Regulatory architecture can’t cope with evolving consumer risks: ALRC

ALRC president Hon. Justice Sarah Derrington

The inability of the current regulatory ecosystem to cope with changes in the risk environment for consumers is a perfect example of its underlying fallibility according to a background paper released by the Australian Law Reform Commission.

The paper, Risk and reform in Australian Financial Services Law, continues on the theme being driven by the ALRC in it’s previous papers and first interim report; that the Corporations Act has been built upon relatively indiscriminately over 20 years without consideration of its overall structure and efficacy.

The latest paper uses two broad developments in the risk environment to illustrate this failure.

The first is the “risk shift” from government and employers to individuals due to variable rate residential mortgages, superannuation supplanting the age pension and a move away from defined benefit to accumulation superannuation schemes.

The second is the rising risk consumers face from increased exposure to markets “and the overall growth of the financial sector relative to the economy”, a trend referred to as ‘financialisation’ by academics.

“Financialisation has meant that the overall size of the financial sector has grown enormously, the paper notes, before quoting Wallis in his 1997 Financial Systems Inquiry final report: “Australian households now rely more on the financial system and have greater exposures to particular financial service providers and to the financial system generally.”

The financialisation trend, especially, has taken consumers far from what the incumbent regulatory system can handle, the ALRC says. The total financial assets of Australian households when the Corporations Act was introduced in 2001 increased 450 per cent from $1.3 trillion to $6.24 trillion by March 2021.

While regulatory philosophies have evolved to accommodate this change, with disclosure taking precedence before principled regulation gaining ascendancy, the regulatory architecture is not flexible enough to accommodate parallel development.

“In leaving the older regimes intact,” the paper states, “this history underscores the fact that the complexity of the legislative regime broadly reflects the accretion of regulatory philosophies without a broader architecture for managing change.”

“The mixture of regulatory philosophies will remain a source of inevitable complexity, necessitating exemptions and tailored regulatory regimes,” it continues, before hinting at the ALRC’s final destination.

“Nonetheless, there remains the potential to rationalise the provisions without changing the policy settings through reliance on more principled obligations for disclosure and removing much of the prescription that has evolved…”

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