Author: Dr Vannessa Ho
As the ALRC’s Financial Services Legislation Inquiry reaches its conclusion, it pays to look to the future. In an ever-evolving technological landscape, what will be the next challenge for financial services law? This article explores some recent innovations and the regulatory challenges they (and similar future developments) pose in the context of financial services law.
Continually evolving technologies
Technological advancements can lead to new or more efficient business practices in the financial services industry. However, the law can struggle to keep up with the fast pace of technological progress. This challenge is not new, and technology will continue to evolve in unanticipated ways. The question then becomes, how can financial services legislation be reformed to best accommodate continually evolving technologies?
The Australian Government has recognised the need to modernise financial services regulation. The ALRC’s forthcoming Final Report for the Financial Services Legislation Inquiry (‘Final Report’) seeks to outline reform that would produce a more adaptive legislative framework. Adaptivity in the face of technological development can help to support innovation and protect consumers from harm, thereby helping to ensure that markets for financial services operate efficiently and productively.
The regulatory challenges of evolving technologies
While financial services legislation should be technology neutral, challenges when regulating evolving technology persist. This is partly because it is difficult to determine how, and whether, legislation should regulate new technologies. There are also competing interests which may need to be considered before extending existing legislation to uses of new technology. For example, the law aims to protect consumers without imposing burdensome regulation that has the effect of stifling innovation. Three examples highlight the regulatory challenges of new technology: automated financial advice (commonly known as ‘robo-advice’); buy now pay later (‘BNPL’); and crypto assets.
The term ‘robo-advice’ is used to encompass a wide range of technological capabilities. ASIC defines the term expansively to include ‘the provision of automated financial product advice using algorithms and technology without direct involvement of a human adviser’. Robo-advice can be used to provide financial advice on superannuation, other investments, mortgages, insurance, and credit products (see Ringe and Ruof’s article for further discussion on the current capabilities of robo-advice).
Robo-advice has the potential to benefit consumers as it could make financial product advice more affordable and convenient. This, in turn, could encourage more consumers to seek out financial advice before making important financial decisions. Further, with continual advancements in artificial intelligence, robo-advice seems likely to become more sophisticated, which may reduce the amount of human intervention needed when providing automated advice.
The existing legislative framework for financial services in Australia applies to robo-advice in the same way that it applies to human advice. This means that any weaknesses in the existing legislative framework would also affect robo-advice. Throughout the Financial Services Legislation Inquiry, the ALRC has highlighted how financial services legislation is unnecessarily complex. The legislative framework contains excessive prescriptive detail, is difficult to navigate, and costly to comply with. This complexity is likely to be a deterrent for firms that have the technological capability to enter the robo-advice sector.
There are many ways the existing legislative framework could be reformed to accommodate robo-advice. This article discusses the regulatory challenges associated with two options.
The first option would be to create bespoke legislation for robo-advice. The main challenge with this approach, however, is that robo-advice is still an emerging technology. The risks of a bespoke legislative framework for any emerging technology include:
- ensuring legislation is drafted to be sufficiently technology neutral, so that it does not become redundant as the technology evolves;
- if the legislative framework is restrictive or produces uncertainty, it may disincentivise firms looking to invest in research and development of the technology; and
- if legislation is too prescriptive, it is likely to require tailoring, exemptions, and carve-outs as the technology evolves.
The ALRC’s Inquiry has shown how excessive prescription and incoherent use of the legislative hierarchy to tailor regulatory regimes is a significant source of complexity. A more coherent approach to using the legislative hierarchy, such as that discussed in Interim Report B, would help to minimise this complexity.
The second option would be to maintain the current approach and continue to treat robo-advice in the same way as human financial advice. Under this option, reform could be made to the existing financial product advice regime. For example, the Quality of Advice Review discussed ‘digital advice’, which includes (and is sometimes used synonymously with) robo-advice. The Quality of Advice Review concluded that its recommendations would help facilitate digital advice. The Australian Government is now consulting further on the recommendations made by the Quality of Advice Review and potential changes to financial advice provisions in the Corporations Act 2001 (Cth) (‘Corporations Act’).
Changes to financial advice provisions may be further supported by the ALRC’s reforms which aim to improve navigability and increase the adaptivity of the financial services legislative framework. A more navigable and adaptive legislative framework would facilitate the advancement of robo-advice technologies, and similar innovations, by making the legislation less costly to comply with.
