Draft Financial Accountability Regime legislation released for comment

On 16 July, Treasury released Exposure Draft legislation for the Financial Accountability Regime (FAR)(FAR Bill). While the FAR Bill has some similarities to the Banking Executive Accountability Regime (BEAR) in the Banking Act 1959 (Cth), there are some provisions of the FAR Bill which differ to BEAR and which raise concerns about over-regulation and uncertainty. These issues will be important for APRA-regulated superannuation trustees, life and general insurers, private health insurers, and Authorised Deposit-taking Institutions (ADI) to consider for implementation. Notably, BEAR will be repealed once FAR is in effect for ADIs and non-operating holding companies (NOHC) of ADIs.

In this first in a series of articles on FAR which will appear on FSR Australia Notes, we outline the key proposed features of the FAR Bill and related Treasury consultation documents.

Summary

FAR will:

• apply to all APRA-regulated entities, e.g. superannuation trustees;
• impose accountability obligations on those entities and their senior executives;
• be regulated both by ASIC and APRA; and
• will be subject to a range of remedies for non-compliance.

FAR will not impose civil penalty liability on accountable persons. This is a significant change to the position in the January 2020 consultation.

Who is subject to FAR obligations?

FAR will apply in respect to ‘accountable entities’: these are ‘constitutionally covered bodies’ (e.g. bodies corporate which carry on banking business within the meaning of the constitution, other than state banking) which are:

• ADIs, and NOHCs of ADIs;
• general insurers and life insurers, and NOHCs of these;
• private health insurers; or
• registerable superannuation entity (RSE) licensees.

FAR obligations will be imposed on accountable entities and on ‘accountable persons’ for those entities. ‘Accountable persons’ are senior executives who manage an accountable entity, or who occupy prescribed positions. The Minister will prescribe these positions by rule, and the FAR Bill does not list any specific positions. However, a Treasury Information Paper for the FAR Bill indicates that prescribed positions may include senior executives for:

• finance (the CFO);
• risk management (the CRO);
• anti-money laundering;
• end-to-end product responsibility;
• remediation; and
• breach reporting.

Additional prescribed responsibilities proposed for particular types of accountable entities include:

The Information Paper clarifies that in respect to the prescribed positions, “[t]he extended list [of prescribed functions] is not intended to capture middle or lower management who may only have day-to-day responsibility for certain parts or aspects of the accountable entity or its significant related entities”.

What obligations will the FAR Bill impose?

Similar to BEAR, the FAR Bill will apply obligations including in respect to:

• Accountable entities:
  • Accountability obligations: e.g. to take reasonable steps to conduct its business with honesty and integrity, and with due skill, care and diligence. Notably, the obligation under BEAR to take ‘reasonable steps in conducting those responsibilities to prevent matters from arising that would adversely affect … prudential standing or prudential reputation” has been broadened to also cover matters which would be likely to have that effect;
  • Key personnel: ensuring prohibited persons do not become accountable persons, and ensuring there is coverage of accountable persons across the accountable entity’s group;
  • Deferred remuneration: deferring certain variable remuneration, and imposing variable remuneration reductions for breach of accountability obligations. Pleasingly, the deferral period will be for a minimum of 4 years for FAR, rather than up to 6 years under the revised draft Prudential Standard CPS 511 Remuneration;
  • Notification: accountability statements and accountability maps (if required depending on the size of the accountable entity), breach of FAR obligations, and dismissal or suspension of an accountable person; and
• Accountable persons: for example:
  • by acting with honesty and integrity, and with due skill, care and diligence;
  • dealing with ‘regulator’ (i.e. each of ASIC and APRA) in an open, constructive and cooperative way; and
  • taking reasonable steps in conducting their responsibilities to ensure that the accountable entity complies with various laws administered by APRA or ASIC, including regulations and instruments made under those laws. This is a significant broadening of what was proposed in Treasury’s January 2020 FAR consultation paper, which was to “take reasonable…to ensure that the entity complies with its licensing obligations”.

What ‘reasonable steps’ can be taken to comply with FAR obligations?

FAR prescribes the following inclusive list of ‘reasonable steps’ that can be taken:

• having appropriate governance, control and risk management in relation to that matter; and
• having safeguards against inappropriate delegations of responsibility in relation to that matter; and
• having appropriate procedures for identifying and remediating problems that arise or may arise in relation to that matter; and
• taking appropriate action to ensure compliance in relation to that matter; and
• taking appropriate action in response to non-compliance, or suspected non-compliance, in relation to that matter.

Who has a regulatory role under FAR and what is that role?

Unlike BEAR, for FAR both ASIC and APRA will have a regulatory role. APRA and ASIC must enter into an arrangement relating to the administration of FAR within 6 months of commencement.

When will FAR be introduced into Parliament and when do regulated entities need to comply with FAR?

A Treasury Q&A document indicates that the FAR Bill will be introduced into Parliament in the Spring 2021 sittings. For ADIs and NOHCs, FAR is proposed to apply from the later of 1 July 2022 or 6 months after commencement of the FAR Bill. For other accountable entities, FAR is proposed to apply from the later of 1 July 2023 or 18 months after commencement of the FAR Bill.

What regulatory remedies are there for potential non-compliance with FAR?

These include:

• disqualification of accountable persons;
• appointment of an investigator;
• compulsory examination;
• compulsory directions (including to reconstruct, amalgamate or otherwise alter all or part of an accountable entity’s business, structure or organisation, and to re-allocate responsibilities);
• civil penalties for accountable entities. FAR will not impose civil penalty liability on accountable persons. This is a significant change to the position in the January 2020 consultation;
• enforceable undertakings; and
• injunctions.

What are some initial key issues with FAR?

Some issues include:

• the potential scope and effect of the accountability obligation in respect to laws administered by APRA or ASIC – this could prove to be a very onerous obligation in practice; and
• the scope of the directions power and secrecy provisions for that power.

When does consultation finish?

The consultation period ends on 13 August 2021.

If you have any questions about FAR, get in touch with on of our experts below.