Why temporary regulatory reforms should stay

Australia should continue to modernise its regulatory framework beyond COVID-19, says AICD head of Advocacy Louise Petschler.

In the governance space, the COVID-19 crisis saw regulatory relief measures put in place as temporary steps. Welcome moves to make permanent some of these changes are now underway.

Continuous disclosure reform

Following a recent parliamentary inquiry into class actions, the government has flagged permanent reform of continuous disclosure laws that would lift Australia’s low threshold for launching securities class actions. If passed by federal parliament, the reform would require that companies and their officers must act with “knowledge, recklessness or negligence” for a breach of continuous disclosure, and misleading and deceptive provisions to be made out — these are provisions under which securities class actions are often launched. This change would bring Australia into line with comparable jurisdictions such as the UK and US.

Importantly, this reform would not water down continuous disclosure obligations. The obligations in the law and listing rules for companies to disclose material information in a timely manner remain in place — with the strong support of the AICD.

Companies and their officers who act negligently, recklessly, or who seek to deceive or mislead the market by commission or omission, would continue to be exposed to the full force of the law — as they should be. The AICD has encouraged the Australian Securities and Investments Commission to fully enforce the law where breaches occur.

However, the change is important in setting a better threshold for breaches. The need for permanent reform to bring the mental or fault element into our statute has been one of the AICD’s key “regulatory reset” priorities this year. In our view, the changes set a more appropriate threshold for launching securities class actions.

The AICD has been a vocal advocate for permanent reform, with the temporary COVID-19 relief currently in place for continuous disclosure “fault” expiring at the end of March. The government anticipates the reforms will lead to cost savings for directors and officers (D&O) insurance, given securities class actions have been the primary driver of recent increases. The reforms have also been welcomed by the D&O insurance market.

At the time of writing, the legislation was referred to the Senate Economics Legislation Committee, due to report by 12 March. The AICD has lodged a submission supporting the legislation in its current form, including with respect to disclosure laws and virtual AGMs.

Virtual AGMs

As part of the same legislation package, the government has proposed extending the temporary relief it provided during COVID-19 to allow companies to run virtual-only AGMs. The measures, due to expire on 21 March 2021, will now be extended until 15 September. The government will also conduct a 12-month opt-in pilot for companies to hold hybrid AGMs to enable a proper assessment of the shareholder benefits of virtual AGMs. The government will also finalise permanent changes to allow electronic signing and sending of documents prior to the expiry of these temporary arrangements.

The AICD supports permanent reform to allow companies to choose the best model for their AGMs, whether physical, virtual or hybrid. We acknowledge that investor voices, including the Australian Shareholders Association, raised concerns about some practices in virtual AGM meetings during 2020, including “over-moderation” of questions. The pilot period and extended temporary relief will allow stakeholders, companies and government to consider these issues further.

The AICD will continue to encourage the government to consider additional regulatory guidance or direction on virtual and hybrid AGM practices for listed entities as a way of addressing these concerns. The AICD will also seek to collaborate with the Governance Institute of Australia on practical guidance for virtual AGMs over the year.

Royal Commission into aged care

The long-anticipated Royal Commission into Aged Care Quality and Safety report was tabled by the federal government in March.

The AICD strongly supports the principles recommended by the Commissioners to underpin the aged care system, including a universal right to high-quality, safe and timely support and care to assist older people to live an active, self-determined and meaningful life. The recommendations include funding and staffing reforms, as well as new standards and a new regulator. If implemented, they would significantly alter how aged care is governed in Australia. They also have implications for expectations around governance standards in other care sectors, including disability and healthcare.

The Royal Commission recommended changes to aged care sector board structure, composition and governance, including majority independent directors, clinical governance committees, a fit and proper person test and requirements that boards have a mix of skills, experience and knowledge of governance to ensure the safety and high quality of care provided. The aged care Royal Commission report makes important suggestions about provider culture and the role of the board. If the recommendations are accepted, there will be increased liability risk for directors of aged care providers — and new prudential standards and increased financial reporting requirements.

The AICD supports the recommendations, although we have some concerns around specific detail — for example, continuous disclosure recommendations. The AICD looks forward to seeing the government’s response to the recommendations and will continue to engage with members from aged care.