The current legislative issues
The Corporations Act essentially provides the legal infrastructure for corporations, financial markets and financial services. Like with any infrastructure, it requires regular maintenance. This is even more important given that the financial services system is a key functioning part of the Australian economy.
However, following over 20 years of development, it’s clear that the existing legislative framework for corporations and financial services regulation is no longer fit for purpose. The tools for building the legislative framework – including legislative instruments, notional amendments and conditional exemptions – often create more issues than they solve. In short, the existing legislation is unnecessarily complex, and poorly structured. This is evident from some of the phrases used to describe the current legislation, as uncovered by the ALRC during their inquiry – those phrases including labyrinthine and legislative porridge.
During the course of our webinar, the ALRC discussed the following key issues with the current corporations and financial services legislation, with these issues most prevalent in Chapter 7 of the Corporations Act:
1. Notional Amendments
The extensive use of notional amendments, within the Corporations Act in particular, creates uncertainty and “invisibility” because a provision may not be relied upon to reflect the actual law; rather, a stakeholder must read the Act in light of any notional amendments and know where to locate those amendments. As the ALRC rightly points out, the use of notional amendments means the law can essentially be made up “on the run”.
The use of notional amendments is most prevalent within Chapter 7 of the Corporations Act. The ALRC points out that there are over 1,200 notional amendments – be they ASIC legislative instruments or hundreds of regulations – which notionally amend the legal effect of the provisions of the Corporations Act, including Chapter 7, without changing their text. Hence, a notional amendment may state that a certain provision is omitted or it may insert a new provision which does not appear on the face of the Act itself. In the words of the ALRC “it’s always nightmarish to look at the face of the Corporations Act and to not know whether its legal effect is what it [states]” due to the fact that there may be a notional amendment buried in a legislative instrument amongst the hundreds of notional amendments which either omits a provision, or inserts a new key obligation or offence. Adding to this confusion and complexity, the ALRC pointed out that, with certain provisions of the Corporations Act, two different versions of the one provision exist in notional amendments.
Notional amendments increase compliance costs for regulated entities and government because mistakes can be made when a notional amendment is missed. This in turn leads to costs as a result of the inefficiencies generated for the financial services system.
The over-reliance on notional amendments is seen as a fundamental issue to address in the current legislative hierarchy. Indeed, when asked what one element of the ALRC’s recommendations would have the most impact if implemented, all the panelists were in agreement that it was reform when it comes to notional amendments, which would be most important.
2. Financial Services Legislation
Chapter 7 of the Corporations Act regulates financial services and markets. The ALRC views Chapter 7 as an anomaly within the Corporations Act, in that it is essentially an Act within an Act, given its phenomenal growth and complexity. Indeed, the ALRC pointed out that Chapter 7, of itself, is larger than all but nine of the approximately 1,220 Acts currently in force in Australia. Although Chapter 7 contains diverse themes, there is no logical order to those themes, making the chapter very broad and difficult to navigate, with no clear target audience. This means that stakeholders can never have confidence in familiarizing themselves with only a particular segment of the chapter; they invariably should consider the chapter in its entirety.
The ALRC also pointed out that, as big as Chapter 7 is, there are also provisions outside the chapter which should reside within it, such as significant penalties, criminal sentences and other essential provisions, located in delegated legislation. This obscures core norms which underpin the whole legislative regime – an issue also identified by the Banking Royal Commission. Likewise the consumer protections in Part 2, Division 2 of the ASIC Act, should be informed and considered by the consumer protection provisions in Chapter 7.
3. Legislative complexity
The current corporations and financial services law has been described as a legislative maze. This is a product of the volume of delegated legislation, creating a complex web of connections and cross-references. The phenomenal growth of the Corporations Act over the past 20 years means that it no longer follows a logical structure, it fails to prioritise key messages and it can be overly-prescriptive. Information is also hard to understand without the assistance of delegated legislation or regulatory guidance.
The ALRC distinguishes between necessary and unnecessary complexity. We don’t necessarily need complex laws to address complex issues. Of course, there will be some inevitable complexity, particularly within financial services legislation; however, the current legislative framework for financial services makes it much more complex than it needs to be.
