Simplifying the financial services laws – pipe dream or reality?

Like politicians, the prospect of completely re-written financial services laws promises so much. But will the proposed re-write by the Australian Law Reform Commission be able to deliver? We have our doubts. But we also hope against hope that we are wrong. For many years now we have advocated for a principles-based financial services regime instead of the highly prescriptive current regime that has also become more and more complex and fragmented over time.

The backstory

The Financial Services Reform Act took effect in 2001. It heralded all-new financial services provisions. Since that time we have had industry review after industry review and reform after reform, leading to a discombobulated, multi-layered, onerous regime that is difficult and expensive to understand, let alone comply with. And of course, among all of this we had a number of ‘scandals’, leading to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

You probably remember Royal Commissioner Hayne, from the Royal Commission, recommending that the financial services laws be rewritten and simplified (see Recommendations 7.3, 7.4).

At 1.5.3 of the Royal Commission’s Final Report, Commissioner Hayne said this of simplification:

“First, it is time to start reducing the number and the area of operation of special rules, exceptions and carve-outs. Reducing their number and their area of operation is itself a large step towards simplification. Not only that, it leaves less room for ‘gaming’ the system by forcing events or transactions into exceptional boxes not intended to contain them.

Second, it is time to draw explicit connections in the legislation between the particular rules that are made and the fundamental norms to which those rules give effect. Drawing that connection will have three consequences. It will explain to the regulated community (and the regulator) why the rule is there and, at the same time, reinforce the importance of the relevant fundamental norm of conduct.”

And, at 4.1 under the heading ‘Recommendations: Answering the key question’, Commissioner Hayne stated:

“The more complicated the law, the harder it is to see unifying and informing principles and purposes. Exceptions and limitations encourage literal application and focusing on boundary‑marking and categorisation. Boundary‑marking and categorisation may promote uncertainty. Removing exceptions and limitations encourages understanding and application of the law in accordance with its purposes. That is, ‘its intent is met, rather than merely its terms complied with’. Like cases are more evidently treated alike.”

From there, the then Attorney-General Christian Porter commissioned the Australian Law Reform Commission (ALRC) to undertake a review of the financial services laws. And the ALRC has enthusiastically taken up the challenge. But what can the ALRC actually achieve and deliver?

Much of that comes down to how a critical element of the ALRC Review’s terms of reference is interpreted.

The ALRC’s Terms of Reference

Some inclusions in the ALRC Review’s Terms of Reference offer tantalising hope that real, meaningful change and simplification may be possible. The Terms of Reference include the following:

1. The use of definitions in corporations and financial services legislation;
2. The coherence of the regulatory design and hierarchy of laws, covering primary law provisions, regulations, class orders, and standards;
3. How the provisions contained in Chapter 7 … could be reframed or restructured so that the legislative framework for financial services licensing and regulation is clearer, coherent and effective [and] ensure that the intent of the law is met.

All very promising you might say. But there is one little reference in the opening stanza of the Terms of Reference that concerns us. That is, that the review needs to be undertaken having regard to and “within the context of existing policy settings”.

But what is the ‘current policy setting’ on any particular issue?

Do the current policy settings mean that the current, failed, highly prescriptive, the disclosure-led approach needs to stay? Is that the ‘existing policy setting’, which as per the Terms of Reference, must remain? Or, will the expert panel tasked with undertaking this ALRC review take a more expansive view of what is meant by limiting the review, and therefore the outcomes of the review, to the existing policy settings? E.g.  Are the current policy settings as broad and simple as you need to be licensed or authorised to provide financial services unless an exemption applies; advisers need to ensure their advice is in a client’s best interests; financial services operators need to proactively and effectively manage conflicts; retail clients deserve and need added protection (including access to AFCA); licensees need to have sufficient resources and systems and make sure they manage their ongoing risk and compliance obligations, and so on, without pages of detail about how such obligations must be met?

Are the prescriptive safe harbour best interests steps ‘existing policy settings’ that cannot be done away with? Or is the principle simply that an adviser must act in a client’s best interests and provide appropriate advice sufficient? If the ALRC adopts the restrictive first position, then our concern is that we will see no meaningful change, just more of the same in slightly different terms. But if the ALRC takes a more expansive view of what it means to maintain the current policy settings, a brave new world of truly principle-based regulation may ensue.

Another example. ASIC’s regulatory guides are said to, among other things, explain how ASIC interprets the law and “describe the principles underlying ASIC’s approach”. As you know, these guides, while useful, are multifarious and contain a lot of prescribed detail on what the regulator thinks you can and can’t do and how you should do it. Are these Regulatory Guides representative of the current principles that can’t be resiled from in any new laws? If so, no meaningful change can come about. Or, if the Regulatory Guides themselves become part of the flotsam that can be jettisoned and re-written in support of brave new, simple, plain English principles-based laws, the future looks decidedly rosier.

Believe it or not, as lawyers we don’t support more and more complicated laws. They simply shouldn’t be that hard to understand and implement. In fact, we have advocated for years for simplified, principles-based laws for the financial services sector. It shouldn’t take hours to properly research multiple sections of the Corporations Act, relevant regulations, ASIC Class Orders, legislative instruments, Regulatory Guides and relevant cases just to accurately answer a simple question for a client. It all adds to the cost of providing financial services and financial advice which, as we know, is already out of reach of too many. Let’s hope common sense prevails and the ALRC review takes a broad view of the ambit of its review powers. (See our previous article on these proposed reforms in our Regulatory Wrap newsletter here.)

Ian McDermott, Financial Services Lawyer and Compliance Consultant