On 18 January 2024, the Australian Law Reform Commission (ALRC) tabled its final report into the legislative framework for corporations and financial services regulation, containing 58 recommendations that aim to transform corporations and financial services legislation into a more efficient and user-friendly legislative framework.
We summarise the recommended legislative framework below and explore ALRC’s proposed next steps.
Background to inquiry
For years, the existing legislative framework for corporations and financial services has proven unnecessarily complex, with parts of the framework described as ‘porridge’, ‘obscure and convoluted’, ‘shrouded in obfuscation’, and likened to a ‘maze’.
The legislation that regulates this area is split between the Corporations Act 2001 (Cth) (Corporations Act), and the Australian Securities and Investments Act 2001 (Cth) (ASIC Act). The tools used to build and maintain the legislative framework — such as notional amendments to the underlying legislation, conditional exemptions, and proliferating legislative instruments — often create more problems than they aim to solve. The legislation is, and has been for some time, ripe for reform.
The ALRC’s recommended legislative framework
The ALRC’s recommended legislative framework consists of three elements:
- restructured and reframed primary legislation in the form of the Financial Services Law, which would contain the law’s key provisions, such as core obligations, offence provisions, rights, remedies, and definitions;
- a single legislative instrument, called the Scoping Order, which would contain matters that adjust the scope of the regulatory regime, including exemptions and exclusions; and
- thematic, consolidated rulebooks, which would contain prescriptive detail that would tailor the regulatory regime for particular products, services, persons, or circumstances.
Implementing the recommended legislative model would create a more coherent and streamlined framework by:
- reducing the number of places users need to look to find relevant guidance;
- removing the need for notional amendments and complex conditional exemptions, while maintaining regulatory flexibility to clarify technical detail and address atypical circumstances as they arise; and
- ensuring that law-making powers delegated to the Minister and ASIC maintain an appropriate delegation of legislative authority.
The ALRC’s key recommendations
| Item | Current State | Proposed Solution |
|---|---|---|
| Simplifying the definition of financial product and financial service | These definitions are critical to assessing whether the legislative framework regulating financial services in Australia apply, however, they are described and adjusted differently depending on which legislation applies. | The report recommends these definitions be simplified and all relevant legislation adopt the same terminology. |
| Financial services law | The legislation that regulates this area is split between the Corporations Act and the ASIC Act. There is no one source of truth. | The Corporations Act should be amended to create a dedicated group of provisions known as the Financial Services Law rather than being split between the Corporations Act and the ASIC Act. Implementing this recommendation would create a clearly identifiable body of primary legislation, to be known as the Financial Services Law, that would be more coherent and easier to navigate and understand than existing legislation. The ALRC recommends that the Financial Services Law be enacted as Schedule 1 to the Corporations Act. |
| Grouping and consolidating financial services provisions | The provisions relating to consumer protection are not contained in one body of legislation and are often difficult to comprehend. | The Corporations Act should be amended to restructure and reframe provisions of general application relating to consumer protection. Specifically, the ALRC proposes grouping generally applicable consumer protection provisions across the Corporations Act and ASIC Act. This would involve grouping and consolidating the following provisions into one chapter: (a) the unconscionable conduct and consumer protection provisions in relation to financial services found in Division 2 of Part 2 of the ASIC Act and across Chapter 7 of the Corporations Act; (b) consumer remedies relating to agreements with unlicensed persons in Division 11 of Part 7.6 of the Corporations Act; (c) the design and distribution obligations in Part 7.8A of the Corporations Act; (d) and aspects of the product intervention powers of ASIC. In addition, the disclosure regimes in Chapter 7 of the Corporations Act that require disclosure documents to ‘be worded and presented in a clear, concise and effective manner’ should be amended to also require that disclosure documents also be worded and presented ‘in a way that promotes understanding of the information’. We note that this recommendation received multiple submissions from industry that did not support the recommendation as the concept of what constitutes promoting ‘understanding’ is too subjective. The ALRC noted in its final report that the goal of any reform should not be to introduce additional uncertainty, and that implementing the recommendation would complement other reforms – the stated goal being to ‘promote meaningful compliance with the core expectations of disclosure regulation’. Similarly, the ALRC recommends that the offence and penalty provisions in the legislation be consolidated into a smaller number of provisions covering the same conduct rather than scattered throughout different legislation with sometimes overlapping conduct giving rise to different penalties. |
| ASIC’s power to provide individual relief | Stakeholders have observed that ASIC’s ability to grant individual relief is important, particularly for addressing atypical circumstances or unintended consequences of the regulatory regime as it applies to particular persons. | Consistent with existing policy, the ALRC recommends that ASIC retains its power to grant individual relief from many provisions of Chapter 7 of the Corporations Act, through making a notifiable instrument. The ALRC envisages a reduced need for individual relief if the recommended legislative model were to be implemented, as prescriptive detail in rules could be readily tailored to minimise problems in its application. |
| Requirement that financial services law and delegated legislation be periodically reviewed by an independent reviewer | To avoid history repeating itself and to ensure that the reformed legislative framework is future fit and able to adapt quickly. | The ALRC recommends that it be subject to periodic post-enactment review, by an independent body, to assess whether the intended outcomes of reform are being met. This recommendation would be given effect by a provision in primary legislation. Including a statutory review clause in the reformed legislative framework is consistent with modern legislative practice. |
Next steps
The ALRC recommends that the implementation roadmap and implementation process should be overseen by one or more specifically resourced taskforces dedicated to those tasks. The Australian Government would set a taskforce’s terms of reference, which should include clear deliverables.
The ALRC has proposed a six-pillar approach to implementing the recommendations, comprising:
- consumer protection;
- disclosure;
- financial advice;
- other regulatory obligations and licensing;
- miscellaneous; and
- policy-evolving provisions.
Whether the Government chooses to accept all or parts of the ALRC’s recommendations and what approach is taken to legislating the changes remains to be seen. However, we agree with the ALRC’s assessment that Australia’s financial services regulatory regime is unduly complex and see this as a significant opportunity to simplify the regime to make it more accessible and comprehensible for product providers, financial advisers and consumers.