InFocus: Moving to principle-based legislation

In a world of ever-changing regulation, thanks to the Royal Commission and the educational requirements, one would think the financial advice industry had seen enough change to regulation. 

However, there are now calls for changes to the Corporations Act 2001 to make it simpler and less burdensome for advisers. 

First, Nathan Jacobsen, managing director of Diverger Limited, said the Act had become very operational and specific in how outcomes should be delivered to clients, rather than principles based.

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A principle-based system would be less prescriptive and allow for more flexibility by advisers. This prescriptive approach particularly applied to fee disclosures and opt-in obligations. 

“A reversion to a less prescriptive, less black and white and more principle-based legislation will actually provide, what is now a very professional adviser population, with the flexibility to execute advice more efficiently,” said Jacobsen.

Several days later, appearing at the AIA Adviser Summit, Senator Jane Hume, minister for superannuation, financial services and the digital economy, appeared to echo Jacobsen’s sentiment.

If the Government was re-elected, she said, moving to principle-based regulation would be a key priority for its first 100 days. It would use the Quality of Advice Bill to identify opportunities to simplify regulatory compliance, reduce costs and remove duplication.

“The regulatory environment has truly become a Gordian knot so now we’re stepping back and untangling that knot,” Hume said.

“We want to make sure that the regulatory framework could better enable the provision of high quality accessible and affordable financial advice for retail investors.”

Finally, the Financial Planning Association of Australia issued its own recommendations to a review by the Australian Law Reform Commission (ALRC) into the Corporations Act. The ALRC’s review was intended to simplify and support the professional services provided by financial planners through improving the operation and structure of the Corporations Act.

Proposals for this included:

General advice - The law should be changed to rename the term ‘general advice’ to ‘product information’ and ‘strategy information’, which better reflects the definition and is less misleading to consumers.  

Restricted and like terms - the use of the terms ‘financial planner’, ‘financial adviser’ and like terms (including ‘financial coach’, ‘financial mentor’ and ‘financial guru’) should be reviewed to determine if restrictions on the use of these terms are effectively protecting consumers from unqualified financial advice. 

Sophisticated investor - The law should be changed to revise the test for a ‘sophisticated investor’ by increasing the dollar- value threshold to an appropriate and contemporary level, providing a method for indexation and introducing a financial capability measure. 

Separation of product and advice - The law should be changed to separate the regulation of financial products from the regulation of financial advice. 

The future of licensees - The law should be changed to focus the AFSL system on the regulation of financial products and remove the requirement for an AFSL to cover the provision of financial advice. 

Sarah Abood, chief executive of the FPA, said: “Financial planners are not lawyers, but it may be that the regulatory and compliance requirements under one Act and regulator differ from those of others, leaving financial planners at risk of breaching one requirement in order to meet the conditions of another. 

“As well as the compliance risk, this has a significant impact on costs and efficiencies, particularly on small licensees who have less support and will find it find it harder to meet the increasing regulatory demands.” 




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