The Australian Law Reform Commission (ALRC) has released its interim report on the review of legislative complexity in financial services, clarifying that its goal isn't to simply "tidy up" existing legislation but determine whether the current law is fit for purpose.
To that end, the ALRC examined the full chain of interdependencies and supplementary legislation connected to the Corporations Act, including the ASIC Act, the SIS Act, the Life Insurance Act, various state and territory laws and regulatory settings implemented by ASIC, APRA and the RBA. The report notes that the Corps Act has over 14,500 internal cross-references, meaning "readers of the Act can be led through a lengthy maze of provisions in seeking answers to even ostensibly basic questions like whether a particular product is a 'financial product.'"
This complexity is compounded further, the report continues, by the power ASIC has to "make notional amendments to the Act by legislative instrument in certain circumstance," which the ALRC describes as "unusual". ASIC has exercised this power approximately 100 times, which has "[made] the law deeply inaccessible."
The report continues: "A person reading the Corporations Act or Corporations Regulations cannot be confident that the provision they are examining has effect as it is written. The provision may have been notionally omitted or amended, or an additional provision may have been inserted. Such changes may apply only in certain circumstances, or may apply universally."
All of this has led to the Corps Act - and chapter 7 in particular - becoming "the most complex on the Commonwealth statute book," the report explains. And given that the Act appears in Federal Court judgements more than "almost any other Commonwealth Act," this complexity "likely has a significant effect on businesses, consumers, legal professionals and the judiciary."
What is “financial product advice”?
To address these problems, the report makes multiple recommendations. You can read the whole thing here, and we'll get into more of the detail in the coming weeks, but of immediate interest is how the report recommends improving the legislative framework around advice specifically.
While this is only the beginning of the ALRC's potential impact on the advice sector - it's noted that the commission will likely take the outcome of next year's Quality of Advice review into account before issuing its final report in 2023 - the interim report acknowledges the industry's recent demands for "substantive reforms to reduce the cost and complexity of providing financial advice."
With a view to reducing the complexity of advice, the report first recommends removing the definition of "financial product advice" and substituting it with the phrases "general advice and personal advice" or "general advice or personal advice" as applicable. The rationale behind this is that "financial product advice always constitutes either general advice or personal advice," which creates a redundancy in the terminology that requires "[readers] to keep multiple concepts in their mind in order to understand a term."
Financial advice or financial service
Second, the report argues that personal advice should be decoupled from the Corps Act's definition of "financial service," while general advice can remain under that umbrella.
"'Financial service' functions solely as a convenient label for the purpose of grouping together activities that Parliament has determined should be regulated alike," the report argues.
"Given the substantive distinction between personal advice and other financial services under the existing regulatory framework, consideration should be given to whether the classification of personal advice as a financial service remains the most coherent approach."
The ALRC continues: "The proposed amendments would also facilitate, but not necessitate, potential changes in relation to the regulation of financial advice. Decoupling personal advice from ‘financial service’ would accommodate amendments to the regulation of licensing and conduct obligations of advisers by facilitating the introduction of further tailored requirements, for example, in relation to individual licensing of advisers, without the need to introduce exemptions from generally applicable requirements for financial services."
Retiring “general advice” for clarity
To further cement the distinction between general and personal advice, the report recommends a relabelling of the former. While research by ASIC found no consumer benefit in renaming "general advice" to something else, the ALRC's report argues that advisers themselves would benefit from such a distinction being made clearer in the law.
"Defined terms should correspond intuitively with the substance of the definition," the report says. "This principle supports the replacement of ‘general advice’ with a more accurate term. There appears to be little reason to retain the existing term, and a potential benefit gained — at least to users of the legislation, if not to consumers — if a more accurate term is used."
While no formal replacement has been proposed in the report - terms like "non-personalised recommendation" and "non-tailored recommendation" are floated as contenders - the ALRC nonetheless argues that the "general advice" label should be retired even if "consumer understanding is not enhanced" as a result.
Severing advice and product
Perhaps most substantial, though, is the report's exploration of whether (and how) financial advice, from a legislative perspective, should be severed from the definition of "financial product". This is part of the ALRC's wider project of considering whether chapter 7 of the Corps Act should be reframed entirely to prevent the definitions of "financial product" and "financial service" being used inconsistently throughout the Act, which it argues "undermines the coherence of the regulatory design for financial services law."
The report notes examples of strategic financial advice "that would not relate to financial products" along with "advice to invest in areas that are the subject of an exclusion from the definition of 'financial product'," neither of which would fit the Corps Act's definition of "financial product advice." Beyond this, the report argues that the current interconnectedness between product and advice "reflects the historical conception of the industry as being 'dedicated to the sale of financial products.'"
"Removal of the linkage with financial product could serve to underscore a new conception of the industry as being concerned with the provision of advice that may affect a person’s finances and financial wellbeing," the report explains, "which may or may not involve a recommendation or a statement of opinion about a financial product or class of financial products."
While the ALRC makes no formal proposals as to how advice and product should be severed, the report does note that the recommendation (discussed above) to separate (and rename) general and personal advice "would be consistent with severing the nexus between financial advice and the definition of financial product."
While we'll have to wait for the Quality of Advice review and the ALRC's final report to determine how the law might actually change to facilitate this goal, the discussion here reflects Clime Investment Management CEO Annick Donat's recent comments to NMP about going "back to basics" and ensuring that the legislative framework around advice actually reflects what advisers do for a living.
Instead of a "merry-go-round" of legislative instruments and regulatory guidance, she argued, "we need to reframe the problem statement. I can tell you that when a client talks positively about their adviser, they say things like, ‘Thanks for helping me understand my situation.’ Or, ‘Thanks for getting me through a difficult time.’ They’re not saying, ‘Thanks for the product recommendation.’"
We'll explore more of the ALRC's interim findings in the coming weeks and keep you posted as to how the review progresses.
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