Overview: What's in the Final Report?

The Australian Law Reform Commission (ALRC) has completed its review of the legislative framework for corporations and financial services regulation. The Final Report - Confronting Complexity: Reforming Corporations and Financial Services Legislation – was tabled in parliament and publicly released on 18 January 2024.

'No longer fit for purpose'

The standout conclusion in the Final Report is that:

'the legislative framework for corporations and financial services regulation is no longer fit for purpose… The existing legislative framework is unnecessarily complex, and the tools used to build and maintain the framework — such as notional amendments, conditional exemptions, and proliferating legislative instruments — often create more problems than they aim to solve. Much legislation is unclear and incoherent, and the objective of an adaptive, efficient, and navigable legislative framework remains unrealised.

These problems also combine significantly to undermine the substantive content and quality of the law. The ALRC’s findings underscore those of the Financial Services Royal Commission: fundamental norms of behaviour are unclear, and the law should be simplified so that its intent can be met'.

Another important finding is that the complexity of existing laws serves to increase costs for all stakeholders (see: Figure 2.4 in the Final Report) as well as contributing to 'legislative inflexibility'.

58 Recommendations for reform

To address these issues, the Final Report includes 58 recommendations to streamline and simplify financial services regulation, including several recommendations aimed at ensuring laws are easier to update and maintain.

• Recommendations 1-23 which were included in the Review's three interim reports – Interim Report A (read: Reforging financial services law); Interim Report B (read: Unwinding the 'byzantine complexity' of corporations and financial services laws: Submission on ALRC Interim Report B) and Interim Report C (read: Creating a separate financial services law) - are described as concerning 'issues of technical simplification that do not have significant policy implementations and were not subject to divergent views among stakeholders'. To date, 13 of these recommendations have been implemented in full or in part. See: Table 1.1 in the Final Report.
• Recommendations 24-58 are new recommendations included in the Final Report. These primarily concern the proposed overhaul of the structure of existing legislation regulating financial products and services contained in Chapter 7 of the Corporations Act 2001 (Cth) (Corporations Act) and Part 2, Division 2 of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and how these proposed changes could be implemented and maintained.

For clarity, there is no suggestion at this stage that the reforms will extend to the following (other than possibly consequential amendments):

• Chapter 5C of the Corporations Act
• Insurance Act 1973 (Cth)
• Life Insurance Act 1995 (Cth)
• Banking Act 1953 (Cth)
• Superannuation Industry (Supervision Act) 1993 (Cth)

A full list of recommendations is included a p16-25 of the Final Report. Appendix C to the Report maps the recommendations against proposals included in the three Interim Reports.

Key recommendations

A (proposed) new regulatory framework

Among the key reforms recommended in the Final Report is the proposed restructure and consolidation of the existing legislative framework for financial services regulation into a new (and more easily navigable) three part structure.

This is proposed to comprise:

• A new Financial Services Law (proposed to be housed in a new Schedule to the Corporations Act – the FSL Schedule) which would 'set the regulatory perimeter and the policy objectives of regulation'. It's envisaged that the new Financial Services Law would contain the primary restructured/reframed provisions - eg 'core obligations, offence provisions, rights, remedies and definitions' - relating to financial services/products and house them in a single location. It's suggested that, like the Australian Consumer Law, this approach would 'help to give the Financial Services Law a clear legislative identity'. These recommendations (Recommendations 41 and 42) formalise proposals C9 and C10 included in Interim Report C. Read: Creating a separate financial services law
• A Scoping Order which is described in the Final Report as 'a single legislative instrument…which would contain matters that would adjust the scope of the regulatory regime, including exemptions and exclusions'. Appendix F to the Final Report is a table giving an overview of the types of provisions that the ALRC envisages may appear in the Scoping Order (as part of the ALRC’s recommended legislative model) and examples of equivalent existing provisions. It's proposed that the power to make scoping orders would be vested in either the Minister or ASIC (or both) in accordance with existing policy settings under Chapter 7 of the Corporations Act and Part 2 Div 2 of the ASIC Act.
• Rulebooks. These are described in the Final Report as 'thematic, consolidated rulebooks, which would contain prescriptive detail that would tailor the regulatory regime for particular products, services, persons, or circumstances'.
  Figure 3.3 in the Final Report is a diagram illustrating how the proposed new framework is proposed to improve navigation and make information easier for users to locate.

