Legal academics researching the efficacy of financial services law believe the development of the Corporations Act has been hamstrung by reactive policy, which has led to ineffective and overly complex regulation characterised by “attractive prophylactic” laws and “shrill” legislature.
Speaking on a recent panel hosted by the Australian Law Reform Commission, which is in the middle of a three-year study into how the complexity of financial services regulation can be unravelled, UNSW associate professor Scott Donald explained how political expediency in times of crisis is leading to legislation that is reactionary and ill-considered.
“The purpose of the legislature is increasingly shrill and urgent,” Donald said. “The political exigencies of responding to successive scandals and the publicity around those has overridden a more principled development of the regulatory regimes.”
A similar tone was taken by Samuel Walpole, a barrister who has previously acted as a consultant at the ALRC, who noted that statutory reforms such as FOFA “all seem to have sort of come out of particular scandals or evolutions in industry, or some sort of reactive event.”
General law seems to be an “attractive prophylactic” to policymakers as a way of dealing with scandals, Walpole commented. Unfortunately, when the ideals of general law get translated into statutory norms the context is often lost, he says.
“Context matters,” he said. “The way some of those statutory obligations has been enacted actually doesn’t achieve what was perhaps sought in the sort of general open textured standard of fiduciary law.”
Choose your own adventure
The ALRC has a daunting task – to assess how the Corporations Act could be made less complex, more efficient and more navigable for market participants – but it hasn’t been afraid to make some bold statements, including the possibility that Chapter 7 could be excised from the Act entirely, which ALRC President Hon. Justice Sarah Derrington said would provide a clear line of demarcation between the lifecycle of companies and consumer protections.
Delivering a short keynote on the panel, Melbourne Law School associate professor Rosemary Langford extended on one of the ALRC’s earliest findings – that there is way too much detail and complexity in the Corporations Act.
“We might assume that greater detail leads to greater clarity and easier compliance, however, as we’ve seen in the era of corporations and financial services regulation, detail actually often leads to complexity and the need to recognise exceptions and qualifications,” Langford said, before using an example familiar to financial advisers.
“So what initially began as a principles based approach can subsequently turn into a framework that’s overloaded with exceptions and safe harbours, and we can point to the framework governing the best interest duty of financial advisers as an example.”
Things tend to get cluttered over time in our day-to-day lives, Langford went on, and financial services law is no exception.
“The Corporations Act has been reformed many, many times over the years,” she said. “Clutter manifests itself at each level of the legislative hierarchy, namely primary legislation, regulations and legislative instruments, and also the overlap that exists between each level.”
Langford noted that the much-maligned Corporations Act has “served us well” over the years, despite its length and complexity leading to some colourful characterisations.
“Academics have described the Corporations Act, and I quote, as ‘unlovely and unloved, obese, economically burdensome, inconsistent and conceptually troubled’,” she said.
ALRC legal officer Phoebe Tapley added that the proliferation of delegated legislation in the Act makes navigation less than straightforward.
“I think the result of these piecemeal modifications across the Act, the regulations and ASIC instruments, is that navigating the product disclosure requirements… is a bit like a Choose Your Own Adventure novel,” Tapley said.
Bullseye UNSW associate professor Scott Donald:
“political expediency in times of crisis is leading to legislation that is reactionary and ill-considered.”
Well said.
Finally some common sense from the legal fraternity! How ironic. I hope they walk the talk. Start with the protection of the consumer in mind and keep them at the centre of any changes. If the law is all about minimising loss of investor monies then protections should look at just doing that. Having said that it is impossible to legislate against bad people but at least the industrialisation of bad behaviour as we have seen by some large institutions could be minimised. Once financial planning becomes a profession hopefully we’ll start to be treated like doctors and dentists and not micro-managed by the law. It’s like getting all cardiologists to provide a SoA before they operate on a patient because on average 2% of patients die undergoing heart surgery. The regulators insist that no one loses their lives on the operating table so therefore they insist on a SoA. Cardiologists will tell you losing some patients happens. It might be a bad analogy but I’m trying to point out that other professions are treated much more fairly than we are. May be we have to wait until 2026 to be treated like adults? In the meantime the outrageous legal handcuffs we operate under must be simplified. If this were done the consumer wins without their protections being diluted. Ultimately isn’t that what we are all after, some common sense?
What an intriguing article. The observations on “reactive policy” are well made, and no surprise to many of us. The scary bit is that the review is scheduled to take three years – if it is completed on time. Which gives ASIC at least another three years to impose more misguided, reactive regulation on our industry. Given that some very credible people quoted in the article have identified the problem, surely at this point on our journey of insanity it is time to call a halt to reactive policy and regulation, and await the outcome of the review. I can’t help but wondering whether the ALRC and ASIC actually speak to each other.
Justinian set about in the year 527 to simplify the Legal maze that had become totally unworkable due to it’s complexity and succeeded in repealing 90% of the laws in a little over a year.
Our current Legal maze is more like an impenetrable jungle.
The only way we are going to get out of this mess, which is crushing our economy and affecting all Australians, is to start again.
By this I mean first and foremost, write down what it is that each Law and Regulation is trying to achieve.
Second. Simplify by making the wording easy to read so everyone can understand them and eradicate 90% of the words.
Unfortunately, the Legal Industry is totally incapable of simplification and must be sidelined from this part of the process, or we will end up with more of the same legalize that only they understand and would read.
The reason why people do not read legal documents, is they do not understand them.
Of course, what I am saying is an affront to the Legal Industry, as they have infiltrated into every aspect of our lives and make Billions of dollars in fees that they will fight tooth and nail to hang onto, even at the expense of Australia and all Australians.
The problem and the solution is very simple to diagnose and treat.
Though the word “simplification” is an anathema to the Legal Industry.