Frydenberg slammed over ‘unclear’ proxy advice changes as committee demands answers

The letter sent to Josh Frydenberg by committee chair Liberal senator Concetta Fierravanti-Wells late last week questioned inconsistencies with government legislation and unclear guidelines about the reforms.

The reforms, announced in late December, will require proxy advisers to have an AFS licence to provide advice to institutional shareholders, to simultaneously share corporate governance advice to shareholder clients with the companies they are providing advice on and to be independent of their institutional clients by 1 July 2022.

“The committee notes that despite the regulations imposing obligations that have a significant effect on licensees that provide proxy advice there is no justification in the explanatory statement as to why it is appropriate for the relevant matters to be dealt with by delegated legislation as opposed to primary legislation,” the letter read.  

“The committee therefore requests your advice as to why it is considered necessary and appropriate to use delegated legislation, rather than primary legislation, to introduce significant new obligations on financial services licensees that provide proxy advice, noting in particular that this approach appears to be inconsistent with the guidance provided in the department of the Prime Minister and cabinet’s Legislation Handbook.”

Speaking to ifa, Morningstar ESG analyst Erica Hall – who criticised the reforms last month – said the reforms were “rushed through law” late last year and that the crux of the issue was that it did not go through the usual legislative process. 

“The bi-partisan senate committee highlights that the motives for introducing the regulatory changes and the mode by which it has occurred are opaque,” Ms Hall said.

“The benefits are unclear as there has not been open discussions with all stakeholders. Changes made in the name of ‘transparency and accountability’, yet ironically the process by which these reforms have been introduced has been anything but transparent.

“It is hard to understand why it was necessary to take such an approach.”

Senator Fierravanti-Wells also questioned the heavy penalties within the reforms that could see proxy advice firms hit with fines of over $11 million due to non-compliance.

The letter read: “Serious criminal offences and significant penalties should ordinarily be included in primary, rather than delegated legislation… however, considering the seriousness of the offences and quantum of penalties the regulations would give effect to, the committee considers it would be more appropriate for the amendments to be made by primary legislation.”

Ms Hall called the penalties “pernicious” as a timing issue could potentially cost $11.3 million for proxy advice firms and $1.3 million for individual advisers.

“If the reforms are successfully withdrawn due to the disallowance process, the disruption caused by this reform in terms of time wasted, and costs of applying for a new AFSL will be significant,” Ms Hall said.

Mr Frydenberg has been asked to respond to the committee’s concerns by 10 February.

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.

Neil is also the host of the ifa show podcast.