Spare a thought for the Australian Law Reform Commission.
Over the past four years, the shape of Australian financial services has stretched and skewed to accommodate significant changes including the economic fallout of COVID-19, the arrival of a new Government and, more recently, the Quality of Advice Review. Reforms, orders and exemptions have been proposed, debated and enacted; all the while, the ALRC has been chipping away at the foundations of the whole thing.
There's some background here if you're unfamiliar with the scope of the ALRC's review, but the gist is that the agency was tasked with determining whether current corporations and financial services law could be simplified to better-facilitate compliance, enforcement and navigability. Four years, 13,000 Acts, 89,000 legislative instruments, 101,000 court judgments and 200 regulatory guides later, the final report provides a definitive answer: yes, it absolutely could.
The tortuous porridge
This won't be a startling conclusion to anyone working in financial advice, given the time and resources spent every year on ensuring they're not running afoul of current regulatory settings – not to mention the levies directed towards the regulator, charged with verifying the same. In fact, the report calls out advice as a "notable example" of legislative bloat, with relevant provisions "spread incoherently across four different parts of Chapter 7 of the Corporations Act."
Little wonder, then, that some of the judges quoted in the final report have variously described the Corporations Act (and associated legislation) as "porridge", "tortuous", "exceptionally complex" and "labyrinthine". The authors of the summary report also noted that the Act has ballooned to over 800,000 words since 2001; as a helpful reference, they pointed out that it's now a longer read than both the Lord of the Rings trilogy and War and Peace.
The report explains that while this level of complexity might "seem [like] an abstract and merely intellectual concern," it has serious and material consequences. There are the aforementioned costs of compliance (with which advisers would be intimately familiar), but also inconsistent application of regulatory powers, stifling of competition and productivity, rising costs of products and services and difficulty navigating (and making judgements on) conduct and consumer outcomes in the courts.
Again: none of this should be too shocking to the average financial adviser. So what does the ALRC propose should be done about it?
Keep it simple
You can read the full list of recommendations (as well as a more digestible summary version) here, but in short: the ALRC has proposed something of a hard reset for the current legislative framework. Definitions would be standardised, disparate provisions and obligations would be consolidated and duplications (and redundancies) would be removed.
Most importantly, the current legislative hierarchy would be reorganised into a three-tier system with the primary legislation (Financial Services Law) at the top, followed by a single Scoping Order and then consolidated rulebooks for more prescriptive detail focused on "particular products, services, persons, or circumstances".
Financial Services Law would contain all of a regulated person's "key legal rights and obligations," such as the requirement to hold an AFSL and prohibitions on "unconscionable and misleading or deceptive conduct." The Scoping Order would then contain any of the relevant exemptions, carve-outs and exclusions "presently spread across hundreds of legislative texts."
Finally, having ascertained the law and the extent to which it applies to them (via the primary legislation and the Scoping Order respectively), a person could then "visit a rulebook to understand how to comply with the law’s requirements and to find other supplementary detail."
Any information relevant to a regulated person or business would be obtainable through this system. This appears to be a much more straightforward process than the current state of affairs, where critical (as well as lapsed and irrelevant) details are often unevenly distributed across "hundreds of existing regulations and ASIC legislative instruments."
Theoretically, all of these changes could make a significant difference to the costs of running an advice business, as well as reduce the amount of time spent on navigating and complying with an increasingly complex (and often inconsistent) set of laws and regulations.
Legislative clarity might also encourage more flexibility in how advisers provide their services, as they would have much more confidence in their ability to determine the boundaries of their professional obligations.
Slaying the hydra
Of course, the current system didn't become what the report calls a "legislative hydra" overnight. As Heracles had to learn the hard way, the heads keep growing back no matter how many you chop off. So what's to stop financial services law from growing out of control all over again?
The ALRC proposes several preventative measures: first, the Minister or ASIC would be required to consult publicly with an independent Rules Advisory Committee before making any scoping orders or rules.
When these orders or rules are made, they would need to be accompanied by a "publicly accessible explanatory statement that sets out how a scoping order is consistent with, or how a rule gives effect to, the relevant objects set out in the Financial Services Law." Any scoping orders or rules would also be disallowable by either house of Parliament and subject to sunsetting after a set period – the ALRC suggests 10 years, as this would be "in keeping with the requirements of delegated legislation more generally."
The report also suggests that these safeguards, along with the proposed legislative hierarchy, would also mitigate the risks of "politics" getting baked into "policy".
"The legislative process is intertwined with the political process," the report notes, which is why you can end up with situations where "a desire to increase the visibility of a policy measure ... may incentivise provisions being placed in primary legislation when they may more appropriately be located in delegated legislation."
Similarly, amendments and exclusions might metastasise throughout legislation, bloating it further – all to fill in the gaps caused by a "rushed or unfinished policy development process."
What about QAR?
Speaking of which: you might be wondering how, if at all, the ALRC's proposed legislative overhaul might impact the Government's post-Quality of Advice Review policy agenda. After all, Stephen Jones has indicated he expects implementation by the end of the year.
The ALRC's mandate was to determine whether legislative simplification was possible within existing policy settings, which therefore precludes any specific policy recommendations. But it isn't hard to imagine how this report might represent something of a spanner in the works, given the Government's current priority is to embed its QAR implementation reforms into the existing legislative hierarchy.
While we can probably expect a response from Government in the not-too-distant, the ALRC doesn't appear too concerned about the idea. In fact, the report argues that "the restructured and reframed provisions would make it easier to identify the key objectives and norms of behaviour relating to financial advice.
"This would make the legislation more amenable to implementing recommendations concerning the provision of good advice, for example, as contemplated by the Quality of Advice Review. Problems in the current legislative framework would continue to make identifying key objectives and norms difficult, even if the objective of providing good advice were adopted."
In this light, balancing legislative overhaul and the proposed QAR reforms seems less like an impossibility and more like a necessity – lest we find ourselves another 20 years and 800,000 words down the track, wondering how we got here.
Advisely Team