Australia's financial markets licensing regime needs to be overhauled to keep up to date with technological developments, according to the Financial Services Council (FSC).
In a submission to the federal Treasury, the FSC said the financial market licensing regime was "outdated, inflexible and in need of legislative reform".
The FSC said Australian capital markets had not been impacted by high frequency and dark pool trading to the same degree as markets in other countries.
"Australia is well-positioned to introduce regulation to avoid the adverse impacts of high frequency and dark pool trading experienced in Europe and the United States," the submission states.
"However, rapid changes in technology have impacted capital markets in respect of the speed and method in which trades are transacted and regulation now needs to keep pace with technological change to address the potential negative impact of technology on capital markets."
The FSC said much of the trade on the share market occurred in venues that either did not exist a decade ago or that enjoyed strong growth in trading volumes because of technological changes.
However, because such venues for dark trading were operating under certain exemptions to the financial markets licensing regime, they had fewer rules than lit markets.
The only way that dark trading venues have been able to be licensed has been by using the participants' Australian Financial Services Licence.
Senior policy manager at the FSC Andrew Bragg told InvestorWeekly that such a compromise meant the Australian Securities and Investments Commission (ASIC) had fewer powers over dark pools.
"We don't want to see them abolished; we want to see them licensed in the same way the lit markets are licensed," he said.
Mr Bragg added that the regulator needed to have complete authority over the market licence.
"If dark pools aren't licensed, they can't do business. They need to remain competitive," he added.
The FSC said it agreed with the government's proposal, flagged last year, for the relevant minister to specify different licence categories in regulations which could be altered over time.
ASIC would then issue the relevant licence in accordance with the categories and requirements set out in the Act and regulations.
In addition, the FSC said it was supportive of legislation in which the minister may modify either the licence categories or the related obligations on a consistent basis.
"The market licensed regime needs to fit purpose, it needs to reflect the contemporary markets," Mr Bragg said.
"We can't go around having a Corporations Act that is 12 years old [and] that doesn't reflect market structure."
In another submission to Treasury on the cost recovery for capital market supervision, the FSC said it agreed the industry should be subject to cost recovery to pay for the expense of regulation.
"We believe that it is important that ASIC is appropriately resourced to supervise Australia's capital markets," the submission stated.
"Appropriate budgeting of costs and cost recovery arrangements, which support the objective of necessary ASIC resourcing, is sound in our view."
In addition, the FSC said it was supportive of the proposals to recalibrate the market supervision cost recovery arrangements to better reflect the cost of supervision.
"This should occur through the creation of a message-based fee which is imposed on all participants," the submission said.
