Regulatory reform, but not as you know it

The Australian Law Reform Commission’s impending review into financial services regulation will not follow the traditional route of past reviews into the sector, with legal and regulatory experts predicting it will focus on the structure and presentation of regulation.

This could have far reaching effects for financial advisers, with everything from tweaks to investor definitions to a thorough unwinding of the current principles-based regulatory regime on the table.

Minter Ellison partner and lawyer Richard Batten says that while the terms of reference for the review are “scant”, it will be about form over substance.

“The focus is really not what we would ordinarily think of as a reform process,” he says, emphasizing that the review will be technical in nature and no policy change recommendations will be come out of it.

The nature of our principles-based regulatory system is a likely target of the review, Batten reckons.

“Principles-based regulation is great – I believe in it – but you have to work out how to apply the principle in a defined situation,” he says. “[Commissioner] Hayne was about making it clear to people what they should be doing.”

Batten says the review could take principles-based regulation “to the next level” by linking principles to prescription. “That could lead to more effective legislative devices,” he adds.

UNSW professor of commercial law and regulation, Pamela Hanrahan, also believes a better link between principles and prescriptive law may be a focus of the review.

“We need to avoid the ‘principles-based’ and ‘black letter law’ debate – which goes nowhere – and see if we can improve the law by providing high-level principles in accordance with which the law is to be interpreted and applied, supplemented by appropriate detail where people need it,” Hanrahan says.

The academic says the Code of Ethics set down by FASEA is a good example of what happens when there isn’t a solid connect between principles and prescriptive guidance.

“If you turn codes, particularly codes of ethics, into legislation they must be precisely formulated and that is exactly what you are trying to avoid,” she says, adding that the “Frankenstein” standards are “neither legislation nor code”.

Don’t hold your breath

The review has three interim reports due, starting from November 2021, before the consolidated review is scheduled for November 2023. According to QMV regulatory consultant Jonathan Steffanoni, the scale of the review could see it drag out a lot longer.

“The first thing that comes to my mind is the rewrite of our income tax laws,” he says.

In 1993 a taskforce was entrusted with the ‘Tax Law Improvement Project’ to rewrite the 1936 Income Tax Assessment Act. It was originally scheduled for three years, but remains incomplete – 27 years later.

“I’m not saying this will be the case here,” Steffanoni says. “A rewrite is a fantastic idea, but it could take a while.”

Lawyer David Jacobsen from Bright Law agrees that the review is a “huge job” and could take more time than anticipated. “When you’re amending the Corporations Act you don’t want to have any more uncertainties or ambiguities or unintended consequences,” he says.

Some of the issues mandated for the review – such as the first interim report’s look into definitions – may need to be addressed separately because certain areas like investor definitions are crying out for earlier reform, Steffanoni says.

“If we’re looking at three years to get the report it could be another year or so to get things drafted,” the consultant says. “I’d be surprised if sophisticated investor definitions wasn’t on the agenda before then, it is possible that there’s intent to address that prior to the completion of this process.”