the investor is typically large and hence the investment has not been pursued due to prospects for short term gains. Also, the employee or the concerned individual accused for insider trading may also use non-possession of any private information about the company as an additional defence against insider trading (Armstrong Legal, nd).
Investment vs Risk-based Financial Products
9. Takeover essentially may be defined as the process in which the acquirer tends to acquire a particular company by either assuming a majority ownership of shares or assuming the largest shareholding and offering to take a majority stake in the company at a given price (Mulherin, & Womack, 2015). The process essentially consists of the following steps.
i. Merchant banker appointment
This step involves appointment of the merchant banker that provides valuable support in carrying out the due diligence, offering advice on valuation, deal structuring and ensuring that the various legal provisions are complied with during the process.
ii. Further, a public announcement is made through sources such as newspaper where the company states that it wishes to acquire the shares of the target firm at a given valuation. As a result, an offer is communicated to the other company which then could deliberate on the pricing and other aspects and thereby decide on whether to accept or reject
iii. Then the board of the target company tends to consider the offer and may enter into negotiations with the offeror, reject the offer or accept the offer. Once the offer is accepted and relevant document signed, then the target firm would issue an announcement in the public with regards to share acquisition with exact details and also specify the dates of acquisition. This would provide an opportunity for the minority shareholders to cash out.
With regards to the bidding and acceptance between the acquiring company and acquirer, the timelines would be mutually decided particularly depending on the length of the negotiation period. However, once there has been an agreement between the two companies for tax over, then the same needs to be disclosed in the public announcement within a period of four working days.
A summary of the various documents required in the takeover process is highlighted below.
Source: https://www.takeovers.gov.au/content/DisplayDoc.aspx?doc=guidance_notes/current/018.htm
References
Agrawal, A., & Cooper, T. (2015).Insider trading before accounting scandals. Journal of Corporate Finance, 34, 169-190.
Armstrong Legal, (n.d.). INSIDER TRADING DEFENCES. Retrieved March 26, 2017 from https://www.armstronglegal.com.au/corporate-crime/insider-trading/defences
ASIC (2016.). Key regulatory developments and issues. Retrieved March 26, 2017 from https://asic.gov.au/about-asic/media-centre/speeches/key-regulatory-developments-and-issues/#b
ASIC (n.d.), Responsible lending disclosure obligations-Overview for credit licensees and representatives. Retrieved March 26, 2017 from https://asic.gov.au/regulatory-resources/credit/responsible-lending/responsible-lending-disclosure-obligations-overview-for-credit-licensees-and-representatives/
AUSTliii, (n.d.). Commonwealth Consolidated Acts. CORPORATION ACT 2001-SECT 708 Retrieved March 26, 2017 from https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s708.html
Copp, S., & Cronin, A. (2015). The Failure of Criminal Law to Control the Use of Off Balance Sheet Finance During the Banking Crisis. The Company Lawyer, 36(4), 99-120.
Ehrlich, C. (2013). When Minding Your Own Business Means Speaking Up: Criminally Punishing a Corporate Executive for Failing to Blow the Whistle on the Illegal Misconduct of a Colleague. JL & Com., 32, 255.
Mulherin, J. H., & Womack, K. S. (2015).Competition, Auctions & Negotiations in REIT Takeovers. The Journal of Real Estate Finance and Economics, 50(2), 151-180.
Vandegraaff, R. (n.d.). A co-regulatory approach to farm animal welfare in Australia. Retrieved March 26, 2017 from https://www.australiananimalwelfare.com.au/app/webroot/files/upload/files/A%20co-regulatory%20approach%20to%20farm%20animal%20welfare%20in%20Australia.pdf
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