Regulation of Security Industry Intermediaries Australian Proposals

Abstract

This article is an analysis of the report A Review of the Licensing Provisions of the Securities Industry Act and Codes (Review) published by the National Companies and Securities Commission (NCSC) in Australia in 1985. The Review made recommendations to improve the licensing of securities industry intermediaries such as brokers and financial advisers to further investor protection in the context of the promotion of commercial certainty, reduction of business costs and greater efficiency in the capital market. The Review examined many issues regarding the licensing of securities industry intermediaries. It borrowed some iniatives from the US/Canadian model of supervised self-regulation by self-regulatory organisations (SROs) to work with strong regulation by the securities commission. The goals of licensing of those in the securities industry include the need to ensure the adequacy of dealer capitalisation, to exclude the untrained and unqualified from the industry, to provide for and to strengthen the rules in the public interest and to enforce compliance with ethical standards. The Review examined whether licensing was the best way to ensure adequate investor protection, and considered alternatives to licensing such as registration, certification and negative licensing. It examined whether the principal and/or representative should be licensed. It examined self-regulation of the industry by SROs as a model, which has the benefit of the expertise of the familiarity of those in the industry with complex situations, informality and flexibility in response. This could be enhanced with administrative and judicial supervision of stock exchanges and professional associations. The weaknesses of self regulation include the failure of rulemaking to keep up with loopholing deficiencies, widespread breaches and lack of surveillance. Any system of self regulation must address the danger of cartelisation and anticompetitive factors, and must avoid the experience of anti-competitive trade associations and guilds in recent history, with their restrictions on entry, membership, fixed pricing and inadequate regulatory powers. It is important for the securities commission to have regulatory powers over SROs, and to be assured that SROs actually do perform their regulatory functions. This must include the power to suspend or cancel SRO approval, to publish SRO particulars and to investigate, discipline, suspend/cancel a licence, subject to the rights of those affected such as SRO members to appeal to the courts. The Review is an important document of 198 pages covering many issues on occupational licensing theory. Postscript: The NCSC Review in 1985 was ground breaking and focused attention on how best to regulate those in the securities industry. Since this article was published, securities regulation in Australia has moved from the weak and state-based NCSC scheme to national ‘one stop shop’ regulation of companies and securities by the national Australian Securities and Investments Commission (ASIC) under the national Corporations Act 2001 (Cth). ASIC now has a strong presence in the regulation of the financial services sector, and in particular expects high standards of a financial services licensee, including doing all things necessary to ensure that it operates ‘efficiently, honestly and fairly’ (s 912A(1)(a).