Buy now pay later
ASIC describes BNPL as an arrangement that ‘allow consumers to buy and receive goods and services immediately from a merchant, and repay a [BNPL] provider over time’. Specific BNPL arrangements may vary depending upon what features the provider offers. However, consumers may seek to use BNPL because:
- it enables them to delay payment but obtain goods and services immediately;
- interest is generally not charged; and
- it can be easier to set up than a credit card or personal loan.
Many BNPL arrangements can fall outside the existing regulatory framework for financial services and credit. As a result, there are increasing concerns that BNPL may cause consumer harms, such as financial stress, hardship, and excessive fees. In response to these concerns and due to the similarity of BNPL with traditional credit facilities, the Australian Government has committed to extending the National Consumer Credit Protection Act 2009 (Cth) (‘NCCP Act’) so that it captures BNPL arrangements. However, due to the variety of BNPL arrangements, there may be challenges when extending the existing credit regime. These challenges are likely to include:
- defining the concept of BNPL to ensure it encompasses a sufficiently broad range of business models;
- tailoring the responsible lending requirements of the NCCP Act to protect consumers without stifling innovation; and
- preventing unnecessary legislative complexity from creeping further into the credit regime, with the aim of avoiding the level of complexity that has developed within the Corporations Act.
As highlighted in the ALRC’s Background Paper ‘New Business Models, Technologies, and Practices’, crypto assets can be defined in different ways and for different purposes. Crypto assets have also been variously referred to as digital assets, virtual assets, tokens, or coins. One description of crypto assets, advanced by Treasury, is that it
is a digital representation of value that can be transferred, stored, or traded electronically. Crypto assets use cryptography and distributed ledger technology.
Treasury has more recently undertaken a token mapping exercise to examine the crypto ecosystem within Australia and its intersection with existing financial services legislation. The token mapping exercise developed an understanding of the key concepts of crypto assets and related terms like crypto networks, tokens, and token systems. This exercise is a step towards policy development for the regulation of crypto assets within Australia.
The existing definitions of ‘financial product’ in Australian legislation are framed in technology neutral terms. This means that crypto assets are capable of meeting these definitions and falling within the existing regulatory regime. Regulatory challenges largely stem from the wide variety of crypto assets and the subsequent difficulty in reaching a settled definition. The obstacles caused by developing a coherent definition of crypto assets may be somewhat resolved by Treasury’s token mapping exercise. However, Treasury has noted that some types of token systems may not fit within the existing framework.
Following the token mapping exercise, Treasury released a consultation paper on a proposal which seeks to ‘introduce a regulatory framework to address consumer harms in the crypto ecosystem while supporting innovation’. Rather than regulate crypto assets directly, Treasury proposes to regulate crypto exchanges via the Australian Financial Services licensing regime, thereby requiring crypto exchanges to meet a licensee’s obligations and requirements within the Corporations Act. Regardless of the form this proposal takes, it is still important that the legislative framework be adaptive to support innovation of the crypto economy.
What could be done?
The regulatory challenges of evolving technologies highlight the importance of an adaptive, efficient, and navigable legislative framework. This is the case for technologies that fall within the existing legislative framework (such as robo-advice) and technologies for which policy is being developed (such as BNPL and crypto assets). The findings of the ALRC’s Inquiry demonstrate that the existing legislative framework for financial services is unnecessarily complex — it is difficult to navigate, hard to understand, and key principles are often buried in prescriptive detail. Adaptation in the existing legislative framework often takes the form of complex notional amendments and conditional exemptions, spread incoherently across the legislative hierarchy. This increases the costs of compliance and creates barriers to innovation.
The ALRC’s Final Report will contain recommendations aimed at reforming the existing legislative framework so that it is more adaptive, efficient, and navigable. The ALRC’s recommendations will focus on:
- restructuring and reframing financial services legislation to better communicate its core requirements and emphasise fundamental norms of behaviour;
- creating more coherent and principled use of the legislative hierarchy, making the legislative framework easier to navigate and more adaptive (without generating unnecessary complexity); and
- ensuring definitions are easier to find and understand.
The are many benefits of using evolving technology to innovate and enhance productivity. Tempered against these benefits, however, is a need for sufficient consumer protection where there is risk of significant harm. The ALRC’s forthcoming Final Report will discuss how the existing legislative framework for financial services legislation is unnecessarily complex. In the context of evolving technology, this complexity can stifle innovation and productivity, and undermine consumer protection. Complexity in the existing legislative framework also makes it harder to implement policy initiatives aimed at regulating emerging technologies. The reforms recommended by the ALRC in the Final Report aim to produce an adaptive legislative framework for financial services that can support innovation, policy development, and consumer protection more effectively than at present.