Initial responses to review of corporations and financial services regulation

Simplification, definitions and disclosure regime targeted 4 min read

The Australian Law Reform Commission (the ALRC) has released a summary of the initial stakeholder views it has received in relation to its Review of the Legislative Framework for Corporations and Financial Services Legislation (the Inquiry) over the course of its first eight months.

The report relies on a mix of views actively sought by ALRC (eg in public webinars, targeted consultations, industry and professional events) and submissions to the FSRC relating to simplification of the legislative framework. Formal submissions will not be called for until after the release of the first Interim Report in November 2021.¹

Three key themes emerging

Below are the three key themes that have emerged from the views expressed by stakeholders so far.

1. The desirability of simplification and principles-based legislation as a goal

The responses received to date by the ALRC indicate inconsistent understandings of what 'simplification' of the legislative regime would entail.

Some consultees were concerned that 'simplifying' the corporations and financial services legislation would involve paring it back so that it would no longer adequately protect the interests of consumers. Others were concerned it might mean reducing the legislative regime to principles alone.

Some stakeholders suggested that expanding objects clauses, and incorporating Hayne norms into such clauses, could be an effective mechanism for introducing principles into the legislative regime while balancing those principles against more detailed substantive rules.  

Many stakeholders were in favour of simplifying the legislation by restructuring it thematically, so that all provisions relevant to a given topic are located in the same place.

2. The use and content of definitions

The ALRC noted that many stakeholders have raised concerns in relation to the inconsistent uses of defined terms across legislation, as well as substantive issues with the definitions given to some terms.  

Definitions are both modified to the point of rewriting in secondary legislation (eg the definition of 'derivative' in the Corporations Act 2001 (Cth)) and given inconsistent meanings across different key pieces of primary legislation (eg the meaning of 'misleading and deceptive conduct' in the Corporations Act and in the Competition and Consumer Act 2010 (Cth)), and that of 'credit facility' in the Corporations Act and the Australian Securities and Investments Commission Act 2001 (Cth)). The most extreme example of this confusing approach to legislative drafting is in the Corporations Act, where identical terms are given inconsistent definitions from chapter to chapter of the same piece of legislation, seemingly for no compelling reason (eg the definition of 'securities').

The definition of financial product was specifically criticised for it's anomalous exception of credit facilities, an exception that is even more incongruous in light of the number of products that are both credit facilities and facilities through which persons make financial investments. The current system leads to duplication and inconsistency, and is not supported by any apparent policy reason.

The distinction between retail and wholesale clients was also criticised, with some consultees noting that the wealth threshold has not been adjusted in the 20 years since its introduction. Similarly, many stakeholders had issues with the distinction between personal and general advice. Some suggested that 'general advice' be relabelled 'product information' to reduce confusion, as any genuine advice would fall outside the scope of the 'general advice' definition.

In the context of 'non-cash payment facilities', some consultees claimed that the lack of clarity in the definition lead people to 'shop around law firms' until they find an interpretation that best suits their goals.

3. The disclosure regime

The continued relevance of the disclosure regime under the Corporations Act was questioned in light of the introduction of the Design and Distribution Obligations. Some consultees also suggested that the disclosure regime needed to be amended to address the current failure to consider the capacity of the person receiving the disclosure to understand what is being presented to them.

The coherence of the existing disclosure regime in the Corporations Act was also criticised. In particular, the imposition of strict liability for breaches of the continuous disclosure provisions was described by stakeholders as both unfair and inconsistent with the treatment of breaches of the other disclosure provisions. Specifically, the availability of a defence for prospectus disclosure breaches, but not for continuous disclosure breaches, was questioned. Stakeholders were in favour of a due diligence defence for continuous disclosure breaches to remove this inconsistency.