FAR moving forward: What’s new and what next?

The Financial Accountability Regime Bill 2021 (FAR Bill) was introduced in the House of Representatives on 28 October 2021. This legislation will replace and extend the Banking Executive Accountability Regime (BEAR) (which currently only applies to authorised deposit-taking institutions (ADIs)) to all APRA-regulated entities – with some key changes, including:  

• the Financial Accountability Regime (FAR) while be jointly administered by APRA and ASIC;
• FAR will cover ADIs, general insurers, life insurers, private health insurers and RSE licensees, as well as their ‘significant related entities’. Like BEAR, FAR will apply to Australian entities, as well as entities that are incorporated and operated outside of Australia that are captured as significant related entities;
• there is a new positive obligation for accountable persons to take reasonable steps to prevent material contraventions of a number of financial services laws;
• FAR expressly recognises that persons may be subject to civil penalties if they are found to have accessorial or ancillary liability (e.g. if the person assists, aids or abets a contravention of FAR); and
• there is a new directions power that provides ASIC or APRA (with the agreement of the other regulator) with the power to give broad directions if it has reasonable grounds to believe an accountable entity or accountable person has contravened or is likely to contravene a provision of the FAR and believes that the direction is reasonably necessary.

Once passed by Parliament, FAR will have effect as follows:

• for the banking industry, it will apply from 1 July 2022 (or six months after Royal Assent, whichever is later); and
• for the insurance and superannuation industries, it will apply from 1 July 2023 (or 18 months after Royal Assent, whichever is later).

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We suggest that APRA-regulated entities start looking at their governance and accountability structures to identify changes they may need to make to comply with FAR. For ADIs, it will be a matter of looking at their existing BEAR governance documents, structures and processes and identifying if any changes are needed to comply with FAR. For superannuation trustees, life insurers and general insurers, many of the FAR obligations will feel familiar, as the obligations can be matched to existing financial services regulatory regimes, particularly the AFS licensing regime and the APRA prudential framework. As the superannuation and insurance sectors undergo seismic regulatory and structural changes, the implementation of FAR can be used to complement in-flight regulatory reform projects, spanning rationalisation activity, revisions to decision-making and delegation frameworks, operational simplification and regulatory engagement frameworks. The key complexity will be effectively integrating FAR into existing multifaceted governance and compliance frameworks. Based on our experience advising on the implementation of BEAR, it is helpful to start early when there is less time pressure, particularly where it would make sense to undertake any organisational restructure as part of the implementation process.

At a high level, FAR will require all APRA-regulated entities, known as ‘accountable entities’, to undertake a mapping exercise to identify all parts or aspects of its operations and apportion individual accountability for each part or aspect to a senior executive. These senior executives, as well as the accountable entity’s directors, must be registered with the regulators as ‘accountable persons’.

Accountable persons include:

• executive and non-executive directors of the accountable entity;
• executives who fall within the ‘general test’ because they have responsibility for management or control of the accountable entity or a significant or a substantial part or aspect of the entity’s (or group’s) operations; and
• executives with specific responsibility for key functions. These key functions will be determined by the Minister, i.e. the Treasurer.

The accountable entity and its accountable persons each have ‘accountability obligations’, including acting with due skill, care and diligence.

Where an entity meets an enhanced notification threshold, it will also be required to prepare and lodge with the regulators an accountability statement for each accountable person (setting out the person’s specific responsibilities) and an accountability map for the entity (covering how responsibility for the entity’s operations are divided, the names of all accountable persons and details of reporting lines and lines of responsibility).

From our experience with the BEAR implementation, this accountability mapping can play an important role in strengthening and enhancing clarity in overall governance arrangements. This is particularly the case for superannuation trustees and insurers within large corporate groups, where intra-group resourcing arrangements invariably mean that key employees perform functions across a range of regulated entities.

FAR will also require a minimum portion of each executive accountable person’s variable remuneration to be deferred and to be subject to reduction if they fail to meet their accountability obligations.

There are also various requirements to notify events to the regulators, including where accountable persons are appointed, cease or are dismissed, where their remuneration is reduced for failure to comply with their accountability obligations or where the entity has reasonable grounds to believe there has been a breach of accountability obligations or key personnel obligations.

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In addition to the recommendations above, we suggest that APRA-regulated entities: begin to identify their likely accountable person candidates and assess whether their roles overlap or are clearly delineated; start compiling a list of the key responsibilities of those persons; and look at their remuneration structures and assess their ability to defer variable remuneration for accountable persons.

