Tuesday, April 24, 2012

Australain Financial System

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The Structure of the

Australian Financial System

1 Describe the difference between direct and indirect financing?

Savers (investors) can lend money (acquire financial assets) in two ways

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�æ Directly - lending funds to actual users of funds e.g. companies obtaining funds directly from a syndicate of lenders. In direct finance, financial institutions often provide financial services to the borrowers and lenders, such as, financial advice and broking services.

�æ Indirectly ¡V investors lend to financial institutions that in turn pool these funds to lend to various borrowers. The ultimate borrower and lender have no legal relationship or claim on each other, but each has a separate legal relationship with the financial intermediary involved.

What is meant by the term ¡¥Financial intermediary¡¦?

Financial intermediaries basically are the ¡¥middlemen¡¦ in the financial sector. They provide the link between those with money and those who need money. The funds are pooled and lent to borrowers with many different needs. For providing this service and assuming a number of risks, the intermediaries charge a fee.

. Briefly describe seven (7) different non-bank financial intermediaries?

1. Finance companies - Offer hire purchase and instalment credit usually for motor vehicles, construction and large household appliances. Because of direct competition from other financial intermediaries, finance companies have tended to operate at the high-risk end of the market. Most finance companies are owned by the four major banks e.g. AGC, Esanda, CBFC, Custom Credit.

. Credit Unions - They make up a small part of the financial picture in Australia. They are community based and provide loans to their members. Credit Unions are often work based offering facilities such as

„X Consumer finance

„X Housing loans

„X Small Commercial Loans

„X Investment and retirement advice

„X Insurance and travel facilities

. Building Societies ¡V The main function is to mobilise funds for housing but since deregulation, with increased competition they have been forced to increase their range of services. Building Societies are very similar to Credit Unions.

4. Life insurance offices and superannuation funds ¡V They receive money from insurance premiums, superannuation contributions and general insurance. They lend and invest these proceeds in the capital markets.

5. Friendly Societies ¡V These are small non-profit intermediaries pooling the funds of small investors to earn higher returns, usually in capital-guaranteed securities to ensure the security of the fund.

6. Unit Trusts ¡V Enables small investors to pool funds to take advantage of larger, higher interest bearing markets. Types include

„X Cash Management Trusts-invest in STMM

„X Property Trusts-invest in real estate

„X Equity Trusts-invest in shares

7. Managed Funds ¡V Similar to Unit Trusts. Funds are investments where individual investors funds are pooled with those of other investors. Investment professionals manage these funds.

4. You are the Chief Financial Advisor of a small company that is in need of short term finance. Outline the various sources of finance that you would recommend as being the appropriate for your company.

For short term finance there are several various sources available for a small company that I would recommend, outlined below is a list with both advantages and disadvantages


„X Relatively easy to obtain

„X Flexible ¡V fluctuates with the acquisition of stock

„X Short term finance for short time need

„X No costs ¡V If paid on time and supplier doesn¡¦t pass on.

„X If defer payment beyond credit terms (stretching) could damage credit reputation

„X Large cost in not accepting early settlement discount (and large cost in offering it!)


„X Allows the use of funds discretely

„X Low cost on overdraft amount as there is no limit

„X Service fees applicable

„X Can be called up by bank manager


„X Similar to overdraft of bank loan

„X Fully drawn on approval

„X Repayments include interest

„X Often 1 months, hence can be Long Term finance as well

There are of course many other sources of short term finance but the two listed above would be the only two I would recommend to a small company. Other sources of short term finance are listed below

„X Commercial Bills (bills of exchange)

„X Promissory Notes

„X Inter Company Loans

„X Hire Purchase

„X Leasing

„X Sale and Leaseback

„X Factoring of Book debts

The Role of Legislation in

the Financial Services Industry

1. The financial industry is heavily regulated. Why?

The financial industry is heavily regulated by legislation which has been passed to ensure

„X The behaviour of financial institutions is regulated

„X The protection of consumers

„X Promotion of efficiency

„X Protection of individual investors

„X Depositors / investors can have confidence

„X Maintain credibility in the international financial scene

. Briefly describe the four- (4) main regulators of Australian Financial Institutions.

The legislation is regulated or enforced by 4 major regulators.

