Blog: Focus on principles key in financial services reform – The Mandarin

Australia’s financial regulations need to focus on principles rather than outcomes, according to Australian Law Reform Commission (ALRC) Financial Services Legislation Inquiry advisor Mark Steward.

“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,” Steward said.

“I think that’s quite a significant difference. These general principles are then supported by more prescriptive requirements in the rulebook, and it’s very difficult to get away from some prescription because the industry wants clarity, wants certainty,” he said.

Steward, who is the former deputy director of ASIC and current enforcement head at UK prudential regulator The Financial Conduct Authority, was appointed to the advisory role by former attorney-general Christian Porter to advise on the rewriting of chapter 7 of The Corporations Act (2001)

Chapter 7 deals with the regulation of financial products and services, and is one of three primary areas for reform being targeted by the inquiry.

Steward said the provision of optional guidance could help providers demonstrate they were acting in good faith.

“If a firm complies with what’s set out in the guidance that creates a safe harbour, which is really important, great incentive to follow the guidance.”

Steward conceded prudential regulation may be “inescapably complex”, due to the fast-moving nature of the sector, but believes it should not be an impediment to creating a regulatory framework that protects consumers, and allows for innovation.

“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, compliance will be harder, and noncompliance and breaches through misunderstanding are going to be more prevalent,” Steward said.

“The purpose of the legislation is to create public good, not create traps,” he said.

Earlier this year, current ASIC chief Joe Longo said Chapter 7 is “clearly broken”.

“It’s become too complex, and needs to be rewritten,” he said.

The first interim report, focusing on the appropriate use of definitions in corporations and financial services legislation, was released on 30 November 2021. It found significant duplication and inconsistencies in definitions, making the law impenetrable to consumers.

“Harm caused by unintended breaches can be just as great as the harm caused by intentional ones. And the legislation needs to comprehend that,” he said.

The inquiry is part of the federal government’s response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry

The second interim report, focusing on ‘regulatory design and the hierarchy of laws, and how legislative complexity might be managed over time,’ is due by 30 September 2022, with the third interim report focusing on chapter 7 due on 25 August 2023.

The final report is scheduled for release in November 2023.


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