ASIC would retain power to grant individual relief

Notably, it's recommended (Recommendation 45) that under the proposed new structure outlined above, ASIC would 'retain its power to grant individual relief' (through making a notifiable instrument).

However, the report makes clear that it's envisaged that this power 

'would need to be exercised in limited circumstances to address atypical circumstances or unintended consequences of the regulatory regime, and would not need to be exercised to the same extent as under the current legislation for the reason that rules could be more easily tailored to deal with specific circumstances'.

The report suggests that this revised structure would provide a 'clear path through the law' by reducing the number of places that users of the legislation need to look to ensure that they are compliant with the legislation.

Consolidating existing provisions 

A number of recommendations in the Final Report, formalise previous ALRC proposals to simplify and consolidate existing provisions to improve clarity and navigability.

These include the following.

Single, simplified definitions of 'financial product' and 'financial services':  Recommendation 31 recommends (as per proposals A3-A6 in Interim Report A) that there should be a single, simplified definition of 'financial product' and 'financial service' included in the Corporations Act which should be cross-referenced in other legislation (Recommendation 31). For clarity, these new definitions are proposed to replace and supersede other existing definitions.

Recommendation 32 recommends:

'To implement Recommendation 31:
a. specific inclusions within the definitions of ‘financial product’ and ‘financial service’ should, so far as possible, be located in primary legislation; and
b. application provisions, exclusions, and exemptions (where relevant) should be used to limit the application of provisions to specific products, services, persons, and circumstances'.

The ALRC writes that these changes would significantly simply the legislative framework by enabling users to look in one place (the Corporations Act) to determine the meaning of both terms, and (assuming the recommended legislative restructure is implemented), enabling users to look in one place (the Scoping Order) to identify all exclusions from these definitions as well as any inclusions that may be in force.

Consolidating consumer protection provisions: As per Proposal C1 in Interim Report C, Final Report Recommendation 33 recommends that the Corporations Act be amended to create a new legislative chapter which would consolidate existing consumer protection provisions into a single location.

Specifically, Recommendation 33 recommends that the Corporations Act be amended to: 

'restructure and reframe provisions of general application relating to consumer protection, including by grouping and (where relevant) consolidating: 
a. Part 2 Div 2 of the Australian Securities and Investments Commission Act 2001 (Cth); 
b. Part 7.6 Div 11 of the Corporations Act 2001 (Cth); 
c. sections 991A, 1041E, 1041F, and 1041H of the Corporations Act2001 (Cth); 
d. Part 7.8A of the Corporations Act 2001 (Cth); and e. sections 1023P and 1023Q of the Corporations Act 2001 (Cth).'

Unconscionable and misleading or deceptive conduct: As per Proposal C2 and C3 in Interim Report C, Final Report Recommendations 34 and 35 recommend that:

'Section 991A of the Corporations Act 2001 (Cth) and s 12CA of the Australian Securities and Investments Commission Act 2001 (Cth) should be repealed, and s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) should be amended to expressly provide that it encompasses unconscionability within the meaning of the unwritten law' [Recommendation 34]

Recommendation 35 recommends that:

'Proscriptions concerning false or misleading representations and misleading or deceptive conduct in the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) should be replaced by a single, consolidated proscription'.

Consolidating existing disclosure provisions: As per proposal C4 in Interim Report C, Final Report Recommendation 36 recommends that:

'The Corporations Act 2001 (Cth) should be amended to restructure and reframe provisions relating to relating to disclosure for financial products and financial services, including by grouping and (where relevant) consolidating:
a. Part 7.7 Divs 1, 2, 3A, 6, and 7;
b. section 949B; and
c. Part 7.9 Divs 1, 2, 3 (excluding ss 1017E, 1017F, and 1017G), 5A, 5B, and 5C'.