1. Australian Securities and Investment Commission (ASIC)

ASIC administers the Corporations Law. Has comprehensive powers to ensure the finance markets act with integrity and that consumers are protected.

. Reserve Bank of Australia (RBA)

Regulates the banking industry by

„X Manipulating interest rates

„X Stabilizing the banks

. Australian Prudential Regulation Authority (APRA)

„X Supervises banks, building societies, credit unions, friendly societies and superannuation funds.

„X Ensures these financial institutions minimise their risks so that depositors / members / policyholders have confidence in those financial institutions.

4. Australian Competition and Consumer Commission (ACCC)

„X Administer the Trade Practices Act and the Prices Surveillance Act

„X Promotes (and enforces) free competition, fair trading and consumer protection

. Lee, a licensed financial adviser, has sent a recommendation to clients to invest in EMU Inc, an EMU farm. Lee does not disclose that a fee is received on every application made based on Lee¡¦s recommendation. Lee informs investors that the return on a $1,000 investment is likely to be 5%. The prospectus forecasts a return of 15%. Lee uses a photocopied application from the prospectus and asks investors to return this to him with a cheque. Lee does not provide prospectus unless the investor requests it.


A) What breaches does the corporations law relating to financial advisers has Lee made?

B) What remedies may an investor have who acted on Lee¡¦s recommendation and suffered a loss when EMU Inc went into liquidation?


a) Lee has breached the conflict of interest provision.

Corporations Law regulates financial advisors by licensing to ensure unsuitable people do not become financial advisors. It also controls the conduct of advisors through conflict of interest provisions. ¡§know your client¡¨ provisions and prohibiting misleading or deceptive conduct / advise.

b) Contract Law or common law acts to set aside a contract if it was entered into under duress, undue influence or inducement due to a false statement.

4. List four (4) different forms of legislation which relate to the financial service industry.

Audit Requirements

Preparation of financial Statements

Company Incorporations

Taxation requirements

The Purpose of Business

(Ethical) Policies and Procedures

1. What are the advantages of an industry ¡§code of conduct¡¨?

Industry codes of conduct are rules that each business within an industry agree to and adhere to. These conducts can address;

„X Ethics

„X Quality

„X Social responsibilities

The advantages of self imposed code of conduct are as follows

„X Potentially averts government intervention

„X A business industry is more sensitive to the needs of its employees/customers and so could prepare a more revelent set of rules than a government.

„X Improves and builds the publics perception and trust of the business industry.

„X Good PR and advertising for the business/industry.

. List five (5) different types of institutions / professions which would need to keep certain records confidential. Besides each, describe one type of record that needs to be treated as confidential.

1) Medical profession ¡V medical records

) Employment Agency ¡V employee personal information

) Military ¡V sensitive military information

4) Accountants ¡V income tax documentation

5) Police Department ¡V internal records

. Rodney Addles was working as an area manager in NSW for Affordable Furniture when he learned he was HIV positive. He informed his employers about his status and Affordable Furniture told Rodney that his conditions of employment would not be affected by his HIV status. Although there was no immediate reaction, later in conversations with senior management there was some discussion about all staff being informed of his condition and mention was made of using polystyrene cups for hygiene.

About twelve months after informing management of his condition, Rodney told his boss that he wished to move to Melbourne to be closer to his doctor and specialised medical treatment. Affordable Furniture agreed to a transfer but to a shop assistants position of $5,000, not to a comparable management position of $50,000.

Rodney felt the company¡¦s action was demeaning and discriminatory and took his complaint to the Equal Opportunity Tribunal.


(a) What was the ethical responsibility of Affordable Furniture in this case?

(b) Was Rodney being discriminated against?


(a) Affordable Furniture has the ethical responsibility of the ¡§Duty of Care of employees¡¨ which means the employee should be treated with dignity fairness and decency. In all fairness and decency Rodney should be transferred and continue in his current management position

(b) Discrimination occurs where an individual or group are excluded from benefit or opportunity because of a characteristic unrelated to their ability to do the job.

Rodney is being discriminated against his illness and as long he meets the job criteria in his management position he should continue in this position.

4. List six (6) different types of discrimination which could be found in the work place.

„X Religion

„X Race

„X Colour

„X Disability

„X Sex

„X Age

5. List two () different forms of legislation which counters discrimination.

„X Discrimination Act

„X Workplace Relations Act

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