by William Isdale and Christopher Ash
This article discusses two of the key themes arising so far from the ALRC’s review into corporations and financial services law – namely, undue complexity, and poor navigability. It also provides a brief overview of some of the reforms suggested in Interim Report A, released on 30 November 2021.
This year, the Corporations Act 2001 (Cth) reached 20 years of age. Celebrations were in order to mark the Act’s many achievements — including the national consistency it brought to corporate and financial services regulation. However, whatever joy was justified is surely tinged with the concern that, despite its maturity in years, the Act has not quite ‘grown up’ – indeed, that it could benefit from significant reform.
Concerns of this kind animated a reference to the ALRC last year, to inquire into what changes could be made to ‘simplify and rationalise’ corporations and financial services law ‘within the context of existing policy settings’. Interim Report A, the first of three interim reports on that topic, was published by the ALRC on 30 November 2021.
In this piece, we provide a brief overview of concerns about complexity in the existing legislation, and highlight some of the ALRC’s proposed avenues for reform. The ALRC invites interested stakeholders to provide feedback on proposed reforms and respond to questions posed in Interim Report A by making a submission before 25 February 2022.
Why complexity matters
Complexity matters because it makes the law difficult to understand. In turn, this makes it harder for consumers and their advocates to know their rights and be able to exercise them; for practitioners to be able to advise their clients confidently; for regulated entities to know how to comply with the law; and for regulators to enforce the law. Complexity may also give rise to rule of law concerns. We all bear the consequences of legislative complexity, including through increased costs for financial products and services, and in publicly funding courts and regulators to wade through the legislative thicket.
Some complexity is unavoidable, given the complex nature of modern corporations and financial markets, and the desire to achieve complex policy objectives. Nonetheless, legislation should be as simple and navigable as is possible, consistent with the achievement of its objectives.
The problem with existing law
At the heart of financial services regulation is the Corporations Act 2001 (Cth) — an Act of elephantine proportions, in excess of 3,900 pages. However, it isn’t simply length that makes the Corporations Act difficult to comprehend, but the complexity with which it is expressed. Former High Court Chief Justice, Sir Anthony Mason, has spoken of the Act’s ‘Byzantine complexity’, while former judge and leading authority on the Corporations Act, Dr Robert Austin, has bemoaned its ‘devastatingly comprehensive abandonment of the principles of simplification’. There has been a consensus among stakeholders consulted by the ALRC that ‘the law in this area is “too complex” and is in need of simplification’.
In Interim Report A, a key focus of the ALRC has been on how the use of definitions and concepts contributes to complexity. For example, a striking feature of the Act is how inconsistent it is in the design and deployment of defined terms. There are over 1,000 unique defined terms in the Act, and over 570 of those are defined more than once, providing different meanings for different parts of the Act. The term ‘property’ alone is defined seventeen times. The term ‘securities’ bears five different meanings. The need for users of the Act to keep in mind that the same term can mean different things in different places makes the law harder to understand.
The lack of consistency is combined with a lack of any clear identification of when defined terms are used, or even a single place in which they may be found. Despite this, the Act is highly reliant upon the use of defined terms to trigger obligations — for example, labyrinthine definitions for ‘financial product’ and ‘financial service’ are used to demarcate many of the Act’s regulatory boundaries. The extensive use of defined terms is a form of internal cross-referencing, which the Act does more than 14,500 times. This makes it necessary for readers to traverse back and forth between potentially disparate parts of the Act, in a sometimes forlorn search for meaning.
Understanding even individual definitions can be vexed, since definitions themselves often contain other defined terms, creating long ‘chains’ of interconnected terms that must be followed to understand the first defined term. In this sense, understanding the law can be like unpacking Russian dolls.
Being able to navigate the law is critical to understanding and applying it. Even apart from difficulties in navigating the Corporations Act, financial services regulation doesn’t end there (nor with the many other Acts that may apply, such as the ASIC Act 2001 (Cth) or National Consumer Credit Protection Act 2009 (Cth)). Primary legislation is just the tip of the iceberg.
