ALRC president, The Hon. Justice Sarah Derrington

The Australian Law Reform Commission has indicated it will audit areas of the Corporations Act that are unnecessarily prescriptive with a view to replacing them with principles-based text as part of its review of the legislative framework for corporations and financial services regulation.

In a background paper for the review released last week, Complexity and Legislative Design, the ALRC said while prescription is a necessary feature of legislation it can lead to legislative complexity.

“This complexity is likely to be excessive and unjustified where the prescription is disproportionate when measured against the capacity of the regulated community to understand, and comply meaningfully with, the legislation,” the paper states.

That ability to understand the Act is something the ALRC is keenly aware of in its attempt to “simplify and rationalise the law”, which is its core task.

While the ALRC has previously stated that a balance between prescriptive and principles-based regulation is required, its mandate to simplify the Act is linked to the evolution of its audience from lawyers and regulators to everyday licensed individuals including financial advisers.

“Historically, legislation in most common law jurisdictions was written for lawyers,” the paper states, adding that the goal has always been “precision”, rather than “readability”.

Along with improving readability and navigability, the ALRC is keen on making the Corporations Act shorter. The Act has grown from 400,000 to 800,000 words in 20 years, with chapter seven – which deals solely with financial services and markets – the most overblown.

The commission makes it clear that overly prescriptive legislation is partly responsible for the bloated nature of the Act.

“Prescriptiveness can exacerbate the problems of length insofar as clarity can be impaired by too much specificity,” the paper states.

To tackle the issue, the ALRC says it can examine provisions which are “particularly long, which have grown longer over time, or which have intricate structural elements”.

It continues: “Having identified potentially prescriptive areas of a legislative text, a qualitative assessment is required to understand the degree of prescription and to consider whether the prescription is necessary and therefore justified.”

Pros and cons

The ‘prescription verse principles’ debate has been a central theme in the ALRC’s research leading up to the publication of its first report – on definitions – to be published on 30 November.

In May ALRC president Hon. Justice Sarah Derrington said the debate is “still raging”.

The challenges inherent in reforming the Corporations Act to become a more principles based document are immense. To begin with, the Act is already largely principles based so finding areas to unwind is a nuanced task.

And while principles-based regulation has the potential to shorten the Corporations Act, there is also a danger in treating principles based regulation as a panacea to complexity. FASEA’s Code of Ethics, for example, which has its 12 principles-based edicts condensed in one page, has been called “impossible to manage” and lacking in clarity.

The ALRC acknowledge this risk, and hark back to the need to balance simplicity and precision.

“This delicate judgement is deeply subjective,” it adds. “For example, critics of simplification projects argue that reductions in regulatory compliance requirements do not eliminate the complex interplay between the regulators, regulated, public, and the state, they just conceal it…”

Ultimately, however, the ALRC believe the pendulum is swinging towards a regulatory architecture for licensed individuals that is more interpretive than specific.

“…in consultation with lawyers, industry, and consumer groups, the ALRC has been told that the Corporations Act is overly complex because of its prescriptiveness and that a more principles-based drafting approach would be preferred,” it states.

The news will be welcomed by the Financial Services Council, which last week included a plea for more principles-based oversight of advice as part of its blueprint for advice reform.

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