ALRC releases report proposing financial services legislation reforms
On 30 November 2021, the Australian Law Reform Commission (ALRC) released its first Interim Report (Report) containing its recommendations, proposals, and questions in relation to the reform of corporations and financial services legislation in Australia.
The ALRC’s inquiry is part of the Australian Government’s response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). The Royal Commission called for the law to be simplified to better reflect its “unifying and informing principles and purposes”. In 2019, the Australian Government published a roadmap outlining its plan for implementation of its response to the Royal Commission’s recommendations. This Report marks the beginning of that development process, and is the first of four interim reports, with the Final Report due by 25 November 2023. Submissions on this Report are due by 25 February 2022.
Links to the Report and the Summary Report are available here.
Who needs to read it? Why?
This Report will be relevant to entities operating in the New Zealand financial services sector, particularly those with parent entities operating in Australia. Although this does not directly concern entities subject to New Zealand financial services law, Australia is a comparable jurisdiction, so this Report is something to be aware of (noting that the Report reflects substantively on New Zealand’s financial services regime).
What does it cover?
The Corporations Act 2001 and its associated legislative instruments extend to over 13,000 pages. Unsurprisingly, the Report’s key message is that the Corporations Act together with the Australian Securities and Investments Commission (ASIC) Act 2001, various regulations, legislative instruments, and regulatory guides is unnecessarily complex. The main objective of the ALRC’s inquiry is to ensure the law is ‘fit for purpose’, recognising the dynamic nature of the financial services sector and enabling consumers to better navigate the law.
In its review, the ALRC references the New Zealand drafting guidance and financial services legislation throughout the Report. Comparing data on the New Zealand and UK jurisdictions helped the ALRC in concluding that the unnecessary complexity is unique to Australian financial services law. The total size of the six New Zealand financial services-related Acts was found to be significantly smaller and easier to navigate than the relevant Chapter 7 of the Corporations Act and the ASIC Act.
The ALRC is seeking feedback on 16 proposals and eight questions for reform contained in the Report. The proposals included:
- When to define: The ALRC sets out that words and phrases with an ordinary meaning should not be defined. The Report notes that this principle is reflected in New Zealand guidance. The overarching consideration when determining whether or not to define a term is proposed as being whether it would enhance readability and facilitate comprehension of the legislation.
- Definitions of ‘Financial Product’ and ‘Financial Service’: To reduce the complexity of defined terms ‘financial product’ and ‘financial service’, the ALRC proposes using the same uniform definitions for these two terms in both the Corporations Act and the ASIC Act.
- Product disclosure: The ALRC proposes to reframe the obligation to provide financial product disclosure to incorporate an outcomes-based standard of disclosure. Comparison is made to New Zealand’s Financial Markets Conduct Act, which clarifies the intended outcome of disclosure through a provision that sets out the ‘purpose’ of a PDS. This proposal would more directly tie the disclosure obligation to the intended outcome.
- Exclusions, exemptions, and notional amendments: The ALRC proposes to replace all existing exemption and exclusion powers with a sole power for either ASIC or the minister to make exemptions and exclusions in a single legislative instrument. All powers to amend Chapter 7 of the Corporations Act would instead be one sole power to make ‘rules’ in legislative instruments.
- Conduct obligations: The ALRC makes numerous proposals which would have the effect of rationalising the ‘efficiently, honestly and fairly’ obligation and other compliance obligations under the Corporations Act.
The ALRC also makes 13 recommendations which focused on relatively technical matters, to improve the use of definitions in corporations and financial services law.
We agree with the ALRC and the Royal Commission that the Australian corporations and financial services legislation would benefit from simplification and rationalisation. The way in which the Report references New Zealand’s financial services legislation suggests the ALRC are of the view that our financial services legislation is more ‘fit for purpose’ than the Australian equivalent.
It is likely that the ALRC’s proposals together with the further interim reports to be released in the future could result in a significant reform of financial services law in Australia. This is likely to attract attention in New Zealand from government, regulators and the media, as well as New Zealand financial institutions. We recommend staying up to date with the legislative reforms in Australia.
If you have any questions about the Report or how it might affect your business, please contact one of our experts.