Lifting chapter seven out of the Corporations Act would provide a clear line of demarcation between the lifecycle of companies and consumer protections according to the president of the Australian Law Reform Commission, which has been charged with reviewing the industry’s regulatory framework.
In an May update on the review, ALRC Commissioner and federal court judge Justice Hon. John Middleton revealed that pulling chapter seven out of the Corporations Act was “very much on the table” and that it may be more effective “as a standalone statute”.
Speaking on the side lines at Professional Planner‘s 2021 Licensee Summit last week, ALRC President Hon. Justice Sarah Derrington explained how the commission thinks extracting chapter seven might reduce overall complexity in the Act.
“One way it might reduce complexity is to have the Corporations Act as a closed Corporations Act in the sense that it regulates everything from the birth to the death of a company,” Derrington explained.
“All those matters that are currently in chapter seven, which are really the consumer protections obligations, relating to financial services and products, would be in a self-contained piece of legislation,” she continued. “So it becomes very clear where you go to for consumer protection regulation as opposed to where you looking at corporate law in the more corporate sense.”
The Corporations Act has grown from 400,000 words to 800,000 words in 20 years, with chapter seven the most overblown.
Chapter seven has “always been too complex”, says ALRC legal officer Nicholas Simoes da Silva. It is the second largest Act in the country and accounts for four per cent of all commonwealth statute law.
Separating chapter seven, which deals solely with financial services and markets, from the rest of the Act, which covers company regulation, would add clarity of purpose to each set of regulations, Derrington explained, thereby aiding navigability and reducing complexity.
“It’s a question of signalling the primary legislation for consumer protection,” she said. “You still have regulations and standards that will sit underneath that, but its purpose will be clear and it gives us a better chance to put the objects and principles and values by which we want to regulate financial advisers front and centre of the new piece of legislation.”
No simple lift-out
If chapter seven is pulled out of the Act, industry observers believe it will likely lead the ALRC to conduct a thorough analysis of whether its foundation – the current licensing system for financial service providers – is best suited for the industry.
The alternative – individual registration for all, including financial advisers – has long been bandied around as an alternative to an AFSL system that places regulatory responsibility on the licensee, instead of the end adviser.
While licensees play an important support role for advisers, some consider the licensing function to be misplaced – including the industry’s largest representative association.
“The FPA strongly supports a model in which registration is the personal responsibility of each financial planner, and is not connected with their employment or authorisation under an AFSL” FPA chief Dante De Gori said in May.
According to Madison Financial head of governance Kerry Thomas, the ALRC could “definitely” recommend changes to the AFSL system.
“If chapter seven is going to come out it won’t be just lifted out as is,” Thomas said.
A long, complicated road
Any proposal by the ALRC to split the Corporations Act and possibly unwind the AFSL system would be just that – a proposal.
Replacing the licensing regime with individual adviser registration would be a mammoth undertaking with a long and complex implementation.
“It’s an opportunity but it would also require stakeholders to get on board, including the government and ASIC,” says Encore Advisory director Tom Reddacliff. “That’s the element I would probably have doubt on.”
The ALRC’s review will produce three interim reports as well as a final consolidated report in November 2023.