The Australian financial services legislation can learn from the United Kingdom’s framework, including its strength of being more easily navigable.
Appearing on an Australian Law Reform Commission (ALRC) video interview, Mark Steward, a member of the ALRC Advisory Committee for the Financial Services Legislation Inquiry, shared his insights from both an international and comparative perspective, along with his experiences from the work undertaken as director of enforcement and market oversight for the Financial Conduct Authority (FCA) in the UK.
The FCA was the financial services, securities and markets regulator for the UK which regulates the activities of about 51,000 firms. Unlike the Australian Securities and Investments Commission (ASIC), the FCA also had prudential supervisory responsibility for those firms.
Highlighting the need for the ALRC financial services legislation review to look into making financial legislation more easily navigable and simplified, Steward pointed to the potential issues that could arise from complex legislation.
“Complexity in legislation is a real problem and if what is required by the legislation is too hard to understand or can only be understood by the high priests of the subject matter, then the intention and purpose of the law is bound to be frustrated,” he said.
“Compliance will be harder and non-compliance and breaches through misunderstanding is going to be more prevalent.”
Steward said navigability was an important means of addressing complexity, noting that a review should not oversimplify the legislation either “because what we’re dealing with is complex in itself”.
One strength of the UK system was that there were overriding principles that were focused on outcomes rather than principles.
“The UK model for financial services starts with overriding legislation that sets out the key statutory objectives that the regulator is meant to strive to achieve, as well as including the statutory powers that the regulator needs to be able to do those things from supervision to investigation to taking action.
“In the UK, statutory objectives are really presented as three overriding aims to protect consumers to enhance financial stability, market integrity, and to promote effective competition. So those things kind of override everything else.
“And then within the legislation, we have delegated rulemaking powers that allow us then to give effect to the content of what is required in regulation to achieve those things.
“So our rules start with 11 general principles and these general principles of conduct comprising the obligation to act honestly, to act with due diligence to treat customers fairly, to manage conflicts of interest, etc.”
In the UK system, the FCA published guidance around the 11 general rules within a handbook to help people understand the legislation.
“The guidance is really important because it sets out in narrative form, how we think firms should operate in practice to comply with those rules. And whilst the guidance isn’t mandatory… the general principles are mandatory.
“The guidance is not mandatory – it’s designed to be helpful. But of course, if a firm complies with what’s set out in the guidance, that creates a safe harbour… a great incentive to follow the guidance.
“So you’ve got something that’s a combination of, in a sense, legislation imposed by the regulator as a legislator, together with non-legislative tools like guidance and search tools for navigation within a hierarchy of black letter, statutory law, general principles, and then some bespoke rules and guidance to help comply.
“All of that creates something that can be described in the way I just described it. It doesn’t avoid complexity and certainly doesn’t avoid length.
“We often joke that if we were to… print out what’s in the handbook, we would have something that would stand well over six feet high.
“So, it’s an enormous piece of work. It is lengthy, it is complex, but it can be navigated and you don’t need to be a high priest to navigate it.”
