Holding Redlich partner, Andrew Stone, has two decades of experience in the investment management and financial services industry, having acted for some of the largest global asset management groups in the establishment and operation of investment funds across a variety of areas, including real estate and infrastructure, public and private equity, and public and private debt.

In a conversation with Lawyers Weekly, Stone delved into key challenges for lawyers within the financial services and funds spaces, and outlined key regulatory concerns, as well as what will constitute best practice in the current market.

Key challenges and regulatory crackdowns

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According to Stone, there are two main categories of challenges for funds lawyers in 2024: economic and regulatory.

The former, Stone outlined, is a result of the current market and “softer” economic conditions.

“For so long as interest rates are perceived as being unstable, investors may have difficulty pricing assets with confidence. This potentially leads to hesitation in transacting. Lawyers tend to prefer economic conditions that are either really bad, or really good, since this tends to drive legal activity. Current market conditions may be considered neither really bad or really good, so this is a challenge for funds lawyers looking to stay busy,” he said.

“Despite the softer economic conditions, regulatory work continues. While this steady stream of work is welcome, it leads to another challenge – keeping up with the volume of regulatory changes.”

ESG was revealed to be one of the top key trends for the legal profession in 2023 and tipped to drive M&A throughout the year – and is an issue that now sits firmly in boardrooms and C-suites.

And as this regulatory area continues to grow, funds lawyers are likely to be impacted throughout this year, Stone said.

“Activism, as a means by which individuals and communities can shape government policy and society, has been a significant feature of the funds world for some 20 years or so. This presents challenges and opportunities for capital sources like superannuation funds and those managing these funds.

“For example, superannuation trustees are obligated to act in the best financial interests of their members. If an activist investment strategy may result in a lower financial return, without a commensurate lowering of investment risk, it becomes important for the trustee to examine the investment very carefully,” he explained.

“Continuing the ESG theme is the imminent introduction of mandatory climate-related financial disclosure in Australia. A bill has been introduced to Parliament and is currently before a Senate committee. If introduced in its current form, the bill will require mandatory disclosure by relevant entities of what are referred to as scope 1, scope 2 and scope 3 emissions. This will place a significant burden on those entities.”

The legislation is seeking to amend parts of the Australian Securities and Investments Commission Act 2001 and the Corporations Act 2001 (Cth) to introduce mandatory requirements for large businesses and financial institutions to disclose their climate-related risks and opportunities, according to the Australian Treasury.

The introduction of this bill comes after investor and consumer appetite for environmentally friendly purchases and investments has grown in recent years, resulting in an increased level of (and incentive for) greenwashing.

Greenwashing has also caught the attention of both ASIC and the ACCC, with a number of cases lodged since ASIC’s first court action in February last year, with regulatory crackdowns on greenwashing to continue moving forward.

“[Greenwashing is] a further regulatory focal point. This has been described by ASIC as misleading and deceptive conduct by another name. ASIC issued Info Sheet 271 in June 2022, offering some general assistance to market participants. In December 2023, the ACCC released a Making Environmental Claims guide, which sets out eight principles to help organisations comply with the Australian Consumer Law.

“Those principles include making accurate and truthful claims, having evidence to back up claims and to not omit important information. This seems straightforward, but the ACCC has also provided some additional commentary for guidance. For financial services industry participants, the ACCC guidance is also useful.”

Earlier this month, ACCC chair Gina Cass-Gottlieb revealed key priorities for the regulatory body this year, including “the existential importance of the net zero transition” and a focus on consumers.

The watchdog will also investigate false and misleading environmental claims, misleading conduct within the energy and telecommunications sectors, fair trading in the digital economy, unfair contract terms, and consumer guarantees.

“In addition to ESG, mandatory climate-related financial disclosure and greenwashing, other regulatory matters likely to keep funds lawyers busy this year include data breaches and regulation and the regulation of financial advice,” Stone continued.

“If we focus beyond the next 12 months, the next major development relates to the potential rewriting of the regulatory regime for financial services in Australia.”

Implications of the ALRC review

Following the Hayne royal commission, the Australian Law Reform Commission (ALRC) was tasked with reviewing the legislative framework for corporations and financial services regulation.

In January this year, Attorney-General Mark Dreyfus KC MP tabled the ALRC final report, Confronting Complexity: Reforming Corporations and Financial Services Legislation, which declared that the legislation governing Australia’s financial services industry is “a tangled mess”, tricky to navigate, costly to comply with, and unnecessarily difficult to enforce.

According to the ALRC, judges have described the current laws as being like “porridge”, “tortuous”, “treacherous”, and “labyrinthine”. Complexity in the existing legislation has also been revealed to cost businesses, consumers, investors and the economy at large.

“After more than 20 years of development, the legislative framework for corporations and financial services regulation is no longer fit for purpose. The existing legislative framework is unnecessarily complex, and complexity only continues to accrue,” the ALRC stated in the report.

The report made 58 recommendations to streamline financial services legislation, including the Corporations Act 2001 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth) – but Stone said that the new reforms may evolve to be as complex as the current laws. “The ALRC proposes to replace many of the regulations and regulatory guides issued by ASIC with what are referred to as ‘scoping orders’ and a ‘rulebook’. It remains to be seen whether the ALRC’s recommendations will be adopted or not,” he said.

“I am conscious that the financial services market can be a complex environment on a number of levels. My concern is that over time, any new regime may evolve into something that is equally as complex as what we have now.”

Best practice moving forward

2024 will demand resilience, adaptability, and a commitment to excellence from funds lawyers. By embracing change, staying connected with stakeholders, and prioritising regulatory compliance, legal professionals can effectively navigate the complexities of the funds landscape.

“Funds lawyers may wish to familiarise themselves with ASIC’s enforcement priorities document for 2024, which was released at the end of last year and highlights 12 key areas the regulator will focus on throughout the year. My recent experience with clients tells me that what ASIC says are their enforcement priorities is very closely aligned with what they then prioritise,” Stone added.

“ASIC states that their regulatory surveillance will focus on distribution failures, greenwashing and predatory lending. Predatory lending is possibly a significant focus because the cost of living is a hot topic, and there may be more stretched borrowers in the market. In addition, rising interest rates are bringing credit, particularly private credit, into the market.”

Earlier this month, Holding Redlich, led by Stone, acted for Richmond Bridge, UniSuper and ISPT in relation to the establishment of an investment fund for the acquisition of a major landholding in Badgerys Creek.

According to the firm, it is anticipated that the property will house manufacturing, warehouse and logistics tenants in more than 400,000 square metres of gross floor area with an expected end value of almost $4 billion, potentially significantly more.

This deal, Stone said, offers hope for increased activity in the current market moving forward.

“The economic cycle and ongoing regulatory change can be challenging, but this also presents opportunities. My recent transaction for Richmond Bridge, UniSuper and ISPT on the structuring of an investment fund for the acquisition of Burra Park, a 280-hectare property located adjacent to the site of the new Western Sydney Airport, demonstrates that there is activity in the market for select assets,” he concluded.

“Aside from speaking to clients, I try to stay connected with my peers in the profession and industry as much as possible, and with industry associations and the regulators. I try to be proactive and engaged with what is going on in the industry day-to-day. By actively participating in conversations, promptly managing my emails and staying updated on LinkedIn, my day flows more smoothly, more efficiently and more effectively.”