Termination pay, share plan taxation, APRA regulation and the Productivity Commission review – surely there could not be more?  Wrong.

Senator Nick Sherry, Minister for Superannuation and Corporate Law promoted the publication of the International Organisation of Securities Commissions (IOSCO) report on Unregulated Financial Markets and Products on 6 May 2009 (see the report HERE).

The Australian Securities and Investments Commission (ASIC) was co-chair of the taskforce.

The report suggests a range of possible regulatory and industry reforms covering key market segments that have been of critical concern during the global financial crisis.

The report focuses on the securitisation market, including asset-backed securities, such as residential mortgage backed securities and collateralised debt obligations, and on the credit default swap market, including development of central counterparty clearing mechanisms.

The report has made a number of regulatory reform suggestions.
 
The report effectively reviewed the financial services and products that are not APRA regulated.  These include mortgage backed securities and their derivatives. Originator and distributor remuneration has been identified in the report as a target for potentially more regulation. 

Specifically, the report identified that studies of incentive structures in the sector support the conclusion that:

(a) Originators, sponsors, issuers and underwriters may not have had sufficient incentives to perform appropriate levels of due diligence of underlying asset pools or to employ robust underwriting standards;
(b) Servicers of asset pools may have had insufficient incentive to prudently perform their obligations under their servicing agreements and may have had different incentives from those of the investors; and
(c) Short-term incentive remuneration structures may have encouraged originators and mortgage brokers to focus on the origination of securitised products without due regard to longer-term performance of those products

Broad recommendations in the IOSCO report included the introduction of regulations for:

1. Servicers or managers – to ensure management services are performed efficiently:

• By mandating minimum standards for managing/servicing of a portfolio;
• By mandating continuous disclosure of risk management practices; or
• To link remuneration to performance of service;

2.  Sales and mortgage brokers – to ensure quality of securitised product remains high:

• By linking remuneration to the quality of the mortgage (for mortgage brokers) or quality of the asset pool (securitised product sales).

It remains to be seen how the two areas can be effectively regulated. 

ASIC is to work with Treasury to examine each of the interim recommendations in the context of the Australian market and corporate legal framework and provide the government with advice on potential reforms.  It will use input from the Parliamentary Joint Committee on Corporations and Financial Services inquiry into the issues associated with some financial products and recent service provider collapses, such as Storm Financial, where remuneration of financial advisers was a key consideration.

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