Consolidating provisions relating to financial advice: As per Proposal C6 from Interim Report C, Final Report Recommendation 38 recommends that 

'The Corporations Act 2001 (Cth) should be amended to restructure and reframe provisions relating to financial advice, including by
grouping and (where relevant) consolidating:
a. sections 912EA and 912EB;
b. Part 7.6 Divs 8A, 8B, and 8C;
c. Part 7.6 Div 9 Subdivs B and C;
d. Part 7.7 Div 3;
e. section 949A;
f. Part 7.7A Divs 2, 3, 4 (excluding s 963K), Div 5 Subdiv B, and Div 6; and
g. sections 1012A and 1020AI'.

Consolidating offence and civil penalty provisions: In line with Proposal B15 from Interim Report B, Recommendation 56 recommends that 

'existing offence and penalty provisions in corporations and financial services legislation should be consolidated into a smaller number of provisions covering the same conduct'.

Reforming general regulatory obligations and provisions comprising the AFSL regime: Recommendations 39 recommends that:

'The Corporations Act 2001 (Cth) should be amended to restructure and reframe provisions of general application relating to financial services providers, including by grouping and (where relevant) consolidating:
a. Part 7.6 Divs 2, 3, and 10;
b. section 963K;
c. Part 7.7A Div 5 Subdiv A, and Div 6;
d. Part 7.8 Divs 2, 3, 4, 4A, 5, 6, and 9; and
e. sections 991B, 991E, 991F, 992A, and 992AA'. [Recommendation 39]

Recommendation 40 recommends that:

'The Corporations Act 2001 (Cth) should be amended to restructure and reframe provisions of general application relating to administrative or procedural matters concerning financial services licensees, including by grouping and (where relevant) consolidating Part 7.6 Divs 4, 5, 6, and 8' 

Implementation and maintenance of the reformed legislative framework

The Final Report also includes a number of recommendations focused on facilitating the delivery and ongoing maintenance of the reforms.

In line with Proposal B9 from Interim Report B, Recommendation 49 recommends that:

'The provisions of Chapter 7 of the Corporations Act 2001 (Cth) relating to the regulation of financial products and financial services should be amended to:
a. establish an independent ‘Rules Advisory Committee’; and
b. require the Minister and the Australian Securities and Investments Commission to consult the Rules Advisory Committee and the public before making or amending any provisions of the Scoping Order or rules'.

In line with Proposal C12 from Interim Report C, Final Report Recommendation 54 recommends that the government

'should establish a specifically resourced taskforce (or taskforces) dedicated to implementing reforms to financial services legislation'.

In line with Proposal C13 from Interim Report C Recommendation 55 recommends that 

'As part of implementing Recommendation 41 (the Financial Services Law), the Corporations Act 2001 (Cth) should be amended to require that the Financial Services Law and delegated legislation made under it be periodically reviewed by an independent reviewer'.

The Final Report stops short of recommending that CAMAC be reinstated

On this point, the Final Report notes that a number of stakeholders have suggested that the Corporations and Markets Advisory Committee CAMAC, or a similar body, should be reinstated as this body could perform the functions recommended in Recommendations 49, 54 and 55 as well as (potentially) other broader functions. 

The Final Report comments: 

'The ALRC is of the view that the establishment of a body, such as CAMAC, that focused on supporting the Australian Government in policy development would complement the ALRC’s reforms. However, given CAMAC’s role as a policy-oriented body, and the focus of this Inquiry on reforms within existing policy settings, the ALRC has not consulted on or recommended the reinstatement of CAMAC'.

Suggested approach to implementation

The report includes a suggested implementation roadmap to guide implementation of the recommended reforms, commencing with the following (suggested) initial steps: 

• Enacting a 'skeletal FSL Schedule in Sch 1 to the Corporations Act' ie (assuming acceptance and implementation of Recommendation 42), it's suggests that the government should 'lay the groundwork' for the progressive implementation of the proposed FSL (Recommendation 41) by enacting a 'skeletal' version of the new FSL – ie placeholder chapters, 'which could contain simplified outlines that explain where provisions are presently located in the pre-reform legislative framework' – to provide a 'navigability tool for users of the legislation'. It's suggested that these placeholder chapters could then be replaced as recommended reforms are implemented.
• 'establishing the legislative architecture for scoping order and rule-making powers'
• 'updating guidance relating to legislative design to operationalise the working.'

