‘Porridge’, 'labyrinthine’ and ‘tortuous’ – these are a few of the words that have been used by judges to characterise the difficulties and complexities of the current state of Australia’s corporations and financial services legislation.¹ The Australian Law Reform Commission (ALRC) reports that Australia’s financial services industry is grappling with an exorbitant regulatory burden, incurring up to billions of dollars annually to navigate and decipher the intricate web of laws that have evolved over two decades of legislative amendments.²

Following the culmination of three years of review of Australia’s corporations and financial services legislative framework, the ALRC has tabled its final report with 58 recommendations for an overhaul of the framework. The summary report is an easier read and is found here. 

The purpose of the ALRC’s review of Australia’s corporations and financial services legislation has not been to change the law, rather, the proposed recommendations are focused on simplifying, streamlining, and enhancing the myriad of laws, regulations, instruments and class orders into a new and improved legal framework that is more fit-for-purpose, digestible, user-friendly and less burdensome. 

The key recommendations involve re-writing current legislative requirements into a structured and agile framework consisting of:

1. the primary legislation i.e. the key obligations;
2. the scoping orders for the operation of the legislation, i.e. as to how qualifications and exemptions apply to the obligations; and
3. the prescriptive requirements of the legislation in the form of rulebooks.

This proposed approach to transform the current legislative framework into three key elements is designed to consolidate and simplify the law and regulations in order to enhance accessibility to the law.

Report

The ALRC’s final report Confronting Complexity: Reforming Corporations and Financial Services Legislation (ALRC Report 141) (Final Report) was tabled in Parliament on 18 January 2024. The Final Report sets out the ALRC’s 58 recommendations to reform and enhance the corporations and financial services legislation, which is primarily located 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), as well as a myriad of other related laws, regulations, and legislative instruments.

Notably, the laws relating to funds (e.g. managed investment schemes) in Chapter 5C and Chapter 8B of the Corporations Act would not be included in these proposed reforms. However, as referenced in our recent article here, Australia’s managed investment scheme regulatory landscape (under Chapter 5C of the Corporations Act) and the wholesale investor test under Chapter 7 of the Corporations Act is under a separate review which will also result in revised legislation in 2024.

Background

The Final Report is the culmination of the ALRC’s extensive inquiry into simplifying the financial services legislative framework (Inquiry), which was initially referred to the ALRC in 2020. The Inquiry was based in part on the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). The Royal Commission highlighted the need to simplify the complexity of the corporations and financial services laws, including by phasing out the unwieldy ‘exceptions and qualifications’ approach embedded in the current legislative model (see in particular recommendations 7.3 and 7.4 in the Final Report from the Royal Commission).³

The first 23 recommendations of the Final Report originate from three interim reports published by the ALRC as part of its Inquiry: Interim Report A (2021), Interim Report B (2022) and Interim Report C (2023). 

Overview of the recommendations

The recommendations are grouped into the following seven themes of reform:

• legislative design;
• restructuring and reframing financial services legislation;
• a legislative model for financial services;
• implementation;
• offence and penalty provisions;
• legislative complexity; and
• technical simplification.

Many of the recommendations are relatively minor and easy to implement (e.g. repealing or removing redundant definitions, references, and provisions – see for example the Recommendations in Interim Report A). Other recommendations are much more substantial and will likely involve significant implementation challenges and costs (e.g. reframing the structure and content of the corporations and financial services legislation – see Recommendations 41-43, as discussed below).

Five key recommendations from the Final Report

1. An ambitious new target state: working towards a consolidated Financial Services Law

Significantly, the ALRC proposes a structural overhaul of the current regulatory framework and to create a new simplified and streamlined three-tiered legislative model comprised of:

(a) the ‘Financial Services Law’, as the primary legislation setting out the core obligations regulating financial products and services (as well as definitions, offences, rights, and remedies), which would be included as Schedule 1 to the Corporations Act;

(b) a ‘Scoping Order’, as a single legislative instrument containing provisions that modify the operation and applicability of the core obligations in the Financial Services Law (e.g. carve outs, exclusions, and other modifications); and

(c) ‘thematic rulebooks’, setting out the prescriptive requirements (i.e. ‘rules’) of the core obligations for specific regulatory themes (Recommendations 41-43).

