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2 February 202410 minute read

"Confronting Complexity": ALRC releases the Final Report in its inquiry into corporations and financial services legislation

On 18 January 2024, the Final Report of the Australian Law Reform Commission (ALRC) – Confronting Complexity: Reforming Corporations and Financial Services Legislation – was tabled in Parliament and publicly released.

In its report, the ALRC makes 58 recommendations intended to improve the efficiency and effectiveness of the regulatory framework for financial services in Australia through the primary goal of simplification. Twenty-three of these recommendations were captured by Interim Reports A, B and C, with 13 having already been fully or partially implemented by legislation enacted before 1 October 2023.

Key recommendations in the Final Report include:

  • restructuring of the existing regime to a simplified body of legislation known as the "Financial Services Law", to be contained in Schedule 1 of the Corporations Act;
  • introducing simplified definitions of the terms of "financial product" and "financial service" and making definitions more generally easier to find and understand;
  • reducing the complexity currently created by extensive delegated legislation and incoherent structuring of the legislation; and
  • consolidating offence and penalty provisions and making them more visible and clarifying the consequences of their breach.
Background to the ALRC’s inquiry

The ALRC’s Final Report follows three interim reports published by the ALRC since 2020.

The ALRC’s inquiry arises out of the findings of the Financial Services Royal Commission that the existing legislative framework for corporations and financial services is unnecessarily complex and hindered compliance.

Against this background, in September 2020, Terms of Reference were issued to the ALRC asking it to consider whether, and if so what, changes could be made to the legislation to simplify the law.

The findings

The ALRC’s inquiry was primarily focussed on the provisions of Chapter 7 of the Corporations Act and Part 2 Div 2 of the ASIC Act that relate to the regulation of financial products and financial services.

The Final Report includes the following findings:

  • the existing legislation is “unnecessarily complex” and difficult to navigate;
  • the use of delegated (subordinate) legislation is a significant source of complexity;
  • Chapter 7 of the Corporations Act is particularly complex when compared to other financial services laws, and Commonwealth legislation generally;
  • the existing use of definitions in the Corporations Act impedes navigability; and
  • the current structure and framing of Chapter 7 does not assist users to navigate the legislation.

Restructuring the legislation

Arguably the most significant recommendation in the Final Report is its recommendation for a reformed legislative model.

The proposed framework would consist of the following three elements:

  1.  Primary legislation, existing in the "Financial Services Law"

    Under the proposed reformed framework, the existing provisions in Chapter 7 of the Corporations Act and Part 2 Div 2 of the ASIC Act would be consolidated and relocated into the "Financial Services Law", which would be contained in Schedule 1 of the Corporations Act.

    The Financial Services Law would contain the key provisions of the regime such as core obligations, offence and penalty provisions, rights and prohibitions, remedies and definitions.

  2.  A Scoping Order

    The second element of the proposed model would be the Scoping Order, which the Final Report describes as a single legislative instrument that would adjust the scope of regime, such as through exclusions and exemptions.

    Accordingly, the provisions of the Scoping Order would assist users to determine whether the core obligations and prohibitions in the Financial Services Law apply in a relevant circumstance.

    The Final Report states that the Scoping Order would replace the hundreds of existing regulations and ASIC instruments.

  3. Thematic rulebooks

    Finally, the rulebooks would contain prescriptive details to assist users to understand how to comply with the regime. The rulebooks would be thematically grouped to contain prescriptive detail that is specific to particular products, services, persons and circumstances.

    For example, the Final Report uses the example of a proposed “Financial Services (Disclosure) Rules 2023” which “may contain rules in relation to the content and form of disclosure documents, who must prepare certain disclosure documents, and detail on the information that must be given to ASIC”.

In addition, the Final Report also recommends grouping and, where relevant, consolidating existing provisions under the four key regulatory themes of "consumer protection", "disclosure", "financial advice" and "general regulatory obligations" (with the aim being to enhance navigability and comprehension).

Technical simplification

The Final Report describes the current legislation as “a complex web of connections” between primary and delegated legislation, with hundreds of “poorly structured” regulations plus hundreds of Ministerial and ASIC legislative instruments.

The Final Report calls out the extensive use of notional amendments as “a major source of complexity and incoherence” which it said was “unique” to the Corporations Act. "Notional amendments" are provisions in subordinate legislation which modify a legislative provision without changing the text of the primary legislation. In the financial services context, these amendments can be made by either the Minister (via regulation) or ASIC through legislative instruments.

