By Associate Professor Pamela Hanrahan, Melbourne Law School

MELBOURNE: 21 June 2014: News this week of the government's planned amendments to the Future of Financial Advice (FoFA) legislation is the latest chapter in a sorry tale that began almost as soon as Australia's current financial services laws were put in place in 2001.

A decade of amendments by successive governments, made to a piece of legislation that has always been recognised by lawyers as fundamentally flawed, has only made bad law worse. It is hard to see the latest attempts at reform producing a different result.

The good news is that David Murray's financial system inquiry provides a once-in-a-cycle opportunity to take a fresh look at the fundamentals of Australia's financial services regulation and open up real debate about whether we can do better.

The goals of financial services regulation should be to ensure, within global norms, that people who use financial services are treated appropriately and with candour, and that the financial system as a whole remains stable, resilient and efficient. Poorly designed regulation not only fails to achieve these goals - it works actively against them by increasing inefficiency and giving false comfort about the "protection" it affords.

Financial services regulation in Australia needs to be both narrower and deeper; it needs to build on rather than cut across established principles of law and equity; and it needs to make smarter use of our regulators.

So, to help kick-start the debate as the Murray inquiry continues, here are eight proposals for reform to the financial services system.

1. Repeal Parts 7.6 to 7.9 of the Corporations Act, which includes FoFA and covers licensing, conduct and disclosure in relation to financial services, and financial product disclosure. It can and should be replaced with better law designed to reflect the following principles.
2. Refocus financial services regulation to cover the key financial intermediaries, including broker/dealers, financial advisers (those who provide personal not general advice), custodians, trustees and responsible entities, and financial product manufacturers (that is, issuers of financial products other than corporate and government securities) - and let's abolish the artificial and unnecessary distinction between retail and wholesale clients.
3. Regulate broker/dealers and advisers by establishing a register, maintained by ASIC, of individual practitioners that includes only people who are vocationally qualified and members of an accredited professional body with proper disciplinary powers. Impose on those practitioners four succinct statutory duties - a duty of care and diligence, an undiluted duty to act in the best interests of the client, a duty to avoid conflicts of interests (including a ban on receiving conflicted remuneration such as commissions), and a duty of full disclosure. Give ASIC appropriate enforcement powers, including civil penalties. If a practitioner works for a financial institution or dealer group, require the institution or group to indemnify the client for any loss or damage resulting from a breach of the practitioner's duties.
4. Limit the kinds of managed investment schemes that may be registered under the Corporations Act to schemes that are taxed as unit trusts under the Tax Act. This will allow for the continued operation of property trusts and managed funds but eliminate weak legal structures, like contract-based agribusiness schemes, from the market. For registered schemes such as mortgage funds, link the ability to offer redemption facilities properly to the liquidity of the underlying investments to avoid the GFC-era "frozen funds" problem.
5. Give regulation of custodians and responsible entities to APRA, which already regulates trustees of public offer superannuation funds.
6. Regulate financial product issuers by establishing a register, maintained by ASIC, of every entity that sells financial products (other than corporate or government securities) to the public, and require them to lodge an electronic registration statement with ASIC for each product publicly offered. The statement should explain the product at the level of detail appropriate for the market to which it is directed, and the issuer should be liable if the disclosure is inaccurate or inadequate.
7. Make product issuers accountable for unsuitable products. This is a radical proposal, but then so was section 52 of the Trade Practices Act - which prohibits misleading and deceptive conduct - when it was enacted 40 years ago.
8. Apply the full suite of Australian Consumer Law protections to the provision of financial services, including the prohibitions on misleading or deceptive conduct, unlawful selling practices, unfair contract terms and unconscionable conduct. It does not matter particularly whether these protections remain under the remit of ASIC or are folded back into the ACCC. The general prohibitions deal adequately with the risk of people receiving misleading general "advice".

Bold reform is always difficult - a combination of vested interests, reform fatigue, and a perception that less prescriptive legislation equals less protection can get in the way. But if FoFA shows us anything, it is that this is a debate we need to have.

This piece first appeared in The Age and The Sydney Morning Herald on 21 June 2014.