ALRC to balance prescription and principles in regulation review

The Australian Law Reform Commission has indicated it will recommend a blend of prescriptive and principles-based regulation in its review of the financial services regulatory system.

After gleaning advice from regulatory and legal experts in the UK, New Zealand and Singapore on a webinar Monday ALRC president Hon. Justice Sarah Derrington acknowledged that the debate around prescriptive and principles-based regulation “is still raging” to an extent.

“But I think we are at a point where we definitely need a balance,” Derrington said.

The judge was responding to Martyn Hopper, solicitor at top UK firm Linklaters, who said the one thing he would change about the UK regulatory system is to “do away” with the principles versus prescriptive regulation debate, which he said was “stale, tired and has exhausted its usefulness”.

“The reality is you need both,” Hopper said.

Herbert Smith Freehills partner Andrew Procter gave a similar view. Some people will always want more weight given to prescriptive regulation, he explained, but the “slightly-blurred lines” of principles-based regulation meant firms tend to stay away from the “grey zone of uncertainty”, which produces better outcomes.

Yet balance is still required, he added, because the “potential weakness” of principles-based regulation is that supervisors can be tempted to apply hindsight “and use a principle to retrospectively change the standards and expectations”.

The comments will give hope to those that believe financial advice is being smothered by overly prescriptive regulation, including the Financial Services Council who recommended a “long-term principles-based approach to regulation” in its December 2020 paper on affordable advice.

Overly prescriptive regulation has long been a bone of contention for advisers, who believe ASIC’s compliance requirements are a big factor in the rising cost to serve. As per Adviser Ratings, median financial advice fees rose by 16 per cent this year to $3,256 in the past year.

From the ALRC’s perspective, the most impactful perspective on Monday’s panel might have come from Ian Ashley Alder, chair of the International Organisation of Securities Commissions (IOSCO), which acts as the global association for financial regulators.

“Principles are really important and they’re a great advantage from a regulatory and a practitioner perspective,” Alder said. “They describe in a very succinct way the universe of outcomes that the regulatory framework is intending to achieve.”

The next level

The ALRC seems determined to recommend significant changes in its final review, due in 2023. In a separate webinar ALRC commissioner and federal court judge Hon. John Middleton said pulling Chapter 7 out of the Corporations Act entirely is “on the table”.

“Just about everyone thinks the Corporations Act is too complex and that it’s probably always been too complex,” added ALRC legal officer Nicholas Simoes da Silva.

“If we want people to obey the law, we need to make finding and understanding the law as easy as possible,” da Silva said, noting the “astonishing complexity” of the current framework.

The ALRC is tasked with assessing the efficacy of the current system, with particular attention being paid to a Corporations Act which has ballooned from 400,000 words to over 800,000 after 20 years of amendments and cascading subsections.

According to Minter Ellison partner and lawyer Richard Batten, the nature of Australia’s principles-based system will be a target of the review.

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.