(From left) IOSCO board chair Ian Ashley Alder, ALRC president the Hon. Sarah Derrington and Herbert Smith Freehills partner Andrew Procter

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.


One comment on “ALRC to balance prescription and principles in regulation review”
  1. Avatar
    Jeremy Wright

    It is admirable that the ALRC have recognised and are looking at the complexity of the current Regulatory maze, though they are the wrong people to be doing a review.

    It is incongruous to expect the Legal / Judiciary Industry to change what they were trained to do, which is to create and interpret Legalese. ( A language that only this secret society understand and will fight to retain, which gives them their powers to continue as they have done for millennia )

    Nero playing the fiddle while Rome burned, has been a point of contention, though what is not conjecture, is the absolute devastation that the current Regulatory framework is wreaking on ALL AUSTRALIA, which is causing more Business and economic decline, in addition to an inability for most Australians to attain affordable advice, than all the natural disasters combined.

    At least with a fire or flood, you know that there will be a recovery and these disasters are in actual fact, necessary to take out the imbalances that occurs in nature.

    What the Legal Industry has done, is to throw the ecosystem into a whirlpool of never ending interpretative chaos.

    My question is, at what point do we as a Country, continue to allow the very people who created the decline of our Businesses and economic future, to continue wreaking the pandemonium that they are incapable of fixing.

    Asking a dog to meow is achievable, though the end result will not work if the dog cannot re-program it’s brain to be consistent.

    Lawyers and Judges are trained a certain way and to ask them to simplify and bring the Regulations to a point that is easy and simple to understand for the masses, goes against everything they have been taught and practice.

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