directors counsel

In February, the Senate disallowed new regulations covering proxy advice firms and their superannuation fund clients. The disallowance motion focused public attention on the (sometimes arcane) process of lawmaking and its oversight.

Legislation in Australia comes in different forms, and from different sources. Acts are made by the federal or state parliament by a vote of members of the legislative assembly. An Act may delegate the power to make further laws to the executive branch of government or its agencies. Regulations can be made on the recommendation of the relevant minister through the Executive Council. An individual minister may be given power to make determinations that have legislative effect — for example, the Corporations (Coronavirus Economic Response) Determinations made by the Treasurer in 2020. Or the Act may allow for other legislative instruments made by government agencies, such as class orders made by the Australian Securities and Investments Commission (ASIC) or prudential standards made by the Australian Prudential Regulation Authority (APRA).

Delegated legislation has been controversial for centuries. Provisions that allow for Acts to be amended by subordinate legislation or executive action are referred to as “Henry VIII clauses” after the English Statute of Proclamations of 1539, giving the Tudor king unilateral power to legislate by proclamation. Henry VIII was, as the Lord Chief Justice of England and Wales observed in 2010, a dangerous tyrant. Lawyers have long memories. These provisions lie at the uneasy centre of the important constitutional question of the limits of executive power.

Also, compared with principal legislation that must be shepherded through Parliament, delegated legislation is relatively easier to pass. So, it proliferates. It can be hard to locate and parse with the principal Act. The important work of the Australian Law Reform Commission (ALRC) in diagnosing complexity in the corporations and financial services laws has identified the volume and obscurity of delegated legislation as a significant drag on the law’s efficiency and efficacy. Everyone — including corporations — is entitled to know what laws apply to them. This goes to questions of the rule of law.

Protections

Unlike the Tudor king, our non-parliamentary lawmakers operate under direct and indirect controls that are intended to manage the risk of executive overreach and encourage sound regulatory stewardship. At the Commonwealth level, direct controls are contained in the Legislation Act 2003 (Cth), which governs making and publishing “legislative instruments”. These include regulations and other instruments made under delegated powers — such as ASIC class orders — that alter the content of the law and have “the direct or indirect effect of affecting a privilege or interest, imposing an obligation, creating a right, or varying or removing an obligation or right”.

Chapter 3 of the Legislation Act provides that “the First Parliamentary Counsel is responsible for promoting the legal effectiveness, clarity and intelligibility of legislative instruments and notifiable instruments”. It requires that, before a legislative instrument is made, “the rule-maker must be satisfied that any consultation that is appropriate and reasonably practicable has taken place”.

Departments and agencies developing subordinate legislation are generally subject to the discipline of conducting regulatory impact assessments. At the Commonwealth level, this involves the preparation of a regulation impact statement (RIS). The RIS is supposed to identify the policy problem and explain why government action is needed to address it. It should explain the options under consideration and the net benefits of each, pick the best and explain how it will be implemented and evaluated. It should also state who has been consulted and how their feedback was incorporated.

The RIS is reviewed by the Office of Best Practice Regulation (OBPR) which sits within the Department of the Prime Minister and Cabinet. The OBPR assessed the RIS for the proxy advice reforms as “adequate with the government’s requirements, but not consistent with good practice”. It concluded that the RIS departed from good practice “as it lacks sufficient evidence of a conflict of interest between proxy advisers and their clients and does not clearly demonstrate that the preferred option yields the highest net benefit over the status quo”. The OBPR’s critical assessment may have factored into the Senate’s disallowance decision.

While a RIS is meant to be compulsory for all cabinet submissions, it is not always done. The “best financial interests” test for superannuation trustees and their directors was enacted in 2021 without a RIS on the basis that the Productivity Commission’s 2019 review of superannuation provided analysis “equivalent to a RIS”, despite having not addressed the question directly and despite the banking Royal Commission having recommended against the change in the interim. Interestingly, that same legislation was criticised by the Senate Standing Committee for the Scrutiny of Bills in February 2021 for leaving too many important matters to be dealt with in delegated legislation.

Once a legislative instrument is made, it must be laid before each house of Parliament within six sitting days of that house, and it may be disallowed by either house within 15 sitting days after it is tabled. This is what happened to the proxy advice regulations. A disallowed legislative instrument is taken to be repealed and cannot be reintroduced within six months.

Up for review

As the proxy advice reforms show, ministers and regulators can get delegated lawmaking wrong. This is why the processes and disciplines provided for in the Legislation Act and under the RIS process (and their equivalents at state and territory level) are so important. Given the volume of delegated legislation that affects companies and directors, it is therefore worth keeping an eye on two inquiries into delegated lawmaking that are currently underway.

The first is a review of the Legislation Act, conducted by Sarah Chidgey from the Attorney-General’s Department, Roxanne Kelley PSM from Treasury, and former First Parliamentary Counsel Peter Quiggin PSM QC. The review is considering the extent to which the objectives of the Legislation Act have been realised, including in encouraging rule-makers to undertake appropriate consultation before making legislative instruments; encouraging high standards in the drafting of legislative instruments and notifiable instruments; improving public access to Acts and instruments; and establishing improved mechanisms for parliamentary scrutiny of legislative instruments. It will report in June.

The second is the ALRC’s reference into the corporations and financial services legislation under Justice Sarah Derrington, ALRC president, which commenced in 2020 and will report in late 2023. Its second interim report, due on 30 September 2022, will address “regulatory design and the hierarchy of primary law provisions, regulations, class orders, and standards”. This includes a consideration of the use of regulations and ASIC’s powers of exemption and modification in financial sector regulation.

“Regulatory stewardship” is an important responsibility of all governments. It includes seeing regulation as an asset that — like operating software — must be continually debugged, maintained and improved. These inquiries should help strengthen the framework for keeping those exercising delegated legislative power accountable and improving both the stock and flow of business regulation.