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Cutting back the thicket of corporations and financial services law

This year, the Corporations Act 2001 (Cth) reached 20 years of age.

However, whatever celebration was justified must be coupled with a recognition that the Act has not quite ‘grown up’ – indeed, that it needs significant reform.

Last year the Australian Law Reform Commission (ALRC) was asked to inquire into how to “simplify and rationalise” corporate and financial services law. The ALRC’s first interim report on this topic was published on 30 November this year and the ALRC is now seeking feedback from interested stakeholders by 25 February 2022.

Why complexity matters

Complex legislation is difficult to understand. It is harder for consumers to know their rights; for practitioners to advise their clients; and for regulated entities to comply. Complexity also gives rise to rule of law concerns.

We all bear the consequences, including through increased costs for financial products and services, and in public funding paid for courts and regulators who must wade through the legislative thicket.

Undue complexity

At the heart of financial services regulation is the Corporations Act 2001 (Cth), which exceeds 3900 pages in length. However, the problem isn’t simply length. As Dr Robert Austin has said, the Act’s development has involved a “comprehensive abandonment of the principles of simplification”.

A key focus of the ALRC’s first interim report has been on how the use of definitions contributes to complexity. There are over 1000 unique defined terms in the Act, and over 570 of those are defined more than once, providing different meanings for different parts of the Act.

The lack of consistency is combined with a lack of any clear identification of when defined terms are used, or even a single place in which they may be found. Defined terms contribute to the Act’s more than 14,500 internal cross-references, which make it necessary for readers to move back and forth between different parts of the Act.

Definitions themselves often contain other defined terms, creating long ‘chains’ of interconnected terms. In this way, understanding the law can be like unpacking Russian dolls.

Getting lost in the thicket

Being able to navigate the law is critical to understanding and applying it. However, primary legislation is just the tip of the iceberg. Users may also need to consult the Corporations Regulations 2001 (over 1300 pages in length), and over 270 ASIC legislative instruments, 200 regulatory guides, and 200 information statements.

There appears to be little rationale for where or why the law is distributed. Most concerning is the frequent use of delegated legislation to ‘notionally amend’ the Corporations Act. More than 100 legislative instruments amend the text of the Act itself, and more than 20 do so for all persons to whom the Act applies.

Using instruments to change the law is troubling because ‘notional amendments’ are not reflected in the Corporations Act and Corporations Regulations as presented on the Federal Register of Legislation. The number, length and complexity of legislative instruments – and their ability to completely alter the legal landscape – make them “dark law to the blameless traveller”.

Potential reforms

The ALRC’s first interim report makes 13 recommendations for reform and includes 24 questions or proposals on which it seeks further feedback.

In relation to complexity, the ALRC seeks feedback on guiding principles for the use of defined terms, including whether they should be used only to clarify words or phrases, rather than to impose obligations (Question A2). Numerous proposals relate to simplifying the definitions of ‘financial product’ and ‘financial service’ (Proposals A3–A6) (with those terms being used 1316 and 423 times in the Act respectively).

An outcomes-based standard for financial product disclosure (Proposal A8), and clarification of the duty to act “efficiently, honestly and fairly” are also proposed (Proposal A20).

In relation to navigability, the ALRC recommends the inclusion of a single glossary of defined terms (Recommendation 7) and the development of drafting guidance to draw attention to defined terms when they are used (Recommendation 10). In relation to navigability between ‘layers’ of the legislative hierarchy, the ALRC proposes removing powers to create ‘notional amendments’ (Proposal A9).

We have only scratched the surface of some of the ALRC’s ideas for reform. To view a summary (or the full version) of Interim Report A, or to make a submission, please visit the ALRC website.

William Isdale and Christopher Ash are Senior Legal Officers at the Australian Law Reform Commission.

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