The ALRC recognises that complexity is essentially a foundational issue, arising from a poorly designed legislative hierarchy. Hence, the causes of legislative complexity date back over 20 years, even before the Corporations Act came into existence. At the same time, the ALRC acknowledges that designing and drafting good legislation is by no means easy.
The hundreds of legislative powers which are contained within the Corporations Act means that it’s very difficult to know whether certain powers have been exercised and how those powers may have changed the legislative framework. The Banking Royal Commission also acknowledged that complex legislation is less likely to be complied with. This can lead to increased costs to the community in terms of mis-sold financial products, poorly-tailored financial advice and the litigation costs which may flow from this. There is also the risk of what the ALRC refers to as “ticker box compliance” – that is, doing the bare minimum in order to achieve basic compliance. This stems from the fact that the key purposes or message of the legislation are unnecessarily hindered by complexity.
In the ALRC’s view, the costs arising from legislative complexity are significant, and include costs to:
- the regulated community – such as compliance costs, in finding the relevant law and implementing highly-tailored compliance systems in order to cope with the complexity of the existing framework,
- consumers and investors – including the difficulties in consumers understanding their rights, and the greater risk of harm where compliance isn’t achieved as effectively as it should, because of the complexity of the existing framework,
- government and the legal system – such as the enormous costs of identifying consequential amendments in introducing new legislative provisions, the costs of understanding all obligations because those obligations are so dispersed throughout the hierarchy, and the costs experienced in litigating the current complex legislation, and
- the public at large – including the increased risk of unjust outcomes and errors in applying a complex legislative framework; this translates into costs for the community in terms of lower competition, lower productivity and higher costs for goods and services, including financial services and products. This is even more of an issue in global markets where being competitive and flexible are now viewed as key elements, and hence presents a clear case for reform.
The ALRC pointed out that the scale of the financial services market in Australia means that even small inefficiencies caused by legislative complexity, can result in enormous costs. In addition, complexity within the law will only continue to grow. As it does, the effort to address that complexity is only going to get harder. This supports the case for reform of the legislation sooner rather than later.
The ALRC’s proposed reforms
To address the current legislative issues, the ALRC proposes the following solutions:
1. Legislative hierarchy
A legislative hierarchy refers to the location of obligations and regulations across primary legislation, delegated legislation, administrative instruments and regulatory guidance. Regulatory guidance itself will become more complex when the law which it is trying to explain is complex. A good legislative hierarchy is one which is predictable and intuitive where obligations are easy to locate. A poor legislative hierarchy is exactly the opposite; it is poorly designed with no clear path through the legislation and it fails to group provisions logically, making relevant information very difficult to find.
The ALRC is very much focused on creating a legislative hierarchy which can adapt and respond to changes – such as policy changes – over time. This involves a restructure of the primary legislation and is aimed squarely at addressing the issues within Chapter 7 of the Corporations Act in particular. The ALRC’s recommendation is to look at the core topics within Chapter 7 which have a solid thematic consistency, such as financial advice, disclosure and consumer protection. Those provisions which cover common subject matter should then be grouped together into a new Financial Services Law.
The ALRC recommends “housing” Chapter 7 in a new separate schedule to the Corporations Act, for example Schedule 1, to be known as the Financial Services Law. This would permit the creation of a new and improved structure which focuses on the regulatory themes as emphasised by the ALRC – those themes being consumer protection, disclosure, financial advice and general regulatory obligations. It would also make the law easier to find. Using schedules in this way is not novel. Indeed, the panel have been encouraged by the relative success of rehousing the Australian Consumer Law in Schedule 2 to the Competition and Consumer Act. There is some evidence to show that the Australian Consumer Law is now more widely known and has been afforded a clearer legislative identity, as a result of these changes. The panel believes that the Financial Services Law could benefit from a similar restructure.
This reform would address the legislative hierarchy issue and help to reduce complexity.
