On 18 January 2024, the Attorney-General of Australia tabled the Final Report of the Australian Law Reform Commission (ALRC) on its inquiry into the legislative framework for corporations and financial services regulation in Parliament. The Final Report contains 58 recommendations that aim to transform corporations and financial services legislation into a more adaptive, efficient, and navigable legislative framework. It builds upon the three interim reports published during the course of the ALRC inquiry, which contained 23 of the 58 recommendations. The ALRC had three key areas of focus:
the use of definitions in corporations and financial services legislation;
the coherence of the regulatory design and the legislative hierarchy; and
how the provisions contained in Chapter 7 of the Corporations Act 2001 (Cth) (Corporations Act ) and the Corporations Regulations 2001 (Cth) could be reframed or restructured.
The ALRC inquiry was part of the Government’s response to the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry released in February 2019. According to its Terms of Reference , the ALRC was not tasked with recommending substantive policy changes but, instead, to recommend a more adaptive, efficient, and navigable legislation framework for corporations and financial services.
What you need to know: the ALRC’s call for an overhaul
The ALRC found that current financial services legislation is difficult to navigate, costly to comply with, and unnecessarily difficult to enforce. Issues include the extensive use of notional amendments (provisions that change the legal effect of another provision without changing the text of that provision), an incoherent legislative hierarchy, and proliferating powers and proliferating instruments, which have resulted in a legislative maze. Presently, users must navigate hundreds of legislative instruments applicable to corporations and financial services legislation.
Australian Securities and Investments Commission Act 2001 (Cth) ( ASIC Act ), while additional (and sometimes overlapping) requirements are also contained in other specific legislation such as the National Consumer Credit Protection Act 2009 (Cth).
Key recommendations include consolidating provisions regulating the financial services industry into the ‘Financial Services Law’, which will be enacted as Schedule 1 to the Corporations Act. This will include a new legislative model for the Financial Services Law, which will comprise primary legislation, a scoping order, and thematic rulebooks. The ALRC has recommended simplified definitions for the key terms ‘financial product’ and ‘financial service’, and proposed the consolidation of offence and penalty provisions. The ALRC has provided prototype legislation in the Final Report.
The ALRC’s key recommendations
The key recommendations from the Final Report:
The problem: The definitions of a ‘financial product’ and a ‘financial service’ are foundational because they establish the regulatory boundaries of Chapter 7 of the Corporations Act and Part 2 Division 2 of the ASIC Act. However, different definitions are used for these two terms to adjust the scope of regulation in different areas. Part 2 Division 2 of the ASIC Act adopts different, broader definitions of these two terms than Chapter 7 of the Corporations Act and includes products and services relating to credit (which are excluded from the definition in the Corporations Act). Contrastingly, other parts of Chapter 7 of the Corporations Act adopt the broader ASIC Act definitions (for example, section 994AA on the design and distribution requirements).
Recommendations: The ALRC recommends that a simplified definition for each of these two terms appear in the Corporations Act and that the definition of a ‘financial product’ covers the broader range of products presently covered in Part 2 Division 2 of the ASIC Act, including incorporating within the Corporations Act the definition of ‘credit facility’ currently contained in regulation 2B of the Australian Securities and Investments Commission Regulations 2001 (Cth). The ALRC also recommends that the definition of a ‘financial service’ should cover the full extent of services currently covered in Chapter 7 of the Corporations Act and Part 2 Division 2 of the ASIC Act. Other legislation, such as the ASIC Act, should adopt the same definitions by reference to the Corporations Act.
The problem: Currently, the primary legislation that regulates the financial services industry is split between Chapter 7 of the Corporations Act and Part 2 Division 2 of the ASIC Act. According to the ALRC, it is anomalous that important consumer protections relating to financial services appear in the ASIC Act, which is otherwise focused on ASIC’s functions and powers. This structure makes the primary legislation difficult to navigate and does not help to communicate the legislation’s core messages.
Recommendations: The ALRC has recommended that the Corporations Act should be amended to create a dedicated group of provisions known as the Financial Services Law, which will be enacted as Schedule 1 to the Corporations Act. The Financial Services Law would comprise restructured and reframed provisions relating to the regulation of financial products and financial services, including those from Chapter 7 of the Corporations Act and Part 2 Division 2 of the ASIC Act.