Following this, the report suggests that implementation could be approached through implementing the following six 'pillars' (broad reform areas). The report states that each 'pillar' has been designed to 'ensure that it could be implemented within a single term of parliament' with the first four pillars – consumer protection, disclosure, financial advice and licensing/other regulatory obligations – covering what the ALRC describes as 'the most significant, complex, and policy sensitive financial services provisions in Chapter 7 of the Corporations Act and Part 2 Div 2 of the ASIC Act'.

Under the ALRC's roadmap, the proposed six 'pillars' for reform are: 

1. Consumer protection (Recommendation 33) is flagged as a suggested starting point. The report also suggests that this would be 'an opportunity to implement recommendations related to the definitions of ‘financial product’ and ‘financial service’, which would be helpful for later reforms'.
2. Disclosure (Recommendation 36). The report states that this is the second priority because 'the relevant provisions are among the most complex in the existing legislative framework. Reform to disclosure provisions could bring significant benefits for regulated persons, consumers, and investors'.
3. Financial Advice (Recommendation 38). The report states that this should be prioritised because 'A simplified legislative framework would be an important step to reducing the costs of advice, supporting advisers to understand their obligations, and promoting higher quality advice'.
4. Other regulatory obligations and licensing (Recommendation 39 and 40).
5. Miscellaneous
6. Policy Evolving provisions. The report envisions that:

'Pillar Six would be implemented on an ongoing basis as and when policy reforms are adopted. It would therefore proceed in parallel with other pillars'.

Integration with other reforms?

A key message for government in the Final Report is the need to 'avoid the perpetuation of complex law-making approaches' when designing/implementing any new legislative measures. It's submitted that:

'it would be desirable to begin implementing the ALRC’s recommendations as part of any new legislative measures and what the ALRC refers to as ‘policy-evolving provisions’…New legislation should avoid the perpetuation of complex law-making approaches, such as notional amendments, conditional exemptions, and highly particularised regulation-making powers. Instead, new measures should be designed according to the principles recommended in Chapter 4 of this Report [Chapter 4 sets out seven recommendations – legislative design principles - aimed at improving the quality and consistency of corporations and financial services legislation]'.

It's further suggested that implementation of the Final Report recommendations in line with the approach envisaged in the roadmap in the Final Report, could help facilitate other policy reforms including, for example reforms to financial advice and buy now, pay later regulation.

For example, the Final Report opines that:

'the restructured and reframed [financial advice-related] provisions would make it easier to identify the key objectives and norms of behaviour relating to financial advice. This would make the legislation more amenable to implementing recommendations concerning the provision of good advice, for example, as contemplated by the Quality of Advice Review'.

In addition, it's suggested that 

'Restructuring and reframing financial advice provisions may also make them more adaptive to changes in technology and business practices'.

Likewise, the report suggests that implementation of the Final Report recommendations could (potentially) assist in regulating buy now, pay later (BNPL) as a credit product. It's suggested that:

'the ALRC’s recommendations may be applied to credit legislation to make it more adaptive and therefore amenable to policy change. For example, BNPL arrangements are a diverse and evolving area, so it may prove challenging to insert a definition of BNPL arrangements to bring them within the scope of the NCCP Act. A definition that is too narrow and detailed may be unsuitable, causing evolving BNPL service providers to fall outside of the NCCP Act. A wide definition would allow flexibility, but if exclusions and exemptions were to be introduced without a coherent legislative hierarchy, then unnecessary complexity may accrue over time. This is where the ALRC’s recommended legislative model could provide the requisite flexibility while minimising unnecessary legislative complexity'.

Outlook 

At this stage it is not clear whether or to what extent the government will implement the Final Report recommendations (Recommendations 24-58) or what the timeframe may be.

The government has flagged it is 'carefully considering the report and recommendations'.

[Sources: ALRC Report 141: Confronting Complexity: Reforming Corporations and Financial Services Legislation; Summary Report; Attorney General Mark Dreyfus media release 18/01/2024]