Often, readers must also consult the Corporations Regulations 2001 (over 1,300 pages in length), and over 270 ASIC legislative instruments, 200 regulatory guides, and 200 information statements (collectively comprising many thousands of pages). To understand the law on financial product disclosure, for example, it is necessary to consider not only over 45,000 words in the Corporations Act, but also an additional 65,000 words in regulations, and tens of thousands of words in other legislative instruments.
Despite the varied sources of law, there appears to be little rationale for where or why the law is distributed. A principled legislative hierarchy would likely involve the core attributes of a regulatory regime being outlined in the Act, with detail added by regulations, and potentially exemptions or administrative minutiae provided for by legislative instruments. However, Australia’s financial services law does not follow this model — regulations and other legislative instruments regularly contain substantive obligations that do more than simply complement the primary law.
More concerning is the frequent use of delegated legislation to ‘notionally amend’ the Corporations Act and Corporations Regulations. More than 100 legislative instruments amend the text of the Act itself, and more than 20 do so for all persons to whom the Act applies (not just to create bespoke regulatory requirements for some entities). Using instruments to change the law in this way is troubling because ‘notional amendments’ are not reflected in the Corporations Act and Corporations Regulations as presented on the Federal Register of Legislation. The number, length and complexity of legislative instruments – and their ability to completely alter the legal landscape – make them ‘dark law to the blameless traveller’ (as our colleague Nicholas Simoes da Silva memorably described it). And as Van Geelen writes, the scattering of law in so many places imposes a ‘considerable burden’ on regulated entities ‘to piece together the rules’.
In Interim Report A, the ALRC makes 13 recommendations for reform and includes 24 questions or proposals on which it seeks further feedback from interested stakeholders. In the ALRC’s view, if implemented, these recommendations and proposals could meaningfully simplify and improve the navigability of the existing law.
In relation to complexity, the ALRC’s report includes reforms relating to a simpler and more coherent use of defined terms. For example, the ALRC seeks feedback on guiding principles for the use of defined terms in legislation, including whether defined terms should bear only a single meaning (Question A2) and should be used only to clarify words or phrases, rather than to impose obligations or for other substantive purposes (Question A2). The ALRC also recommends the repeal of numerous terms that are not used (Recommendation 2), or which are defined unnecessarily (such as definitions of ‘for’ and ‘of’) (Recommendation 4).
Numerous proposals relate to simplifying the definitions of ‘financial product’ and ‘financial service’ (Proposals A3–A6). These terms are significant for the regulatory regime, being used 1,316 and 423 times (respectively) in the Corporations Act. The ALRC also suggests that an outcomes-based standard for financial product disclosure should be adopted (Proposal A8), noting the highly prescriptive (and complex) nature of this area of law at present. Simplification is also proposed in relation to conduct obligations by, for example, clarifying the core obligation on financial services providers to act ‘efficiently, honestly and fairly’ (in s 912A of the Corporations Act) (Proposal A20), and reducing the number of provisions that proscribe unconscionable conduct (Proposal A22).
In relation to navigability within the Corporations Act, the ALRC recommends the inclusion of a single glossary of defined terms (Recommendation 7) and the development of drafting guidance to draw attention to defined terms when they are used (Recommendation 10). In relation to navigability between the Act and other ‘layers’ of the legislative hierarchy, the ALRC proposes reforming powers to grant exemptions from obligations in the Act and removing powers to create ‘notional amendments’ (Proposal A9). The ALRC suggests that a more principled legislative hierarchy could be created by: locating exclusions and exemptions in a consolidated legislative instrument (Proposal A10); and placing much of the prescriptive detail currently spread across the legislative hierarchy into thematically consolidated ‘rules’ made by ASIC (Question A11).
This brief synopsis only scratches the surface of some of the ALRC’s ideas for reform. The ALRC hopes to spark a debate about this area of law, and to have the benefit of feedback from a wide range stakeholders on Interim Report A. This feedback will be invaluable as the ALRC proceeds to Interim Reports B and C, and its Final Report due in 2023.
Download the Financial Services Legislation Summary Report.