There have been a number of material changes to the FAR Bill following Treasury’s consultation on the Exposure Draft. We outline some of the most important changes below.

New obligation on accountable persons to take reasonable steps to prevent material contraventions of financial laws

From its earliest consultation on FAR, Treasury proposed a new obligation for accountable persons to comply with financial services laws. Following feedback at each stage of the consultation process, Treasury has sought to amend this new obligation to address concerns raised in relation to its scope.

The Exposure Draft included a positive obligation to take reasonable steps to ensure compliance with the specified financial services laws.

The FAR Bill, however, proposes to introduce an obligation for accountable persons to take ‘reasonable steps in conducting’ the responsibilities of their position ‘to prevent matters from arising that would (or would be likely to) result in a material contravention by the accountable entity’ of the specified laws.¹ The reframing of the obligation (compared to the Exposure Draft) is a positive step, as it narrows the scope of what is required.

The ‘reasonable steps’ style obligation is not new to financial services law, and exists in different forms such as in the AFS licensing regime and the Design and Distribution Obligations regime. While the move to a ‘reasonable steps to prevent a material contravention’ obligation (away from an absolute ‘reasonable steps to ensure compliance’ obligation) is a positive step, accountable persons should still be aware that this obligation is onerous, and a robust decision-making and record-keeping framework will be critical to demonstrating reasonable steps have been taken.

The Explanatory Memorandum for the FAR Bill also includes guidance on what is meant by a ‘material contravention’ – it is intended to capture “material and significant breaches” rather than “occasional minor or technical contraventions”, although “a large number or repeated occurrence of minor breaches could indicate a systemic issue of non-compliance which could amount to a material contravention.”²

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To assist accountable persons with complying with this obligation, it is important to: identify the particular financial services legal requirements that are relevant to each accountable person’s responsibilities; have a robust compliance system (including relevant frameworks, policies and procedures) in place and identify which parts of the compliance system the accountable persons are relying on to prevent material contraventions; establish a process for ongoing reporting to, and monitoring by, the accountable person of compliance with the relevant laws and any emerging risk areas, to enable the accountable person to identify emerging risks of non-compliance early and take action to prevent a material breach of the laws; and make sure that there is a good record-keeping process (in case the accountable person ever needs to prove that they took reasonable steps).

Joint accountability removed

One of the areas of concern in relation to BEAR was that where two accountable persons held the same responsibility, BEAR imposed joint accountability.

Unlike under BEAR and the Exposure Draft, the FAR Bill replaces the concept of joint accountability so that where two or more accountable persons have the same responsibility, they have the same obligations in relation to the responsibility that they would have if it were solely that person’s responsibility.³  It is not entirely clear what this phrase means (in comparison to ‘joint accountability’).

The Explanatory Memorandum provides that this is intended “to prevent accountable persons from avoiding their obligations under the regime by shifting responsibility to other accountable persons.”⁴

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We suggest addressing personal responsibility for any overlapping areas in accountable person workshops in the lead up to the commencement of FAR so that responsibilities are clearly defined and allocated.

Civil penalties for individuals

Treasury’s initial consultation considered whether to introduce civil penalties for breaches of FAR by individual accountable persons (under BEAR, civil penalties were limited to ADIs).

While Treasury did not proceed with this proposal, an accountable person (or other individuals) could be subject to civil penalties for ancillary / accessorial liability (e.g. where a person attempts, aids, abets, procures, induces or is in any way knowingly concerned in or party to a contravention, or conspires with others to effect, a contravention),⁵ even though the FAR Bill does not include civil penalties as a direct remedy for non-compliance by an accountable person. 

While the Exposure Draft included a provision for dealing with the maximum civil penalty that may be imposed for a breach of FAR for a body corporate, it did not address the maximum penalty for an individual. Now, the FAR Bill includes a maximum penalty for individuals, being the greater of 5,000 penalty units (currently $1.11 million) or, if the Court can determine the benefit derived and the detriment avoided because of the contravention, that amount multiplied by 3.⁶

Although an individual can potentially be liable for a civil penalty under the ancillary liability provisions, the FAR Bill departs from the stringent prohibition on indemnities and insurance under BEAR so there is no prohibition relating to indemnification or insurance for accountable persons (although the prohibition on indemnification and insurance relating to breaches by the accountable entity remains).⁷

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In light of the potential provisions for civil penalties to be imposed on accountable persons or other individuals for ancillary liability: we suggest checking your deeds of indemnity and insurance and insurance policies to confirm coverage of accountable persons; and be aware that individual accountable persons may seek or expect higher salaries to compensate them for this risk.

