Unpacking and repacking Chapter 7: Improving the structure and framing of financial services legislation

Ellie Filkin and Christopher Ash

Chapter 7 of the Corporations Act 2001 (Cth) is like an old cupboard: it is crammed full and poorly organised, with insufficient time set aside for the occasional spring clean. While the first few boxes fit in this cupboard, over time the containers have become mislabeled and inconsistently sorted. More and more law has been packed into old suitcases, tattered boxes, and shabby bags. The cupboard contains more than it was ever designed to hold.

The sense of dread when opening a messy cupboard is the same feeling that confronts many users of Chapter 7. Interim Report C is, fundamentally, about how the cupboard that is Chapter 7 could be better organised so that users can find what they need without having to go through every box of old CDs and cassette tapes.

Today, the ALRC launches the third (and final) interim report as part of its Review of the Legislative Framework for Corporations and Financial Services Regulation. Like Interim Report B, a central theme of Interim Report C is finding the right ‘home’ for different parts of the law. Interim Report C focuses on Chapter 7 of the Corporations Act (concerning financial services regulation), but many of the law design principles examined by the Interim Report are relevant to legislation more generally. This article reflects on some of these principles, and other findings of the Interim Report.

Stakeholders are invited to make submissions on the proposals and question in Interim Report C by 26 July 2023.

Legislation should be as easy to navigate and understand as possible

There are practical and principled reasons for why legislation should be as easy to navigate and understand as possible. Legislation that takes longer to find and understand costs more to comply with. Laws that are hard to find, or once found can only be understood with difficulty, are unlikely to achieve their purpose. Legislation that is hard to find and understand also runs contrary to rule of law principles.

Even experts in financial services law have told the ALRC that they have difficulty navigating Chapter 7 of the Corporations Act. As the ALRC’s Inquiry has shown, users of Chapter 7 must sift through too much poorly organised prescriptive detail to find and understand their core rights and obligations.

Interim Report C applies some of the approaches from human-centred design — commonly used in non-legal fields —to show how financial services legislation could be made more user-friendly and, ultimately, more effective.

Unpacking financial services legislation

From the outside, Chapter 7 of the Corporations Act looks thematically consistent: it regulates financial products, financial services, and financial markets. However, thematic consistency at that high level is unhelpful, and has produced a chapter that — at 254,000 words — is longer than all but nine Commonwealth Acts. As the Chapter’s contents have expanded, more has simply been placed into existing boxes, particularly those relating to financial products and services. Compared with every other substantive chapter in the Corporations Act, Chapter 7 simply does too much.

Even where provisions within Chapter 7 are grouped together in a way that makes sense, core obligations are often obscured by administrative and procedural detail. Exceptions are sometimes placed prior to the rule, and specifics before more general (and fundamental) obligations. A reformed structure is needed to better organise existing provisions and accommodate future policy developments.

Financial services providers and consumers face the additional problem that Chapter 7 is not the only Act they must consult to find the relevant law. The ASIC Act  — focused largely on establishing the financial services regulator — contains many of the most fundamental standards of commercial behaviour for financial services providers and many protections for consumers. The fact that several of these provisions overlap with provisions of Chapter 7 compounds the difficulty of understanding the law.

The current structure of financial services legislation means finding the relevant law takes longer than it should, and once found the law is still unnecessarily complex and difficult to interpret and understand. Law that is unnecessarily difficult to understand is less likely to be followed. Such non-compliance can result in policy failure and harmful consequences for consumers, businesses, and the effective functioning of markets. Increased resources associated with navigating, understanding, and applying unnecessarily complex legislation increases costs for financial services providers, which are in turn passed on to consumers.

Repacking financial services legislation

The ALRC suggests that financial services legislation should find a new home and legislative identity in a schedule to the Corporations Act — to be known as the Financial Services Law (Proposals C9 and C10). This new home would allow a reformed structure and framing to be implemented, less burdened by the drafting styles and ad hoc legislative design choices of the past. Moving can be a lot of work, and so the ALRC’s implementation roadmap shows how it could best be done.

