Web of definitions weighing down financial services law: ALRC

The ALRC has pursued a whole-framework approach in its review of the financial services legislation ecosystem – looking over the Corporations Act, the ASIC Act and the National Consumer Credit Protection Act (NCCP).

The body had sought feedback from industry earlier this year, with both the Mortgage and Finance Association of Australia (MFAA) and Finance Brokers Association of Australia (FBAA) both explaining challenges for brokers around the current laws in written submissions.

“The mortgage and finance broking industry has experienced many years of intense reform, implementing several key regulatory reform programs through the COVID-19 global pandemic while continuing to support consumers and businesses to access critical finance,” the MFAA submission stated.

“While these regulatory reform programs ultimately, in our view, drive good customer outcomes, as identified by the ALRC, there is significant opportunity to simplify and modernise what we consider has become an unnecessarily complex, duplicative and often-times impenetrable legislative framework.”

During a webinar on Friday (17 June), ALRC general counsel Matt Corrigan, senior legal officers Phoebe Tapley and William Isdale, and University of Western Australia professor of private law and commercial regulation Elise Bant talked through the industry feedback the review had received.

Russian doll definitions

A key thorn in the side of stakeholders was the use of definitions scattered across the laws.

As Ms Tapley explained, the ALRC had found there were multiple issues, such as definitions being interconnected – meaning understanding a definition of a term could require a reader to consider the definition of another term, which required the knowledge of another term and so on.

“Understanding one term is a bit like unpacking a series of nesting dolls,” she stated.

Financial product, financial service and credit were three such terms that had interconnected definitions across the acts – which could affect how companies understand what is or isn’t out of regulatory parameters.

The ALRC has proposed that definitions should be uniform across the various acts and for interconnected terms to be used sparingly.

The majority of stakeholders had supported this call, particularly for a consistent definition for credit, but some had noted care would be needed to avoid unintended consequences from applying definitions too generally.

The FBAA and MFAA in particular both supported consistent definitions of credit across all legislation.

As such, the FBAA pointed to issues around the inclusion of credit in the definition of financial product under the ASIC Act, while the Corporations Act’s definition of financial product excludes credit.

It referred to AFCA drawing on the ASIC Act definition to make determinations against commercial credit entities, despite their products not being covered by the NCCP Act and there being no prescriptive obligations of record-keeping, assessing capacity or providing specific disclosures.

“We have seen first-hand how the inclusion of credit in the definition of financial product under the ASIC Act has created inconsistency with decision makers and at EDR [external dispute resolutions],” the FBAA submission said.

‘More law is not necessarily better law’

Dr Bant also explained that where concepts are left undefined, there is an “important opportunity for courts to really engage with the nature of the obligation or the prohibition that’s under inquiry”.

Misleading conduct is one such term left undefined, which has required courts to refer to surrounding statutory common law, context and the legal landscape.

Otherwise, if a term has highly specific definitions that can differ between acts, the law “will fracture”, Dr Bant warned.

“You’ll have a whole series of prohibitions that look a little bit similar to one another but slightly differently phrased,” she said.

“Different language is supposed to indicate different meanings. So you have courts grappling with ever increasing complexity and you have the capacity for litigation and arbitrage between different provisions because of that complexity and incoherence.”

The problem with added complexity and opacity in the laws, she added, is that it can encourage corporations to “adopt legalistic and even opportunistic approaches to their obligations”, as well as approaches to litigation that waste time and resources.

“In a similar theme that ALRC’s inquiry into corporate criminal responsibility found that the profusion of statutory corporate attribution rules have not helped hold corporations responsible for knowing, deliberate dishonest, and other highly culpable misconduct,” she said.

“So again, the key theme here, which really runs through these inquiries, but also through the current inquiry, is that more law is not necessarily better law, less might be more.”

There had been 56 submissions from stakeholders, which included calls for the ALRC to also consider ASIC guidance, consumer outcomes and the costs of regulatory burdens for businesses.

The ALRC had also met with 130 consultants.

The ALRC is due to release a second interim report from the review in September, before a third next year.

It is planning to release a final report, with its recommendations for law reforms next year.

[Related: 9/10 Australians confident brokers have best interests at heart]