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Frydenberg’s proxy reforms on thin ice


Opposition to Treasurer Josh Frydenberg’s proxy advice reforms is growing, with one key Liberal senator questioning his use of the regulations power and warning of a possible disallowance.

While not disagreeing with the reforms in principle, senator Concetta Fierravanti-Wells – head of the standing committee for scrutiny of delegated legislation – questioned why Frydenberg had used regulations to force them through and whether it would be more appropriate for the reforms to receive “full parliamentary scrutiny.”

“From a scrutiny perspective, the committee is concerned that the significant new obligations outlined above, which may have a major impact on the business model and operation of existing businesses that provide proxy advice, are being implemented through delegated legislation,” Fierravanti-Wells wrote in a letter to Frydenberg.

“The committee therefore requests your advice as to why it is considered necessary and appropriate to use delegated legislation, rather than primary legislation, to introduce significant new obligations on financial services licensees that provide proxy advice, noting in particular that this approach appears to be inconsistent with the guidance provided in the Department of the Prime Minister and Cabinet’s Legislation Handbook.”

The letter represents the first objection from within the Liberal Party to the reforms, which have been the subject of fierce criticism from both the superannuation sector and Labor and the Greens since they were announced shortly before Christmas in 2021. Of particular concern to Fierravanti-Wells is the significant financial penalties assigned to breaches of the new regulations, which would see large proxy advisers and individuals on the hook for up to $11.1 million and $1.1 million respectively for what the sector has described as minor errors of omission.

“From a scrutiny perspective, the committee is concerned the regulations function in such a way as to impose significant offences and civil penalties on conduct which was not previously subject to such sanctions,” Fierravanti-Wells wrote.

“The committee notes there is no justification of why the penalty is appropriate to the relevant offence or provision, and why it is necessary and appropriate to include provisions which give effect to such penalties in delegated legislation instead of primary legislation.”

Also in question is how proxy advisers will handle the requirement they be independent from the entities they advise – a requirement that could doom the Australian Council of Superannuation Investors – with Fierravanti-Wells warning that the regulations fail to define exactly what it means to be independent. The regulations also require advisers to “be independent of’ ‘any other entity that makes decisions affecting the exercise of those voting rights”, which Fierravanti-Wells believes will
create significant confusion.

“It appears to the committee that the concept of ‘any other entity’ exacerbates an already unclear provision and has the potential to cause a licensee to simply not know what is required of them and creates uncertainty for regulators trying to enforce the provision,” Fierravanti-Wells wrote.

“There is also the issue of possible uncertainty for other interested parties, including entities that are the subject of proxy advice. Ultimately, key terms should be clearly defined in the Regulations to remove any potential confusion or misunderstanding, or the potential for inconsistent application.”

The regulations could still be subject to disallowance, and independent senator Rex Patrick has indicated that he would support such a motion at the first sitting day of the senate (February 10). Other cross-benchers remain undecided, though both Labor and the Greens have criticised the regulations.

Other reforms of this nature have generated significant upheaval within Parliament, with cross-benchers uniting with Labor and the Greens to oppose the inclusion of the controversial investment veto power in the Your Future Your Super reforms. Fierravanti-Wells has also requested a response from Frydenberg by February 10, and warned that the committee may give notice of a motion to disallow the instrument as “a precautionary measure.”

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