Australian Senate rejects Frydenberg’s proxy rules

February 11, 2022

Three days after they were set to come into effect, the Australian Senate has overturned Treasurer Josh Frydenberg’s regulations on proxy advisers.

On Wednesday, independent Senator Rex Patrick put forward a motion to disallow the regulations and succeeded in a 29 to 25 vote. Senator Patrick’s motion gained the support of the entire Senate Crossbench (Labor, Greens and One Nation).

The changes to regulations extended the country’s financial services licensing regime to require proxy advisers to provide their voting recommendations to companies on the same day they are provided to investors from the enforcement date of February 7th and required proxy advisers to be independent of their institutional clients from July 1st, 2022. Advisers could have received a fine of up to $11 million for breaking the new rules, including for small administrative errors, and individual fines of up to $1.3m.

The reforms were brought into question in late 2021 by a number of independent bodies. The Standing Committee for the Scrutiny of Delegated Legislation raised concerns about the regulation in a letter to Frydenberg, asking him to provide more information on why the reforms were introduced through delegated legislation, rather than primary legislation, to introduce significant new obligations on financial services licensees that provide proxy advice.,

In particular, this approach appears to be inconsistent with the guidance in the Department of the Prime Minister and Cabinet’s Legislation Handbook.  The Committee also asked for more information on the justification for the significant penalties in the delegated regulation and raised concerns with the lack of clarity of the drafting.

The Office of Best Practice Regulation assessed the quality of the regulatory impact assessment as adequate, and therefore sufficient to inform a decision. That said, the OBPR considered that the impact statement departed from good practice as it lacked sufficient evidence of a conflict of interest between proxy advisers and their clients and does not demonstrate that the preferred option yields the highest net benefit over the status quo.

CPA Australia spokeswoman Jane Rennie said: 

“It wasn’t only that the substance of these reforms was bad, the purpose and processes underlying them were manifestly inadequate. The reforms were made without adequate justification, explanation, consultation and consideration. These are pretty fundamental requirements for good law-making. It’s appropriate that they have been disallowed in the Senate. We were concerned that the reforms could limit investors’ ability to exercise their voting rights by reducing their access to information about companies’ practices and performance. This would in turn decrease the accountability of boards and management and deliver poor outcomes for shareholders, especially superannuation fund members.”

This is not the first time that regulations such as Frydenberg’s now shot-down rules have been brought into question. Notably, independent watchdog Australian Securities and Investments Commission, which undertook a review of proxy advice services in 2017, found no further regulation of proxy advice was needed. At the time, it stated there was “no consensus on any specific areas in which existing industry guidance on the engagement process was deficient and should be updated”.

While the regulation has been unsuccessful, Treasurer Frydenberg is likely to revisit this regulatory area later this year after further review by the Government. Although with the Australian Federal Election later in the year, the regulatory focus could change.

Read Minerva’s past coverage of this ongoing story.

Last Updated: 11 February 2022