Australian Law Reform Commission special counsel Andrew Godwin

The Australian Law Reform Commission has become the latest authority to identify what financial services minister Jane Hume dubbed the “Gordian knot” of advice regulation, with the first of its reports into financial services focussing almost solely on the “overly prescriptive approach” used in advice regulation.

So ubiquitous is the issue within advice all five of the examples used in the interim report – which deals with use of definitions within financial services – are related to the sector.

In a section on the overly prescriptive nature of regulation (which “obscures the clarity of the law”), the example given is that the simple 16-word obligation for advisers to act in the clients’ best interests “…is tied to a prescriptive ‘safe harbour’ defence that is 261 words long”.

In arguing that financial services regulation is “complex and unwieldy”, with too many cross-references for industry participants to keep track of, the report notes that 83 different legislative instruments affect a core advice staple – product disclosure statements.

On definitions within legislation (where the report quotes a judge calling them “complex and prolix, if not labyrinthian”), the example given is the “lengthy and numerous” provisions that relate to the meaning of a ‘retail’ client.

And tellingly, under the heading ‘Laws do not reflect fundamental norms’ the example referenced is the regime prohibiting conflicted remuneration for advisers, which is contained across 25 different statutory provisions.

“The analysis so far has identified a number of issues with the complexity of the existing law that impacts businesses, consumers, regulators and the courts,” the report states.

Difficult legislation

The review itself was commissioned by the attorney general in September as part of the government’s response to the royal commission, where Hayne called out unnecessary complexity in financial services regulation.

According to ALRC special counsel, Andrew Godwin, the review isn’t intended to focus solely on financial advice, but there is no escaping the issues that are inherent in the industry.

“Financial advice has a certain prominence partly because of the Hayne royal commission but also because financial planning is a very important area and it continues to excite discussion and debate,” he tells Professional Planner.

Godwin says he has sympathy for advisers given the nature of the rules they have to navigate, noting that Chapter seven of the Corporations Act – which covers financial services and financial products – is generally recognised as “not an easy piece of legislation” with “lines of demarcation sometimes difficult to identify”.

“It’s partly because of what Hayne said – you have so many exceptions and qualifications, and therefore sometimes it’s not so easy to apply the laws or comply with the rules,” he explains.

Almost two decades since the Corporations Act was first enacted, Chapter seven is now “an accumulation of amendments, revisions, modifications and what-have-you,” he adds.