Breaking down the ALRC’s legislation review
The scope of the Australian Law Reform Commission’s inquiry into the simplification of laws that regulate financial services is anything but simple.
Part of the Government’s response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the terms of reference of the ALRC’s Financial Services Legislation Review is to consider whether the Corporations Act 2001 and its regulations could be simplified and rationalised, particularly in relation to:
- The use of definitions;
- The coherence of the regulatory design and hierarchy;
- How the provisions in Chapter 7 of the Corporations Act and regulations can be reframed or restructured.
- The review has been split into three separate reports based on the above themes, the first of which (Interim Report A) was tabled in Parliament in November 2021. The second (Interim Report B) and third report (Interim Report C) will be released in September 2022 and August 2023, respectively, with a final report due in November 2023.
IMPETUS AND SCOPE
The review explores legislation at the centre of financial services regulation in Australia, including the Corporations Act, particularly Chapter 7, the National Consumer Credit Protection Act (NCCP) and the ASIC Act.
The Corporations Act (the Act) provides the broad legislative architecture of corporations and financial services regulation, with a number of provisions dedicated to consumer protection. The ASIC Act is more specifically focused upon consumer protection, while also containing the provisions dealing with the general functions, operations, and powers of ASIC. Furthermore, the regulation of consumer credit — including in relation to licensing, disclosure, and conduct regulation — occurs pursuant to its own separate regime, which is contained in the NCCP Act.
The Corporations Act, where most legislation pertaining to consumer protection within the architecture of corporations and financial services regulation is found, is now two decades old and has had a handful of inquiries and reports, including the Royal Commission.
Throughout 2019, the ALRC conducted a national conversation with interested parties to ascertain appropriate topics for future law reform inquiries, publishing a final report on law reform topics in December 2019.
Of approximately 100 respondents who answered the relevant question in the ALRC’s initial survey, 84% considered there was a high or medium need for reform of financial services legislation. Many submitted that the legislation was too long, complex, and inaccessible, detracting from principles of transparency and facilitated ‘abuse’ of the law by institutions.
The Terms of Reference require the ALRC to survey the gamut of corporations and financial services legislation and make recommendations for simplification, with the aim of promoting meaningful compliance with the substance and intent of the law. It aims to lay the foundations for an adaptive, efficient, and navigable regulatory framework, recognising that there are emerging new business models, technologies, and practices.
UNPACKING REPORT A - THE USE OF DEFINITIONS
The key concepts examined in the review include definitions of ‘financial product’ and ‘financial services’, licensing, disclosure, definition of ‘financial product advice’, definitions of ‘retail client’ and ‘wholesale client’ and conduct obligations.
As the review is expansive in nature, this article will delve into one key issue affecting financial advisers in the Interim Report A: the debate over the definition of financial product advice and the naming of ‘personal’ versus ‘general’ advice.
PERSONAL VERSUS GENERAL ADVICE
Section 766B(2) of the Act provides that there are two types of financial product advice: personal advice and general advice.
Under the Act, personal advice is defined in s 766B(3) as: “For the purposes of this Chapter, personal advice is financial product advice that is given or directed to a person (including by electronic means) in circumstances where:
- the provider of the advice has considered one or more of the person’s objectives, financial situation and needs (otherwise than for the purposes of compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 or with regulations, or AML/CTF Rules, under that Act); or
- a reasonable person might expect the provider to have considered one or more of those matters.”
And general advice is in turn defined as ‘financial product advice that is not personal advice’.
Speaking to Money Management, Maurice Blackburn principal lawyer, Josh Mennen, outlined the problems with the legislative distinction between general and personal advice as presented in his submission to the inquiry.
Referring to himself as a consumer advocate, Mennen said he had been involved in a good number of disputes with financial planners, where his law firm alleged that the advice given was negligent or otherwise inappropriate.
Mennen’s submission agreed with ALRC proposals A13, A14 and A15 which aimed to “simplify, clarify, and improve the navigability of concepts relating to ‘financial product advice’”, through:
The removal of the definition of ‘financial product advice’ and the substitution of the term with ‘general advice and personal advice’;
The removal of ‘financial service’ and ‘financial product advice’ and substitution with ‘general advice; and
Amending to replace the term ‘general advice’ with a term that corresponds intuitively with the substance of the definition.
