ALRC urges fixing ‘broken’ financial services legislation

In its final report, Confronting Complexity: Reforming Corporations and Financial Services Legislation, tabled in Parliament on Thursday by Attorney-General Mark Dreyfus, the ALRC found that the legislation governing Australia’s financial services industry is a tangled mess – difficult to navigate, costly to comply with, and unnecessarily difficult to enforce.

In the report, judges described the current laws as being like “porridge”, “tortuous”, treacherous”, and “labyrinthine”, while others called the legislation “broken”. Complexity in the existing legislation is not an isolated problem – it costs businesses, consumers, investors, and the economy at large, the report noted.

In order to revamp the financial services sector legislative framework and simplify the law, the ALRC made 58 recommendations aimed at reducing costs for service providers and consumers, improving productivity by reducing complexity, and providing clarity around compliance requirements and enforcement.

Recommendations in the final report include:

• Redesigning financial services legislation to give it a clear home and identity as the “Financial Services Law”, making it easier and less costly to find, navigate, and understand.
• Ending the use of almost invisible notional amendments that make the law deeply inaccessible, and instead, using thematic, consolidated rulebooks to provide flexibility for regulating particular products, persons, services, or circumstances.
• Making it easier to tell when something is a “financial product” or “financial service” by introducing a single, simplified definition of both terms.
• Making offence and penalty provisions less complex and more obvious by consolidating them into a smaller number of provisions that cover the same conduct, making them easier to identify, and making the consequences of breach clear on the face of the law.

“Australia’s laws governing financial services are a confusing maze. The reforms outlined in this report will make these laws easier to understand and navigate, drive down the costs associated with complying with the law, and make it easier for consumers to understand and enforce their rights,” said Justice Mordy Bromberg, president of the ALRC.

“These laws provide the legal and economic infrastructure of the financial services industry. The reforms we’re proposing are broadly supported by stakeholders and, if implemented, will see substantial improvements for both consumers and business.”

The ALRC added that 13 recommendations made during the inquiry have already been implemented, in full or in part, by legislation passed during 2023.

Previous interim reports from the inquiry saw the ALRC propose creating a dedicated chapter within the Corporations Act for financial advice to consolidate relevant provisions, making it easier for users to locate and navigate the applicable laws.

“Proposal C6 would see the creation of a single legislative chapter, bringing together all provisions that only regulate financial advice. This restructure seeks to reflect the needs and expectations of users of the law, and thereby enable the law to communicate more effectively,” Financial Services Legislation: Interim Report C reads.

ALRC emphasises the importance of avoiding the “curse of knowledge” and ensuring that when it comes to new or infrequent users, the law should not assume any prior knowledge regarding the application of provisions such as “conflicted remuneration” or “best interests duty” to specific types of financial advice.

“The law’s structure should communicate how it applies to specific persons, services, and circumstances.”

Namely, dissecting, in particular, Chapter 7 of the Corporations Act, ALRC said the present design of this chapter does little to help users either find or disregard financial advice provisions.

Instead, it noted, in searching for the law relating to financial advice, “users must read through the substantive provisions of the act to identify financial advice provisions or look to ASIC regulatory guidance to address defects in the law’s communicative power”.