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.
Banking & Finance cont ...
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
Banking & Finance cont ...
• 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
Banking & Finance cont ...
Financial Products and Financial
Services Regulation
• Prospectus Disclosure: Chapter 6D
Corporations Act
Banking & Finance cont ...
• 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).
Banking & Finance cont ...
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.
Banking & Finance cont ...
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.
Banking & Finance cont ...
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).
Banking & Finance cont ...
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.
Banking & Finance cont ...
• 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.
Banking & Finance cont ...
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
Banking & Finance cont ...
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•
•
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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.
Banking & Finance cont ...
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.