The Final Report highlights that there are over 1,200 distinct notional amendments in force which impact over 600 provisions of the Corporations Act and Corporations Regulations. It observes that whilst the existence of these amendments are “unknowable” on the face of the legislation, users must be aware of relevant notional amendments in order to understand the true effect of the law.

For instance, the Final Report includes the following examples to demonstrate the complexity and “invisibility” of these notional amendments:

For example, s 1012G of the Corporations Act was replaced by a notional amendment in 2005. The text of the provision in the Act has not had any legal effect since then, and the "real" s 1012G is in reg 7.9.15H of the [Corporations Regulations]. There is nothing on the face of the Corporations Act to alert users to this change.

ASIC Class Order 14/1262 notionally amends s 1012D of the Corporations Act, which is also notionally amended by reg 7.9.07FA of the Corporations Regulations. To understand the law, users must therefore read the original s 1012D of the Act, alongside the subsection notionally inserted by the Corporations Regulations, and the additional six subsections notionally inserted by ASIC Class Order 14/1262.

The Final Report states that this issue would be addressed by instead setting out the prescriptive detail of the legislation in thematic rulebooks (as discussed above) which would be able to be amended and understood without reference to another Act or legislative instrument.

Making definitions easier to find and understand

The Final Report illustrates how the existing use of definitions in the legislation create complexity and impede navigability – in particular, as a result of different, but overlapping, definitions used across the Corporations Act and ASIC Act.

In this context, a key recommendation of the ALRC is to amend the legislation to introduce single and simplified definitions for "financial product" and "financial service" (presently the ASIC Act adopts broader definitions of these terms than the Corporations Act, which creates complexity).

Simplifying the definition of these terms will assist in clarifying the scope of the regulatory framework, given that these terms are foundational for the application of the regime.

The Final Report also makes numerous other recommendations focussed on making definitions easier to find and understand (for example, introducing a single glossary of defined terms into the Corporations Act, removing duplicate definitions and ensuring consistency of definitions).

In addition, the Final Report recommends that other legislation, such as the ASIC Act, adopt the same definitions as the Corporations Act.

Making offences and civil penalties more visible

The Final Report also recommends a suite of reforms in relation to offence and civil penalty provisions with the aim of leading to better compliance and more effective enforcement.

The proposed reforms include:

  • consolidating offence and civil penalty provisions into a smaller number that still effectively covers the same conduct;
  • making offence, civil penalty and infringement notice provisions more visible and clarifying the consequences of their breach; and
  • clarifying the fault element applicable to offence provision (where the provision is not one of strict liability).


Where to from here?

There are clear benefits connected with a simplified financial services law.

The current complexity of the law creates challenges for compliance teams (particularly for smaller licensees who may not have the same compliance resources as the bigger players). In addition, in light of ongoing legislative and regulatory change impacting the larger institutions (including responsible entities of registered schemes, superannuation trustees, banks, insurers and advice providers), a successful streamlining of core financial services laws arguably serves an important purpose of increasing compliance certainty. For example, the current complexity connected with identifying offence and civil penalty provisions impacts the navigation of breach reporting obligations (a regime which treats certain breaches constituted by a contravention of a civil penalty provision or a commission of an offence as "deemed significant" and therefore automatically reportable to ASIC).

A simplified financial services law arguably also has the potential to encourage innovation and competition in circumstances where the complexity of the law creates a "barrier" or "hurdle" for new entrants to the market.

Next steps are now a matter for the Government, as it considers the recommendations in the Final Report. The ALRC has recommended a staged approach to commencement of the legislation, taking into account the input from stakeholders who have emphasised the importance of allowing the sector sufficient time to prepare for changes to the law. The Government will also need to consider how any proposed changes interact with other potential and ongoing reforms (for example, relating to the Quality of Advice Review, the current review of the regulatory framework for managed investment schemes and the draft legislation covering foreign financial services provider exemptions).

If adopted, the recommendations will involve a significant overhaul of the legislative framework for financial services regulation in Australia. We expect there will be consultation on any legislative changes and so this is very much a case of "watch this space".

If you have any questions about the Final Report, or the current Australian financial services regulatory framework, please reach out to our team.