The problems of poorly designed regulation uncovered by the Australian Law Reform Commission go deeper than just the financial services laws, and a more radical rethink is needed. 

    The findings of the three-year Australian Law Reform Commission (ALRC) inquiry into the state of Australia’s corporations and financial services laws were quietly released in January. The 362-page Confronting Complexity: Reforming Corporations and Financial Services Legislation is based on analysis of some 10 million pages of documents and 53GB of data. Attorney-General Mark Dreyfus KC said the government is “carefully considering the report and recommendations”. But it is doubtful those recommendations go far enough.

    Tangled mess

    The ALRC inquiry was established in 2020 following the banking Royal Commission. The Commissioner heard evidence that the law was too complex. Fundamental norms of conduct were obscured by excessive prescription, and complexity hindered both compliance and enforcement. So the legislation was referred to the ALRC for review.

    The ALRC terms of reference limited its options, making it clear “existing policy settings” were not up for renegotiation. Instead, in proposing changes to “simplify and rationalise” the law, the ALRC was to concentrate on three things: the use of definitions in the legislation, the “coherence of the regulatory design and hierarchy of laws, covering primary law provisions, regulations, class orders and standards”, and reframing and restructuring the existing Chapter 7 of the Corporations Act 2001 (Cth).

    Nevertheless, the ALRC findings were damning. It found that the “legislation governing Australia’s financial services industry is a tangled mess — difficult to navigate, costly to comply with and unnecessarily difficult to enforce”. Pointing to judicial descriptions of the legislative framework as “porridge” and a “maze”, the ALRC said the law “is unnecessarily complex, and complexity only continues to accrue”. It concluded that after “more than 20 years of development, the legislative framework for corporations and financial services regulation is no longer fit for purpose”.

    This has real costs for businesses, consumers and investors, governments, regulators and courts, and the community at large. And, as the ALRC points out, “unnecessary complexity has broader implications for the whole economy. These include lower competition brought about by increased barriers to entry and lower productivity as a result of inefficient regulation”.

    Causes and cures

    The ALRC identifies five root causes of unnecessary complexity. Four go to the structure of the legislation: The extensive use of “notional amendments” (those made in regulations or by ministerial or ASIC instruments); an incoherent legislative hierarchy; a legislative maze created by proliferating administrative powers and instruments; and poorly designed primary and delegated legislation. 

    The ALRC’s fifth cause is the lawmaking process itself. “Challenges with lawmaking processes and legislative maintenance are both a cause and a symptom of complexity in the existing legislative framework. Short timeframes for new legislative initiatives and insufficient legislative maintenance may contribute to the complexity of the existing legislative framework. However, both legislative initiatives and legislative maintenance are made more difficult by the complexity of the existing framework, reflecting the reality that the framework provides a poor platform for policy development.

    The report has 58 recommendations to create “a more adaptive, efficient and navigable legislative framework”. They include that the government “should establish a specifically resourced taskforce... dedicated to implementing reforms to financial services legislation” according to its reform roadmap. A skilled and credible taskforce, adequately resourced in time and money, will be essential to carry off a disruptive transition to a new legislative model, even if existing policy settings are not revisited.

    The broader problem

    While most of the recommendations are specific to financial services laws, a few go to the broader problem: How to stem a tide of poorly-designed regulation that drags on innovation and productivity and fails to deliver policy objectives effectively and efficiently. These recommendations address the process of regulatory reform, and regulatory maintenance or “stewardship”.

    Recommendation 24 sets out principles of legislative design — that legislation “should be structured and framed so as to enhance navigability and comprehensibility, and to communicate the fundamental norms of behaviour underpinning the legislation”. Those principles go to coherence, grouping, intuitive flow, prioritisation, succinctness, consolidation and supporting mental models.

    Recommendations 25–26 concern delegated lawmaking, emphasising the need to ensure democratic accountability and legitimacy, durability and flexibility, clarity and predictability, and coherence and navigability. Tellingly, the ALRC recommends the Attorney-General’s Department (AGD), in consultation with the Office of Parliamentary Counsel (OPC) and the Department of the Prime Minister and Cabinet, “publish and maintain consolidated guidance” in this area.

    Recommendations 28–29 also concern the lawmaking process, noting OPC “should establish and support a Community of Practice” for those engaged in making laws, and Treasury, in consultation with OPC, “should review existing guidance relating to the design and drafting of legislation, with a view to producing and main- taining a consolidated guide to legislative design”.

    The ALRC’s final recommendation is “a publicly available data framework for monitoring the development of corporations and financial services legislation”. At a minimum, this would track the proliferation of legislation, penalties provisions, notional amendments, powers to make delegated legislation and ASIC regulatory guidance, helping to make the proliferation problem visible.

    The recommendations may be hard to deliver. Development of business regulation lies with Treasury, not AGD where the ALRC resides. Legislators, including ministers and agencies with delegated legislative power, are usually reluctant to surrender it or submit to independent scrutiny. The political pressure to legislate quickly, without proper consultation, will remain difficult to resist.

    This suggests a need for a circuit breaker. In Recommendations 49 and 55, the ALRC advocated independent oversight in the form of a “Rules Advisory Committee” and a requirement for periodic review by an independent reviewer for its proposed Financial Services Law. But decided not to weigh in on the re-establishment of an independent and expert statutory body with broader responsibility for the development and stewardship of business regulation, which many in the business and legal communities called for.

    The ALRC’s core finding should be an urgent wake-up call. The problems it identified are not confined to these statutes. Unless we rethink the way business regulation is made and overseen, the risk is we will be back here again in a decade. 

    Dr Pamela Hanrahan is a consultant at Johnson Winter Slattery. 

    This article first appeared under the headline 'Untangling the Maze’ in the April 2024 issue of Company Director magazine.  

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