This new legal structure should significantly reduce the number of legislative sources that would need to be consulted to locate all relevant laws and requirements for a particular regulated activity. The ALRC has also recommended that the Corporations Act should incorporate a requirement for an independent reviewer to regularly monitor the Financial Services Law (Recommendation 55).

2. Consolidating and streamlining legislative requirements under key regulatory themes

The ALRC recommended that the following legislative requirements be grouped together under their respective regulatory themes, instead of being dispersed and separated across various sections and laws:

(a) consumer protection provisions in the Corporations Act (Recommendation 33);

(b) false or misleading representations and misleading or deceptive conduct provisions in the Corporations Act and ASIC Act (Recommendation 35);

(c) financial product and financial services disclosure provisions in the Corporations Act (Recommendation 36);

(d) financial advice provisions in the Corporations Act (Recommendation 38);

(e) provisions specific to financial services providers in the Corporations Act (Recommendation 39); and

(f) administrative and procedural provisions specific to financial services licensees in the Corporations Act (Recommendation 40).

3. Minister and ASIC to have overlapping delegated power to create the Scoping Order and rulebooks 

The power to create the prescriptive requirements in the Scoping Order and rulebooks would be jointly vested in the Minister and ASIC, with any overlap and conflict of powers to be governed by a protocol (Recommendation 44, 46 and 48). A key concern with this arrangement is the potential risk for ASIC or the Minister to overstep their delegated law-making powers. However, the ALRC has also outlined a number of proposed safeguards to monitor these law-making powers, including:

(a) a requirement for ASIC and the Minister to consult with an independent ‘Rules Advisory Committee’ and the general public prior to creating and modifying rulebooks and the Scoping Order (Recommendation 49);

(b) a requirement for the Scoping Order and any notifiable instruments issued by ASIC providing for exemptions or relief (Recommendation 45) to be accompanied by an explanatory statement (Recommendation 50); and

(c) the power for Parliament to disallow the Scoping Order and rulebooks and using sunsetting provisions to monitor these legislative instruments (Recommendation 52).

4. Streamlined and efficient management of definitions, including single consolidated definitions of ‘financial product’ and ‘financial service’

Recommendation 27 and 28 provide principles and guidance for the effective management of definitions. The Final Report also advocates for the creation of a single, consolidated, and simplified definition of ‘financial product’ and ‘financial service’ in the Corporations Act (Recommendation 31-32), instead of having different, modified definitions spread across the Corporations Act, ASIC Act, or other legislation.

5. Creating a public regulatory framework tracker

The ALRC has recommended that the Government create a ‘publicly available data framework’ for the purpose of tracking legislative developments (Recommendation 58). This framework would be an indispensable tool to keep abreast of regulatory change.

Implementation – the road ahead

The ALRC has designed a ‘reform roadmap’ that is grouped into the following six ‘pillars’ (regulatory themes) in order of priority and strategic implementation:

• consumer protection;
• disclosure;
• financial advice;
• other regulatory obligations and licensing;
• miscellaneous; and
• policy-evolving provisions.

The ALRC states that each pillar is capable of being implemented in one term of government and that multiple pillars could be implemented at the same time. The ALRC suggests that the Government appoint a dedicated taskforce to drive the reforms (Recommendation 54). While it is clear that the proposed reforms would provide significant and long-lasting benefits to the corporations and financial services regime, the question yet to be answered is whether the Government will adopt these recommendations and to what extent, as well as confronting the associated costs and practical challenges and setting a feasible timeline for implementation.

We believe that these reforms should be progressed and it would be sensible for the legislation relating to disclosure to be tackled first, as it is the most settled area of financial services law out of the six pillars.

We will keep you updated on the Government’s response, progress for these recommendations and key considerations arising for our corporate and financial services clients. 

1. Australian Law Reform Commission, Confronting Complexity: Reforming Corporations and Financial Services Legislation (Final Report, Report No 141, November 2023).
2. Australian Law Reform Commission, Confronting Complexity: Reforming Corporations and Financial Services Legislation (Summary Report, Report No 141, November 2023).
3. Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Final Report, 4 February 2019) vol. 1.