Anyone involved in financial services could likely attest to the complex and convoluted nature of the legislation that governs the sector, with numerous and varied amendments being made to the Corporations Act since it was originally passed in 2001.
In fact, things have gotten so out of hand that the Australian Law Reform Commission (ALRC) noted it has almost doubled in size to more than 4,000 pages and over 800,000 words.
“Chapter 7 of the Act has similarly almost doubled to 265,000 words since the Financial Services Reform Act 2001 (Cth) commenced in 2002, making the chapter alone equivalent to the 10th longest Act of Parliament,” the ALRC said.
It also looked to the world of epic novels for comparison, pointing out that the act is longer than Leo Tolstoy’s War and Peace, which is roughly 580,000 words, and the entirety of The Lord of the Rings by JRR Tolkien, which stands at around 550,000 words.
“At 265,000 words, Chapter 7 of the Corporations Act is similar in length to the novel Ulysses by James Joyce,” the ALRC added.
In order to rein in some of the excesses and streamline the regulation of financial services, the ALRC has, since September 2020, undertaken a review of the legislative framework for corporations and financial services regulation.
On Thursday last week, Attorney-General Mark Dreyfus tabled in Parliament the final report coming out of this review, titled Confronting Complexity: Reforming Corporations and Financial Services Legislation, which called the legislation governing Australia’s financial services industry as a tangled mess – difficult to navigate, costly to comply with, and unnecessarily difficult to enforce.
In the report, judges described the current laws as being like “porridge”, “tortuous”, treacherous”, and “labyrinthine”, while others called the legislation “broken”.
How will this impact financial advice?
Among the 58 recommendations included in the report – mostly aimed at reducing costs for service providers and consumers, improving productivity by reducing complexity, and providing clarity around compliance requirements and enforcement – the most relevant for financial advisers is recommendation 38.
The recommendation states: “The Corporations Act 2001 (Cth) should be amended to restructure and reframe provisions relating to financial advice, including by grouping and (where relevant) consolidating:
- a) sections 912EA and 912EB;
- b) Part 7.6 Divs 8A, 8B, and 8C;
- c) Part 7.6 Div 9 Subdivs B and C;
- d) Part 7.7 Div 3;
- e) section 949A;
- f) Part 7.7A Divs 2, 3, 4 (excluding s 963K), Div 5 Subdiv B, and Div 6; and
- g) sections 1012A and 1020AI.”
As is clear from the diverse array of sections proposed to be consolidated, the provisions relating to financial advice are currently “scattered throughout Chapter 7 of the Corporations Act without having a logical and coherent home”.
“The current structure and framing of provisions relating to financial advice in Chapter 7 of the Corporations Act makes the law difficult to find and difficult to understand,” the report reads.
“This is principally a result of their dispersal among more general provisions relating to financial services and a failure to update the legislation’s structure to reflect changes in the substance of provisions relating to financial advice.”
According to the ALRC, implementing recommendation 38 would bring together all provisions relating to financial advice and make it easier for users to “locate, navigate, and understand the law that applies to financial advice”.
It would also simplify the task of statutory construction by making it easier to interpret provisions within their broader context, the report said.
The ALRC first floated this measure in Financial Services Legislation: Interim Report C in June 2023.
“Proposal C6 would see the creation of a single legislative chapter, bringing together all provisions that only regulate financial advice. This restructure seeks to reflect the needs and expectations of users of the law, and thereby enable the law to communicate more effectively,” the interim report said.
In the latest report, the ALRC noted that submissions in response to Proposal C6 were largely supportive.
“Submissions that expressed qualified support focused on the range of provisions selected to form part of a financial advice chapter, such as breach reporting obligations relating to financial advice,” it said.
“However, as the Financial Services Council observed, navigational difficulties caused by these choices may be overcome through the use of cross-references, signposts, and other aids to interpretation that alert users to potentially relevant provisions that are located elsewhere.”
QAR and the ALRC review
There have previously been suggestions that there could be issues with the interplay of the ALRC review and the Quality of Advice Review’s (QAR) recommendations.
In its submission to an earlier consultation on the ALRC review, the Financial Services Council (FSC) said that the ALRC’s proposed restructuring of provisions relating to financial advice taking place at the same time as the implementation of the QAR’s recommendations would be “disruptive”.
“The FSC notes that the reform roadmap in the report contemplates a reform pillar for ‘policy-evolving provisions’ (Pillar 6) which the ALRC suggests would not disrupt implementation of the reform package,” the FSC submission said.
“The FSC has reservations with this suggestion. On the contrary, in our view, it is likely that attempting to implement evolving policy changes at the same time as reframing or restructuring existing law would be potentially very disruptive.”
Pointing specifically to the interaction of the ALRC’s proposals for amendments to the Corporations Act and the QAR, the FSC said “it is difficult to see how this would not be disruptive”.
“Users of the provisions concerning financial advice will need to track how they are transferred from their current locations and then reframed and restructured in the new Chapter 5 of the Financial Services Law, while simultaneously track any substantive changes driven by policy change,” the FSC said.
“It would seem that where reframing and restructuring is accompanied by policy change, the burden on all parties in keeping up with the changes would be materially increased.
“The FSC submits that more detail should be provided on how Pillar 6 would interact with the other reform pillars set out in the report.”
Ben Marshan, founder of Ben Marshan Consulting, disagreed with the FSC’s reasoning, telling ifa that the ALRC and the QAR worked “fairly closely” while the QAR was in progress.
“Michelle [Levy]’s thinking was somewhat influenced by the ALRC, and the ALRC was influenced by what Michelle was seeing,” Mr Marshan said.
“So, while the ALRC focused on the structure of the law, QAR focused on what the law did and how it could be improved – ideally, they would be implemented together.
“The idea of a ‘rules book’ for advice which contained a succinct and complete subset of laws which apply to financial advice is a fantastic idea – which can then implement the simplification Michelle talked about.”
The ALRC directly addressed these concerns in its final report, contending that restructuring and reforming provisions alongside its recommended legislative model would “provide a better foundation for undertaking policy reform”.
“For example, 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,” it said.
“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.”
