Friday, July 13, 2012

Laker's missing commandment: Thou shalt not be stupid

The corporate watchdog has flagged a crackdown on complex financial products that could breach the spirit of the law.

The Australian Securities and Investments Commission (ASIC) is chairing a global push to crack down on risky products which can potentially be used to get around takeover regulations.

Listen to my analysis broadcast this morning on AM.

ASIC is concerned about derivative products, such as contracts for difference, which are retailed widely in Australia.

A common form of these products allows investors to bet on a share price to fall, even without putting down money upfront.

As part of the bigger picture, such derivatives can help facilitate major deals that could involve billions of dollars in proposals which can be made without proper financing.

Now ASIC chairman Greg Medcraft says he is very worried about derivatives.

He is chairing a global taskforce with the French regulator in a bid to get ahead of certain banks which are skirting regulations.

"They are basically manufactured on a global basis by banks, etc, so perhaps there should be some guidance or standards established for the way that the products are actually basically regulated," Mr Medcraft observed.

"You know, one of the things you are trying to do is make sure you have consistent global rules. So, you know, that's what we're looking at."

This scrutiny on derivatives comes as ASIC also takes a very close look at current takeover laws - whether they are outdated, provide proper disclosure or demonstrate that innovation is now outstripping the spirit of the law.

Earlier this week, AM broke the story that ASIC wants to overhaul so-called creep laws, where a corporate raider can use a loophole to gradually up their stake in a company without paying a premium.

That was a thinly veiled swipe at Gina Rinehart and James Packer in relation to Fairfax Media and Echo Entertainment respectively.

However, when it comes to preventing crippling losses, the corporate and banking regulators say there is only so much they can do and they certainly do not have any laws to outlaw bad decisions or, indeed, stupidity.

Both ASIC and the banking and insurance regulator APRA (the Australian Prudential Regulation Authority) say many of the poor decisions that have sent companies bust or hurt investors badly come down to decisions made on company boards.

ASIC's Greg Medcraft made the point that directors should at least be able to understand a balance sheet to fulfil their duties in monitoring the business.

APRA's chairman John Laker told a conference hosted by The Economist magazine in Sydney yesterday that boards need to take more responsibility, but he cannot do much about highly paid stupid people.

"I've been in a lot of discussions about the role of regulation where the word board doesn't get mentioned and it should," he said.

"That is the starting point for this financial system, not the regulator. So we can't regulate against reckless behaviour. 

"We can certainly do our best to intrude, to identify and to modify it, but show me a piece of paper that says thou shalt not be stupid. I'd love the regulation but, you know, that won't help me at all."

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