2. Legislative model
The panel then addressed the recommended legislative model to accompany the legislative hierarchy. The legislative model is aimed squarely at solving the issues in the legislative hierarchy, particularly the current incoherence in the hierarchy, in that there is no clear home for different parts of the legislation and stakeholders must assume that different obligations, prohibitions or offences may be located in delegated legislation, hundreds of ASIC legislative instruments or the vast Corporations Regulations.
The ALRC’s proposed legislative model attempts to make it as predictable and easy as possible to source the law which applies to particular entities, individuals, products or circumstances. The legislative model will contain the Financial Services Law in primary legislation – at the top as it were – containing all the key provisions, obligations, prohibitions, offences and penalties which form the foundation of the whole legislative framework, thereby providing the key messages for all stakeholders.
The ALRC’s proposed legislative model is not about trying to achieve a utopia; rather, their proposal is very much grounded in reality based on feedback from numerous stakeholders about their experiences in dealing with the legislation over the past 20 years. The ALRC wishes to tackle change, which is warranted – without generating a huge amount of legislative complexity.
3. Scoping Order
The panel then recommends adopting what has been called, the Scoping Order, to sit beneath the legislative model. This would be a single legislative instrument which brings together the hundreds of exemptions, exclusions or inclusions which are presently dispersed across hundreds of ASIC legislative instruments, provisions of the Corporations Act and the Corporations Regulations, and which adjust the scope of that regulatory regime.
4. Rulebooks
As a final step, the ALRC recommends implementing thematic, consolidated Rulebooks, which would be single consolidated legislative instruments for financial advice or disclosure. These Rulebooks would provide the descriptive detail to complement how certain provisions within the Financial Services Law may apply to certain entities, individuals, products, services or circumstances. In other words, the Rulebooks may tailor the regulatory regime.
The role of technology to streamline the creation of legislation
The ALRC recognises that the way in which most individuals interact with the law these days is mediated by technology, tackling the overarching issues in the legislation is still key. Technology can then be used to supplement this effort. The ALRC believes that they have, in essence, proposed a form of technical solution in their recommended legislative model because that model brings together hundreds of legislative instruments into a single Scoping Order and thematic Rulebooks. It is based on the logic of having a single document containing the core details.
In the final chapter of their report, the ALRC recommends the creation of a legislative data framework which could list, for example, all the offence civil penalty provisions and legislative powers in the Act. This could then provide a platform for a RegTech solution to create marked-up or filtered versions of the legislation. Technology could also certainly assist in the drafting and design of legislation. That is because law can be readily understood as data. Hence, being in a position to analyse and monitor the complexity of the legislative scheme, via the analysis of metrics, could be very beneficial.
The reforms in practice
Under the proposed reforms, a stakeholders’ starting point would be the Act, to determine if a particular provision applies to their person or circumstances. The stakeholder would then consult the Scoping Order to establish if any exclusions, inclusions or exemptions apply. As a final step, they may need to consult the Rulebooks to determine if a particular provision applies to their circumstances, products or services.
The proposed roadmap for reform
The ALRC recognises that there are obvious challenges in attempting to reform law which is still operational, such as the Corporations Act. The potential for disruption to the status quo often makes a lot of stakeholders very nervous when it comes to proposals for reform.
Chapter 7 of the ALRC’s report contains a detailed roadmap for implementation. That roadmap has been used to inform the design of all the ALRC’s recommendations, including minimising transition costs for stakeholders. The ALRC has broken down how the recommendations could be implemented, according to different themes. It’s the ALRC’s hope that segmenting implementation in this way will permit the provisions in each area to be restructured discreetly. Essentially, it will allow for a staged implementation which means that compliance systems don’t necessarily need to be entirely updated at once. In other words, there would be a gradual restructuring.
It is also hoped that, by breaking down the implementation in this manner, momentum and appetite for change can be maintained, by the achievement of realistic, but regular, milestones.
The ALRC’s aim is to ensure that even partial implementation still leaves us “in a better world than we are today”. Each pillar of the ALRC’s proposed reforms are capable of functioning on their own and will deliver significant benefits upfront in terms of consumer protection and disclosure. This will assist in achieving momentum and stakeholder buy-in.