The problem: The ALRC has concluded that the legislative hierarchy of Chapter 7 of the Corporations Act is neither principled nor coherent. This is mainly a result of:
overly prescriptive primary legislation;
the myriad powers that enable delegated legislation to be made;
poorly designed delegated legislation; and
the extensive use of notional amendments and conditional exemptions in delegated legislation.
Recommendations: The ALRC has recommended that the proposed legislative model for the Financial Services Law should comprise:
primary legislation containing provisions appropriately enacted only by Parliament, including key obligations and prohibitions;
a scoping order (a single, consolidated legislative instrument) dealing with inclusions, exclusions, class exemptions, and other details necessary for adjusting the scope of the primary legislation. This would be used to determine whether an obligation applies; and
thematic ‘rulebooks’ (consolidated legislative instruments) containing rules giving effect to the primary legislation in different regulatory contexts as appropriate. The rulebooks would accommodate much of the prescriptive detail necessary for tailoring the regulatory regime to suit different products, services, industry sectors, and circumstances currently regulated by Chapter 7 of the Corporations Act. These rulebooks could take a form similar to the UK Financial Conduct Authority’s Handbook which is an online resource that integrates legislative materials in one location with the use of hyperlinks and marked-up defined terms.
The problem: Presently, provisions relating to consumer protection in financial services are scattered across the Corporations Act and the ASIC Act. The provisions relating to disclosure for financial products and financial services are excessively complex. The ALRC has concluded that the current structure and framing of provisions relating to financial advice in Chapter 7 of the Corporations Act makes the law difficult to find, navigate, and understand.
Recommendations: The ALRC has recommended that the Corporations Act be restructured and reframed to incorporate (including from the ASIC Act) the following:
consumer protection, including unconscionable conduct and misleading or deceptive conduct (recommendations 33-35);
disclosure for financial products and financial services, including by clarifying the outcome of consumer understanding that disclosure regulation is intended to promote (recommendations 36-37);
financial advice (recommendation 38); and
the general application related to financial services providers and the general application relating to administrative or procedural matters concerning financial services licensees (recommendations 39-40).
The problem: There is a multiplicity of individual offence and civil penalty provisions in the Corporations Act. An Interim Report of the ALRC (Report No 139 , 2022) found that having a large number of detailed, sometimes overlapping, offence and penalty provisions does not lead to better compliance or more effective enforcement.
Citing the Financial Services Royal Commission (final report , volume 1, February 2019), the ALRC in the Final Report stated: ‘So many wires are strung between the fence posts that they inevitably overlap, intersect and leave gaps. And, instead of entities meeting the intent of the law, they meet the terms in which it is expressed.’
Recommendation 56: Offence and penalty provisions in corporations and financial services legislation should be consolidated into a smaller number of provisions covering the same conduct.
The ALRC's final report: What’s next for the reform
The Final Report sets out a detailed roadmap for implementing the reformed legislative framework for financial services. The ALRC’s work complements the ongoing work of the Federal Department of Treasury in seeking to simplify relevant legislation.
The Australian Government will now decide whether to implement the ALRC’s recommendations in full or in part. The ALRC has created a reform roadmap that comprises six pillars: (1) consumer protection; (2) disclosure, (3) financial advice; (4) other regulatory obligations and licensing; (5) miscellaneous; and (6) policy-evolving provisions.
The roadmap is based on the staged application of the ALRC’s recommendations to each pillar. Each pillar is designed to ensure it can be implemented within a single term of Parliament. The pillars are also designed so they may be implemented sequentially or simultaneously.
Given the Terms of Reference for the ALRC’s inquiry excluded policy decisions, pillar six would be in keeping with the policy decision of the Government of the day and implementation could proceed in parallel with other pillars of the roadmap.
The ALRC notes that the six-pillar approach is just one way to implement the ALRC’s recommendations. The Government could choose to differently conceptualise and scope reform pillars, or undertake them in an alternative order.
Whether the Government chooses to accept all or part of the ALRC’s recommendations and what approach is taken to legislating the changes remains to be seen. Given the considerable benefits of reframing and reforming corporations and financial services legislation, we consider it important and necessary that the Government accept the recommendations in full and commence the process of legislating these reforms.