New exceptions to registration requirements

The FAR Bill has introduced a new exception for the prohibition on a person being an accountable person if they are not registered, which applies where a person becomes an accountable person by being appointed as a director of a body corporate at a general meeting. However, this only applies for the first 30 days of being an accountable person.⁸ This is in additional to the 90-day grace period where a person takes on an accountable person role due to a temporary or unforeseen vacancy.

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In designing your FAR governance / compliance policies, factor in these temporary exceptions and establish supporting HR processes to ensure compliance.

The FAR Bill provides for joint administration of FAR by ASIC and APRA, and includes a number of wide powers. Certain functions and powers may only be performed or exercised with agreement of the other regulator (although there are exceptions).

APRA and ASIC are required to enter into and publish an arrangement relating to administration of FAR within 6 months of its commencement.⁹

Although there is a joint administration arrangement, certain functions and powers of ASIC (e.g. certain regulatory and enforcement powers, determining what is or is not, and how to work out, variable remuneration and requesting further information in relation to applications to register an accountable person) are limited so that they only apply to accountable entities that hold an Australian financial services licence or credit licence.¹⁰

We noted in our HSF submission on the Exposure Draft the importance of regulator guidance in relation to the joint administration arrangements being published well in advance of the implementation dates for FAR, however the relevant provisions in the FAR Bill did not address this.

This is a key area in which we anticipate there may be some teething problems. Historically, there has been confusion and duplication for dual-regulated entities where both ASIC and APRA have regulatory remit over a particular matter, as it is not immediately apparent which regulator has primary carriage of the matter. The anticipated joint administration arrangement will (hopefully) go some way in resolving some of this ambiguity for the industry. It will also be interesting to see whether one regulator is given a specific mandate over receiving reports of contraventions of the FAR obligations and undertaking enforcement activities relating to FAR.

We are hopeful that the regulators will provide details of their administration arrangements and relevant guidance early on, to allow the industry to efficiently and effectively implement FAR.

Directions power for non-compliance with FAR

The FAR Bill includes a new power to give directions if ASIC or APRA (with the agreement of the other regulator) has reasonable grounds to believe an accountable entity or accountable person has contravened or is likely to contravene a provision of the FAR and believes the direction is reasonable necessary to ensure compliance.¹¹

This provision is probably the most concerning aspect of the FAR. Stated bluntly, it gives two regulators the power to instruct financial services companies how to operate their businesses.

The types of directions that can be given are wide, and include to:

• take specified action to deal with the issue;
• order an audit of the affairs of the entity or a significant subsidiary at the entity’s expense;
• make changes to the entity’s or a significant subsidiary’s systems, businesses or operations;
• reconstruct, amalgamate or otherwise alter all or part of the business, structure or organisation of the entity, significant subsidiary or group; or
• do or refrain from doing anything else in relation to the affairs of the entity or significant subsidiary.¹²

Like many others, we expressed concerns regarding the directions power in our HSF submission on the Exposure Draft and suggested that this wide power be removed. Unfortunately, the directions power included in the FAR Bill remains in the same form as in the Exposure Draft.

The FAR Bill provides that where a regulator gives a direction in relation to an accountable person’s breach or likely breach of the Act, the Regulator must provide the person with a copy of the direction.¹³ Similarly, this requirement applies where the regulator exercises its power to direct accountable entities to reallocate responsibilities.¹⁴

We note that this power has been considered in other contexts in the past, but was not previously adopted. We expect that it is only a matter of time before a similarly broad power is introduced in other contexts as well.

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The availability of a broad directions power is a reminder of the importance of having appropriate and robust governance, risk and compliance systems, frameworks, policies and procedures in place and robust processes for monitoring, identifying, escalating and remediating issues to mitigate the risk of this power being utilised by the regulators. Now is the time to revisit, test and where necessary, enhance those arrangements, ahead of the commencement of FAR.

BEAR was introduced in 2018, and in 2019, the Federal Government committed to taking action to address the issues identified by the Financial Services Royal Commission, which included extending the scope of BEAR to cover all APRA-regulated entities.

Treasury began consulting in early 2020 on a proposal to expand BEAR in order to reflect Commissioner Hayne’s recommendations.

In July 2021, draft legislation was released and submissions were invited; you can find a copy of the HSF submission here. 

The objects of FAR are:

• to provide for a strengthened accountability framework for financial entities in the banking, insurance, and superannuation industries, and persons who hold certain positions within those entities; and
• to confer on APRA and ASIC greater information gathering, investigation, and enforcement powers.¹⁵