Financial services legislation has become extraordinarily complex: ALRC

The ‘shifting sands’ of regulatory approaches has resulted in financial services legislation that is unwieldy and extraordinarily complex, according to the Australian Law Reform Commission (ALRC).

According to the new background paper, Risk and Reform in Australian Financial Services Law (FSL5), the existing legislative model had proven inadequate, and a new architecture could better accommodate change going forward.

The ALRC said two broad changes emerged over time including a shift to greater risk for individual citizens and the ‘financialisation’ of the Australian economy, involving increased exposure to financial assets and markets and continued growth of the financial sector relative to the real economy.

For example, a move away from interest rate controls, and the lack of long-term fixed-rate residential mortgages, meant thouseholds would bear the risk of changes in interest rates, according to the ALRC.

And, the overall size of the financial sector has grown enormously, in both relative and absolute terms.

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For example, household exposure to financial markets increased from roughly 30% of total household assets in 1980, to in excess of 40% in 2021 (with the total wealth of financial assets owned by Australian households now in excess of $6.2 trillion).

“Collectively, these trends have meant that financial risks pose a greater threat to both the wellbeing of individual citizens and the Australian economy,” the background paper said.

The daunting volume of law was cause for concern enough, but even more concerning was its ‘Byzantine complexity’ (as described by former High Court Chief Justice, Sir Anthony Mason).

The ALRC argued the divergent and varied approaches to risk that had accumulated in the law over the past 20 years contributed to the law’s complexity.

“In particular, this is because new law has simply been added to the old. The accretion of law has reflected varied approaches to risk, but there has been little desire to revisit or dismantle what came before.”

The ALRC considered that a survey of existing law and its history highlighted two particular needs:

• First, the need for comprehensive and ongoing review of the law, to ensure it remains coherent, comprehensible, and accessible. This is part of the work now being undertaken in the ALRC’s Financial Services Legislation Inquiry. However, there might also be a role for a body akin to the former Corporations and Markets Advisory Committee (abolished in 2018), to continually review and make suggestions for improving the law.
• Second, the need to ensure that the legislative framework for regulation provided an architecture that was sufficiently flexible to accommodate inevitable future changes. In the ALRC’s view, the Corporations Act’s structure – and particularly, the use of legislative instruments to modify or amend it — were unsuitable. The ALRC’s research suggested the legislation administered by the Australian Prudential Regulation Authority (APRA) was better adapted to changing approaches to financial risk.

The recommendation of a more suitable legislative architecture would be a core component of the ALRC’s Interim Report B, due in September 2022, as part of its Financial Services Legislation Inquiry.

Stakeholders were encouraged to engage with the ALRC and the Financial Services Legislation Inquiry.