At 664 pages, the first interim report of the Australian Law Reform Commission’s 3-year review of complexity within legislation regulating financial services matches the Corporations Act itself for complexity.
Presented with this observation, ALRC special counsel Andrew Godwin tells Professional Planner: “It’s a big task to look at such a big Act.”
Despite its preclusive length, the interim report is the most significant document the industry has seen since Hayne’s set of recommendations, with its proposals to revamp terminology and, crucially, separate financial advice from other financial products and services likely to change the foundations of the industry.
The report’s most impactful finding is that personal financial advice should no longer reside under the umbrella terminology of ‘financial product advice’, which the commission believes should be repealed entirely. ‘Financial product advice’, Godwin says, is an “intermediate” term that doesn’t serve any meaningful purpose.
“The term ‘financial product advice’ is somewhat redundant and somewhat obscures the main focus,” he says. “A number of stakeholders said it’s important to decouple it from personal advice and move away from that salesperson approach.
“Yes, it’s about improving navigability [within the Corporations Act], but it’s also about removing the focus on products,” he continues.
While the ostensible focus of the interim report is on reducing complexity by simplifying definitions, the task brings with it questions that go to the core of the advice framework. The commission came to the view that it’s not enough to just remove advice from product – financial advice shouldn’t even sit within the same regime as financial services.
The reasoning here is that there are a number of provisions that apply to financial advice that do not apply to other financial services – SoA obligations, unique licensing arrangements and best interest duty among them. As more advice-specific aspects have been added over time, the area of personal advice has outgrown its regulatory home.
There is now more outside the overlapping areas of the regulatory venn diagram than within (refer Figure 11.1 from the interim report, below).
Personal advice should be a category on its own, ALRC special counsel Matt Corrigan says. This would not only make sense from a terminology perspective but also “attack the Russian dolls” of definitions being piled within each other.
Norms for the rules
A further recommendation from the report is that general advice should be renamed something more accurate, due to it being moreso about information than advice.
“The suggestion was that consideration should be given to something more intuitive to what it’s about,” Godwin explains. “We don’t have any suggestions at this stage, but the use of non-intuitive terms create difficulties in comprehension and perhaps compliance.”
Changing general advice to something without ‘advice’ in the moniker – for example, ‘financial information’ or ‘consumer guidance’ – would at least make the terminology match the “norms”, Godwin says, rather than the rules.
It’s a phrase the lawyer comes back to repeatedly. Not being able to see the norms for the rules in the Corps’ Act is the commissions own version of not seeing the forest for the trees.
“The issue with general advice is it’s not advice, [and] labelling something that’s not advice as advice is inherently problematic,” Corrigan explains. “It’s not that it’s too general, it’s that it’s a mislabel.”
“It’s also a concept that is defined negatively,” Godwin adds. “It’s misleading in what it implies.”
Broad industry review
The main thing the commission wants to achieve with its interim report, Godwin says, is to get clarity within the regimes and increase navigability within the Corporations Act.
Idealogy aside, the proposals are about creating clearer lines and making the framework function better.
“It’s really about the regulatory regime [rather] than anything conceptual,” he says.
The Corporations Act has grown from 400,000 to over 800,000 words in 20 years, with an increasing portion of that growth coming in the form of conditional statements and ‘nested’ amendments that require cross-referencing to other sections of the Act.
The commission knows it has a giant task ahead, but it’s also aware that its reports will form part of a broader industry revamp. “We’re mindful that Treasury is approaching its Quality of Advice Review,” Godwin says.
While the first interim report has huge significance, the commission’s final consolidated report, due in November 2023, could contain even more dramatic proposals. The commission has already signalled that taking Chapter seven out of the Corporations Act in order to separate the regulation of companies and consumers is very much on the table.
Agreed. “General advice” has always been a misleading label with potential for misinterpretation.
“Advice” ought to stand on it’s own. Even the word “personal” seems unnecessary…
Finally! Ever since these reg’s were introduced, I’ve questioned the term “general advice”, which is not advice AT ALL, but simply general information. Stating facts does not constitute advice. It only becomes advice when you make a recommendation on what action should be taken. Is there a chance that, for the first time in my career, there might be legislation that actually defines and regualtes what I do?
The Corporations Act growing from 400,000 to 800,000 words that require cross referencing to other sections of the Act and the understanding from the Legal profession that interpreting all this in a 664 page interim report, knowing that Treasury is also making it’s own quality of advice review, plus the final report due out in November 2023 that will contain even more dramatic proposals, does not appear to be a simplification strategy, rather, more of the same complexity that gives little comfort over the next 2 years while all this is going on and even after then, it will be years of talking and negotiating on behalf of all interested parties before any action can be taken, leads us back to, what was the purpose again?