When it comes to designing a legislative framework around financial services, a certain amount of complexity is inevitable - but how much is too much?
That's the basic (paraphrased) question that the Australian Law Reform Commission is currently trying to answer. One of the ALRC's latest publications as part of its review of the legislative framework for corporations and financial services regulation in Australia makes the distinction between necessary and unnecessary complexity; while the former is "required to required to achieve the desired outcomes of the legislation," the latter is not.
The paper explains: "[Daniel M Katz and Michael J. Bommarito II] refer to this challenge as Einstein's razor: 'make everything as simple as possible, but not simpler'. In other words, an objective of legislative design should be to reduce unnecessary complexity as much as possible. Thus, the question of complexity is really a question of necessity. Given a society and a set of normative preferences, how much complexity in the means is necessary to achieve law’s desired ends?"
When the level of legislative complexity goes beyond what's necessary to achieve "law's desired ends," the paper continues, it can result in increased costs (for regulators and regulated entities), difficulty in achieving compliance and uncertainty.
How does one reliably determine what's necessary and unnecessary complexity in legislation, though? The ALRC highlights the use of proxies for identifying legislative complexity such as "metrics that are not directly related to particular legislative features but which may indicate that legislation is overly complex." These include data on litigation, disputes and compliance.
One example provided pertains to disclosure and documentation - an area of legislative complexity with which advisers are surely quite familiar.
"Financial product and services disclosure is among the areas in which AFCA disputes are most frequently lodged," the ALRC paper explains. "ALRC quantitative and qualitative analysis suggests this is one of the most unnecessarily complex areas of the Corporations Act, including in terms of prescriptiveness, use of legislative instruments, definitions, exceptions and exemptions."
It should be encouraging to the advice sector that the ALRC's review is considering whether the legislation around disclosure in financial services is too prescriptive, especially in light of earlier comments from ALRC commissioner Hon. Justice John Middleton that the review is looking at removing Chapter 7 of the Corporations Act. Given the increased scrutiny being directed at how much compliance work goes into the production of a single SOA, there's never been a better time to go back to the legislation and determine whether advice laws are actually fit for purpose.
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