our regulatory shield is improving but...

The traps for retail investors are great and these articles show that the regulators are working on any short comings,imo.


http://www.theaustralian.news.com.au/business/story/0,28124,26060899-36418,00.html

"Our regulatory shield still needs work.

Adele Ferguson | September 12, 2009


The Australian
WHEN the powerful and once venerable Lehman Brothers collapsed in a heap on September 15 last year, legendary investor Warren Buffett likened it to "an economic Pearl Harbor".

Lehman's sudden demise triggered a fundamental breakdown of the entire financial system and put the spotlight on the many inadequacies and limitations in its regulation.

Between the on-market exchanges and the murky over-the-counter (OTC) derivatives market, auditors, company directors, independent property valuers, the credit ratings agencies, financial planners, hedge funds and regulators asleep at the wheel, investors didn't stand a chance.

A year on, and trillions of dollars in public money spent and much soul-searching in the world's policy community, the mood of governments is to right the wrongs of the past by going from a "light touch" to regulating the "shadow banking system", including private equity, hedge funds, money market funds, non-banks and securities such as collateralised debt obligations, all of which played a significant role in the failure or near failure of Lehman, AIG and others.

Bill Moss, a former senior executive at Macquarie Bank who recently joined an advisory board for ASIC, told The Weekend Australian he had long been a critic of the regulators for not doing their job but, in his role, he noticed a real desire and intent to get on top of the problems.

"My view is we're going to get a greater focus on regulation, and rightly so," he said. "What we had didn't work. If the reaction is to over-regulate, then it's not a necessarily bad thing.

"There needs to be awareness, education, simple documents that people can read, greater penalties and the government has to support this and ASIC has to be empowered," he said." article continues..................



After a succession of earlier meetings on the crisis, the members of the G20, which includes finance ministers from countries including the US, Britain and Australia, met in London in April this year and agreed on a series of regulatory measures and a timetable for implementation.

These include developing a framework to regulate OTC markets, requiring hedge funds and private equity funds or their managers to be registered, overhauling remuneration and compensation schemes including bonuses to properly reflect risk, international consistency of capital in the banking system, improving accounting standards on valuation and extending regulatory oversight to credit rating agencies. In the US, this means beefing up the powers of the SEC and setting up a clearing house to make OTC trading more transparent.

Opaque financial products, including derivatives, which were traded in the OTC market, contributed to almost $US1.6trillion in writedowns and losses at the world's biggest banks, brokers and insurers since the start of 2007. In Britain, the Financial Services Authority will take on added responsibilities as a way to bolster regulation.

In Australia, the consensus is that we weathered the financial tsunami better than most countries. But as Professor Thomas Clarke at the University of Technology Sydney says: "Gaps in this regulatory shield were exposed when Allco Finance, Babcock & Brown, ABC Learning, Opes Prime and a host of other finance and property companies collapsed as they were not subject to prudential regulation by APRA."

To this end, the ASX has lost half of its supervisory powers to ASIC, rules on short selling will be introduced and ASIC is proposing to regulate the credit rating agencies by forcing them to have an Australian Financial Services licence and removing an exemption from liability, and ASIC itself is becoming more market oriented.

It's about time. Former competition regulator Allan Fels told The Weekend Australian one of the problems was that regulators spent the past 15 years going down the wrong path.

Instead of identifying harms to society and then finding the best way to deal with them, their main focus was cutting red tape.

"The GFC was caused by a number of factors, including severe regulatory failure that failed to deal with new financial instruments, driven by a deregulated ideology, and a mistaken belief that markets could be left to self-regulate," he said.

Andrew Murray, a former Democrat who long pushed for regulatory reform and more transparency, described the GFC as not so much market failure but regulatory failure. "In Australia, APRA have done well but ASIC and the ACCC need to pay less heed to rent-seekers' delaying tactics (those with a vested interest in the status quo) and exhibit more aggressive scepticism," he said.

"Rent-seekers like self-regulation because it benefits insiders. Self-regulation means well-informed insiders can manage their situation to their best advantage, but the partly informed in the wider market don't know what is going on. Wise corporate law and effective regulation have to help address that imbalance," he said

Litigation under IMF's Hugh McLernon will see class actions increasing over the next few years as investors take action against companies for breaches of continuous disclosure.

He said a key target would also be the role of credit rating agencies in the selling of complex financial products such as CDOs.

"These CDOs could not have been sold without a high rating.

"They were so hellishly complicated that no one in his right mind would have undertaken to read all the relevant documents from cover to cover. Warren Buffett recently suggested that a standard CDO of residential mortgage backed securities consists of more than 750,000 pages.

"Investors don't read that material -- they rely upon the credit rating," he said.

On Thursday, ASIC announced proposals to regulate credit rating agencies by removing an exemption that protects them from liability for their ratings in product disclosure documents, and from January 1 they would need to obtain an Australian Financial Services licence, which brings with it more scrutiny and obligations.

ASIC suggests that these moves are required to protect retail investors.

But Mr McLernon asks: what about the sophisticated investors, who under the Australian corporate system are investors who have $500,000 to invest?

"Apart from the fact the answer to this question being blindingly obvious, it misses the point -- such ratings are also desperately important to many, if not most, sophisticated investors," he said.

But as Michael Peters, lecturer in business law and taxation from the University of NSW said: "There are many obstacles to regulating credit rating agencies."

For starters, the entire financial system globally relied on the agencies' ratings. Even countries like Australia set the price of their bonds on credit ratings.

"If credit rating agencies are questioned it could erode the entire system. The financial markets have no prospective alternative, and the credit rating agencies have developed their business model to ensure their prominence," he said. In the meantime, the markets are roaring ahead and people are now suggesting a "W" recovery might just well become a "V" recovery.

With this new-found optimism, the fear is that the mood to reregulate might start to wane.

Jokes are starting to creep back. The most insightful being a quote from the Observer newspaper.

"We are like goldfish," the newspaper quoted Jon Macintosh, a Mayfair hedge fund manager, as saying. "We swim once around our bowl and when we complete the circle everything looks new."

Private equity funds are talking about IPOs, hedge funds are coming up with new products, executives are finding new ways to keep their big pay packets and the Financial Times reported yesterday that several of London's largest hedge funds were poised to launch onshore funds in order to trump strict new regulations expected from the European Union.

It seems the more things change, the more they stay the same, or so the old proverb goes."

My observation..
Bill Moss must have quite an good understanding of OCV.