Interim Report C identifies several areas of existing legislation that should be grouped together to make the legislation easier to navigate and understand. These topics should form separate chapters of the Financial Services Law, covering consumer protections, disclosure, financial advice, and general regulatory obligations. If the Financial Services Law were not adopted, this grouping could also be undertaken within the existing body of the Corporations Act (either as chapters or parts within a chapter), although such an approach is likely to be less effective.

Consumer protection

Consumer protections lie at the heart of financial services legislation, and the fundamental norms that they embody resonate throughout the legislative framework. Generally applicable consumer protection provisions have the broadest application, and typically provide a cause of action and remedy directly to consumers. Such protections should be intuitively grouped together and easy to locate, particularly given their relevance to consumers who may be unfamiliar with the legislation. Currently, however, these provisions are spread between various provisions of Chapter 7 of the Corporations Act and Part 2 Div 2 of the ASIC Act.

The ALRC proposes consolidating Part 2 Div 2 of the ASIC Act with consumer protection provisions currently in Chapter 7 of the Corporations Act (Proposal C1). The ALRC also suggests that several consumer protections, such as the prohibitions on misleading or deceptive conduct (Proposal C2) and unconscionable conduct (Proposal C3), could be consolidated to express their normative significance more forcefully. These measures would help to improve the navigability and communicative power of consumer protection provisions.

Financial advice

The fact that Parliament has made a concerted effort to create a legal framework for financial advice is far from clear on the face of Chapter 7 of the Corporations Act. The original Chapter 7 included almost no provisions specifically regulating financial advice, and as such it has never had a logical ‘home’ for these provisions. As the regulation of financial advice has developed, provisions have been slotted in among other topics, without any hints as to where financial advice provisions are located or how they fit together. The ALRC suggests that provisions relating solely to financial advice should be reframed and grouped into a financial advice chapter (Proposal C6).

Disclosure

The provisions relating to disclosure for financial products and services in Chapter 7 are some of the most unnecessarily complex and least coherent provisions of the Corporations Act. Their complexity makes it difficult and costly for regulated persons to navigate and understand disclosure obligations. Restructuring and reframing disclosure provisions into a single legislative chapter (Proposal C4) is an area where reform represents substantial ‘bang for your buck’.

The ALRC also suggests that the framing of disclosure provisions could be improved by making explicit what is currently implicit: namely, by making clear the outcome — consumer understanding — that disclosure documents are meant to produce (Proposal C5).

General regulatory obligations

General regulatory obligations underpin how financial services providers conduct their business. The ALRC proposes that the range of general regulatory obligations currently spread across financial services legislation should be more coherently organised into two legislative chapters (Proposals C7 and C8). Alongside the creation of a chapter focused on consumer protection (Proposal C1), this would be central to a more navigable and comprehensible legislative framework.

User-friendly design

Adopting the logic of human-centred design, each reformed chapter (or part) should be structured and framed with the needs of users in mind. The ALRC proposes several law design principles that would help achieve this (Proposal C14). For example, provisions should be ordered so as to prioritise core obligations and norms, with administrative and procedural matters given lesser prominence. Obligations should not just appear in ‘shopping lists’ — rather, their order should reflect their relative importance and scope of application. Prescriptive detail should be separated from core obligations, with legislative notes and other aids to interpretation used to signpost where further information is located.

Dedicated removalists

Anyone who has moved house would attest that the process is much easier when you have the right people to help. It is reassuring to know that your valuables are in safe hands and won’t get damaged or lost along the way. Restructuring and reframing financial services legislation should be treated with the same level of care.

The ALRC proposes that a dedicated taskforce (or taskforces) should be formed to oversee the staged reform of financial services legislation (Proposal C12). This would allow expertise and stakeholder involvement at each step of the process. Partnerships between the public sector, industry, and academic expertise would help to maintain momentum throughout the reform process.

Conclusion

In short, Interim Report C shows how unpacking and repacking financial services legislation could make it more user-friendly and a less daunting prospect for those who open its doors. If we leave the task any longer, the cupboard will only become even more crammed and jumbled.

To learn more, download the ALRC’s Interim Report C (in both summary and complete forms). The ALRC welcomes submissions in response by 26 July 2023.