‘Labyrinthine’ financial services legislation set to be streamlined

In its final report, Confronting Complexity: Reforming Corporations and Financial Services Legislation, tabled in Parliament on Thursday (18 January) 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.

For example, the ALRC found that, since 2001, the Corporations Act has almost doubled in length to more than 4,000 pages and over 800,000 words.

By way of comparison, this is longer than the novels War and Peace by Leo Tolstoy (approximately 580,000 words) and The Lord of the Rings by JRR Tolkien (approximately 550,000 words).

It highlighted that chapter 7 of the Act has similarly almost doubled to 265,000 words since 2002, making the chapter alone equivalent to the 10th-longest Act of Parliament (and similar in length to the novel Ulysses by James Joyce).

It has previously stated that the legislation included a ‘web of definitions’ and the final report found that much of the legislation was either redundant, “incoherent”, or “obscured by excessive prescription”.

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.

The majority focus on removing overly prescriptive or confusing terminology and definitions and standardising definitions to ensure consistency.

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.

The report also recommends that the Australian government should establish a specifically resourced taskforce (or taskforces) dedicated to implementing reforms to financial services legislation. The membership of taskforces could also vary based on the reform pillar being implemented.

For example, a taskforce implementing financial advice reforms might only include members relevant to that area of legislation and not (for example) financial services firms that do not provide advice or distribute financial products through financial advisers. Similarly, the taskforce reforming consumer protection would likely have broader membership – noting that mortgage brokers may not provide financial advice, but will be regulated by the consumer protections.

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

“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 emphasised 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 Mortgage and Finance Association of Australia (MFAA) and Finance Brokers Association of Australia (FBAA) have both previously flagged challenges for brokers around the current laws given confusing overlap with financial services regulation – with the MFAA having responded to the consultation in writing.

[Related: Broker feedback wanted on ‘complex’ financial services legislation]