Maintaining the legislation
The ALRC also recognises that there needs to be a shift in focus to the maintenance of legislation going forward. There are current challenges with law-making and maintenance, simply due to the complexity of the existing framework. However, the Corporations Act did not end up in its current form overnight; rather, it is a product of over 20 years of change. It is easy for path-dependent amendment choices to lead down roads which can then be difficult to back track – even when those paths are recognised as leading to increased complexity and increased compliance costs.
The ALRC recognises the challenges when it comes to maintaining legislation. Indeed, Australia’s statue book has grown exponentially, almost doubling in size, over the last 15 years. This “flow of legislation” is so great that it leaves government with little time to take stock. The ALRC is very much focused on making the law work for people over time. This means ensuring that appropriate processes and practices are in place to ensure that the law is current, meets its objectives, is adaptable to change and is easy to understand. When it comes to maintaining legislation, it is essential that the framework for that legislation is as flexible and adaptable as possible to new technologies and markets.
The ALRC proposes that the reformed legislation be subject to 10 yearly reviews, to ensure that the legislation remains fit for purpose and has kept pace with changes and shifts in policy, practice and technology. Post-legislative scrutiny is by no means novel with approximately 60% of Acts now subject to some form of review following a set period.
When it comes to making delegated legislation, the ALRC recommends engaging a Rules Advisory Committee – comprised of subject matter experts in the design of delegated legislation. The purpose of the Rules Advisory Committee would be twofold as follows:
- to ensure that the delegated legislation is drafted thematically and to the highest possible standards, and
- to permit for best practices in delegated lawmaking to be established between Commonwealth agencies.
The benefits of reform
The ALRC’s proposed reforms would provide a clear predictability and a clear path to navigating the legislation, via the primary legislation, the Scoping Order and the thematic Rulebooks. This means that the reformed law would:
- be more succinct,
- have an intuitive flow,
- prioritise the more significant provisions,
- logically group, and consolidate, related provisions,
- be easier to maintain – because of the reduced complexity – whilst being flexible and adaptive to change,
- promote meaningful compliance with the law, and
- support reduced costs, via reduced complexity.
Moving to a more coherent legislative hierarchy and reducing prescription in the Corporations Act via a reformed legislative model (preferably via the Financial Services Law) combined with a Rulebooks approach, will permit prescriptive detail to still be fleshed out in a consolidated thematic legislative instrument – but not in a way which requires the text of the Act to be notionally amended. Hence, the ALRC’s proposed reforms would negate the need for notional amendments because the Corporations Act could be read as itself; likewise, the Rulebooks could be read in and of themselves, in that they simply flesh out, where necessary, the detail of the Act. The rules themselves would never amend the Act. Hence, there wouldn’t be the current uncertainty concerning whether certain provisions in the Financial Services Law have been omitted, or new ones inserted by a legislative instrument “buried” somewhere on the Federal Register of Legislation.
The government response and next steps
Approximately 13 of the recommendations, as made by the ALRC in their interim reports, have already been implemented by the government, in part or in full. Most of those recommendations were primarily technical in nature. Hence:
- there is now a single glossary for the Corporations Act, as recommended by the ALRC,
- some of the headings for defined terms have been made more consistent – this should make those definitions easier to find, and
- certain redundant and spent provisions have been removed.
As to the ALRC’s final report, the government is yet to respond in detail, although the government has indicated that they are considering the report and the recommendations contained therein.
On a positive note, one thing which became clear to the ALRC during their inquiry, was the almost universal acceptance amongst stakeholders of the serious issues within the current legislation and that those issues are worthwhile to fix. Even those who were skeptical at first, have come around to the idea of change, after considering the ALRC’s strongly presented case for reform. Hence, the urgency for reform is there and stakeholders appear very much on board. One stakeholder put it well in stating that the question isn’t so much whether reform of the legislation is a good idea; rather, it’s if and when to allocate the time to fix it.
Further reading and resources
Further information on the ALRC’s inquiry and final report can be found at this link.
If you missed this presentation, you may access the webinar recording by registering here.
