ALRC takes aim at ‘porridge’ of financial advice legislation

The Australian Law Reform Commission notes in its final report on simplifying financial services legislation that “at 265,000 words, Chapter 7 of the Corporations Act is similar in length to the novel Ulysses by James Joyce”.

And while the plot of the legislation isn’t nearly as good as the Irish literary classic, it’s a point well made.

Wrangling the legislation into the ALRC’s preferred semblance of logic and structure will require implementing no fewer than 58 recommendations, which were made public on Thursday after an exhaustive investigative process spanning more than three years.

“After more than 20 years of development, the legislative framework for corporations and financial services regulation is no longer fit for purpose,” the ARLC report said.

“The existing legislative framework is unnecessarily complex, and complexity only continues to accrue. Parts of the legislative framework have variously been described as ‘porridge’, ‘obscure and convoluted’, ‘shrouded in obfuscation’, and likened to a ‘maze’.”

The report confirmed what every financial adviser already knew: the laws they operate under are a mess. They are inconsistent, complex, and they have made getting even quite simple things done take too long. They have stymied real innovation in delivering financial advice, added to costs (thereby helping to block millions of people from professional advice), and too often require engaging a phalanx of lawyers to ensure no legal missteps.

Simplifying the law might not be all good news for the legal firms that make a living from the complexity of the law, but it will be welcomed by advisers and licensees as potentially making their lives just a little less miserable.

A separate review of financial advice laws, the Quality of Advice Review has been heralded as likely to reduce costs and support delivery of advice more efficiently to more consumers. But simplifying existing laws should not be underestimated for its potential impact on costs (and without quite so much politics and hullabaloo).

“Reducing costs of compliance and enforcement” is noted by the ALRC as one of the key outcomes of law reform. The ALRC proposes pulling apart and then reassembling existing legislation so that currently far-flung elements are grouped together in a way the report said would “make it easier to navigate and understand”, and it would do so under four broad themes: consumer protection, disclosure, financial advice, and general regulatory obligations.

Getting into the detail of what would wind up where, it gets pretty complex pretty quickly.

For example, in relation to financial advice, it proposes “grouping and (where relevant) consolidating”:

• Sections 912EA and 912EB;
• Part 7.6 Divs 8A, 8B, and 8C;
• Part 7.6 Div 9 Subdivs B and C;
• Part 7.7 Div 3;
• Section 949A;
• Part 7.7A Divs 2, 3, 4 (excluding s 963K), Div 5 Subdiv B, and Div 6; and
• Sections 1012A and 1020AI.

The ALRC proposes creating a dedicated group of provisions that would be called the Financial Services Law (FSL), which it says should be enacted as a schedule to the Corporations Act. But it has cleverly structured its recommendations so that even if its FSL Schedule approach is rejected, recommendations 33 to 40 (which obviously includes Recommendation 38 relating to financial advice) “may be implemented independently”.

“This means that if the FSL schedule were not adopted, the recommendations to create separate legislative chapters (or parts within a chapter) relating to consumer protection, disclosure, financial advice, and general regulatory obligations could be implemented within the existing body of the Corporations Act,” the report said.

Unlike the QAR, which was subject to criticism for being completed in a year and being the work (albeit in deep consultation with industry) of one lawyer, Allens partner Michelle Levy, the ALRC report is the result of years of labour by five ALRC commissioners, 22 ALRC staff, four consultants, 56 students, 17 advisory committee members and 24 “expert readers”.

It also made extensive and novel (the ALRC describes it as “pioneering”) use of big data analysis – in total, more than 53gb of data, representing more than 10 million pages of documents gathered, visualised and analysed to formulate its recommendations.

Its workings and progress have been well publicised, including through three interim reports and a dozen background papers.

Implementing its recommendations will be a complex and time-consuming task, but the job of simplifying the laws that regulate corporations and financial services has potentially significant economic benefits and should receive strong bipartisan support. The ALRC’s conclusions cannot be dismissed as ill-informed or politically motivated.