How could the ALRC report change financial advice?

Financial advice is a "significant" area of focus in the final report of the Australian Law Reform Commission (ALRC) inquiry, with the report singling it out for its difficulties in interpreting legislation.

The report, Confronting Complexity: Reforming Corporations and Financial Services Legislation, was tabled on 18 January by Attorney-General, the Hon Mark Dreyfus. 

With the terms of reference first received in September 2020 and three interim reports produced, the ALRC has been examining the use of definitions in corporations and financial services legislation, the coherence of regulatory design and hierarchy of laws, and how the Corporations Act 2001 could be reframed or restructured. 

It also noted how financial advice is a “notable example” of how the structure of obligations for advisers is spread across four different parts of the Corporations Act, making it difficult for them to find and masking an otherwise coherent regulatory scheme. 

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“The structure of these provisions means that the law fails to communicate the advice providers are subject to a highly developed and tailored regulatory regime. This makes it difficult to identify the fundamental obligations and norms that apply to their conduct. The failure to prioritise key messages also obscures the context that such messages should provide for more detailed obligations. This in turn makes the legislation harder to interpret and apply.”

A joint submission by five organisations, including the Financial Advice Association Australia, had explained to the ALRC that advisers in small businesses are at risk of failing to comply with the mass of complex legislation and are spending between $100,000 and $500,000 each year on internal staff compliance. 

As such, financial advice is the third of six pillars in the ALRC’s reform roadmap, behind consumer protection and disclosure. A fourth pillar also comprises regulation of the Australian financial services licence (AFSL) regime. 

“Financial advice provisions are significant because they regulate one of the key means through which consumers access financial products and services. Multiple governments have reiterated the importance of effectively regulated and affordable financial advice. A simplified legislative framework would be an important step to reducing the costs of advice, supporting advisers to understand their obligations, and promoting higher quality advice.”

It recommended grouping financial advice provisions together to make it easier for users to locate, navigate and understand the law that applies to financial advice.

“Financial advice provisions use relatively little delegated legislation, so much of the reform would occur through restructuring and reframing existing provisions of the Corporations Act into a single legislative chapter.”

Working alongside the Quality of Advice Review

The ALRC final report comes just weeks after the government published its second and third tranche of Delivering Better Financial Outcomes regulation, based on the Quality of Advice Review (QAR), and the ALRC discussed how this has been factored in.

There had previously been concerns about implementing two parallel regulatory frameworks and whether it would pose enhanced risk to do so concurrently.

The final report confirmed the ALRC roadmap envisages the framework being implemented alongside policy reforms to financial advice.

It did note, however, that three proposals regarding the wording and definition of “financial product advice” and “best interest duty” in earlier interim reports had been removed from the final report in light of QAR recommendations. 

Implementing the ALRC’s recommendations, it said, would “provide a better foundation for undertaking policy reform” and “make the legislation more amenable to implementing recommendations” such as those around robo-advice and good advice. 

“Restructuring and reframing financial advice provisions may also make them more adaptive to changes in technology and business practices. For example, robo-advice has the potential to increase access to financial advice due to its convenience and lower costs. 

“However, unnecessary complexity in the existing legislative framework may present a barrier to innovation in respect of robo-advice and prevent new firms from entering the market. A legislative framework that is more adaptive and makes it easier to implement clear policy objectives may better facilitate innovation so that consumers could benefit from more accessible financial advice. An adaptive framework would also enable any future policy developments in relation to robo-advice if bespoke regulation were necessary.”