But, according to Mennen, the term ‘general advice’, in its current use, is a misnomer which leads to confusion and poor financial outcomes for consumers.
“It gives the impression to a layperson that there is a level of tailoring or bespokeness to it,” he said.
“In fact, its definition is not something which is tailored or bespoke at all. It is merely the provision of a particular product and it puts all of the onus on the consumer themselves to determine whether or not that particular product is appropriate for their needs, circumstances and objectives.
“Now, that’s a large onus to impose on a consumer who may, through no fault of their own, consider that they’re being guided by a qualified professional through a complex process that they’re not familiar with.
Therefore, in Mennen’s view, a better term for general advice would be general information.
Mennen is not alone in expressing this view, with the Financial Planning Association of Australia also holding this stance.
Mennen acknowledges that just a name change is never going to be sufficient as that is “merely semantics”.
“What we need is for the industry to ensure that when it is providing personal advice, or advice of any type, it clearly delineates the nature of the advice being provided and clearly states whether it is bespoke and actually ensures that the client is educated about that.
“Because what we see time and time again, is that the paperwork says in the fine print, ‘this is general advice, you’ve got to go work out for yourself whether it’s appropriate’, but there’s a schism between the client’s understanding and what is said in the fine print.”
Super Consumers Australia policy manager, Franco Morelli, agrees with Mennen’s assessment that more is needed to be done than a name change.
“The consumer research shows it isn’t that simple; in fact the naming has no effect on a consumer’s understanding,” he said.
“Instead, people tend to base their belief as to whether the advice takes into account their personal circumstances on other factors, like who is giving the information or when. The ALRC acknowledges a name change wouldn’t help consumers, but recommends it anyway to assist “users of the legislation” (e.g. lawyers and some practitioners).
“While it might be nice to help lawyers with their problem in understanding legislation, a name change does nothing to help consumers with a much larger problem. We’d rather legislators spend their limited resources on solving real problems for consumers, rather than rearranging deck chairs with name changes.”
Morelli and Super Consumers expects the Quality of Advice Review to pick up this issue and deal with the actual problem facing consumers.
Mennen said a clear delineation was needed because consumers have a high level of trust in their adviser, opening the door for exploitation.
“The reality is that once trust is built in an adviser-consumer relationship, which advisers are very good at building, consumers ask very few questions and they go along with the process and they sign paperwork without going through it with a fine-tooth comb,” Mennen said.
“When it turns out that the product is no good, and that it is tainted by conflicts of interest, for example, then [the consumer] comes back and says, ‘why did you give me this product?’
“And the adviser says ‘hey, we just gave you a brochure and here’s a general advice warning, and here’s the bit you signed on page 37’.
“So that’s a poor system for a consumer to be in and we need to deal with that problem.”
POSSIBLE AMENDMENTS
To address this concern, Mennen proposed an amendment to the Act in his submission which would reframe this definition of personal product advice so that, whether or not personal advice is given is based on the subjective understanding of the consumer.
He said this could be done through a fact-find exercise by the adviser, as well as through educational conversations with clients.
“Now of course, that understanding has to be reasonable. And you can determine the reasonableness on the facts and the evidence,” Mennen said.
“But if a consumer reasonably believes that they’re receiving tailored advice, then it’s tailored advice. And I believe that the legal definition should confirm that that’s the case.”
Mennen gave support for his proposal by stating, under common law, the general advice warning was not, in and of itself, enough to protect a financial services provider.
He referred to a High Court decision against Westpac in which the bank was fined $10.5 million for actively conducting a sales campaign aimed at rolling customers from their existing superannuation accounts into Westpac superannuation products.
“What they were doing is a good example of a huge problem in the industry, around vertical integration.
“The super fund [thought] ‘where can we get more members? Well we’ve got a beautiful opportunity to get them from our parent company’s customer banking list.”
“I referenced that as further support for the proposition that it should be about the consumer’s own personal understanding of the relationship.”
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