Treasury has released a Proposal Paper for the Financial Accountability Regime (“FAR”). When legislated, FAR will impose a raft of significant new obligations on regulated entities, directors and senior management for many in the financial services industry.
What is the FAR?
The proposed Financial Accountability Regime is part of the Federal Government’s response to the recommendations of the Financial Services Royal Commission regarding governance, accountability and culture, including the recommendation to expand the scope of the current Banking Executive Accountability Regime (“BEAR”).
FAR will impose a stronger accountability framework on APRA-regulated entities and their senior executives and directors. The Government’s stated intention is to “increase the transparency and accountability of financial entities in [APRA regulated] industries and improve risk culture and governance for both prudential and conduct purposes”.
The new regime will be both an expansion of BEAR – to cover a broader range of APRA-regulated entities – and a strengthening of the obligations imposed by BEAR on institutions and individuals. When legislated, FAR will replace BEAR in its entirety.
Which institutions will be affected?
All small, medium and large authorised deposit-taking institutions (“ADIs”) currently subject to BEAR will be affected by the proposed expansion of the regime.
In addition, FAR will extend to:
- all operators of APRA-regulated superannuation entities (RSE licensees);
- all general and life insurers, and private health insurers; and
- all licensed non-operating holdings companies.
While the Royal Commission recommended a staggered commencement of the new regime, the Proposal Paper does not specify an implementation timetable.
Separate to the Royal Commission’s recommendations, the Government has also committed to expanding BEAR to entities solely regulated by ASIC (e.g., AFSL holders which are not also otherwise regulated by APRA). Those entities are not covered by the current Proposal Paper, and the Government will consult on this after FAR is implemented for APRA regulated entities.
How is this different to BEAR?
If legislated in the form outlined in the Proposal Paper, FAR would:
- expand the regime to cover all RSE licensees, insurers and licensed non-operating holding companies (as well as all ADIs);
- be jointly administered by APRA and ASIC;
- require FAR entities to identify and register accountable persons for an increased number of roles and responsibilities. This will include individuals who have senior executive responsibility for any significant business division/s, dispute resolution, remediation programs, breach reporting, or setting incentives. It would also include an accountable person with end to end accountability for management of each product offered by the entity, although the scope of this responsibility remains subject to further consultation. Certain responsibilities are also prescribed for insurers (e.g. responsibilty for the actuarial and underwriting functions) and for RSE licensees (e.g. financial advice services). Under BEAR, a single individual can fulfil multiple prescribed responsibilities;
- impose new Accountability Obligations on both the FAR entity and on individual accountable persons. This would include a new obligation on accountable persons to take reasonable steps, in conducting the responsibilities of their position, to ensure that the entity complies with its licensing obligations. This places conduct matters squarely within FAR’s domain, going beyond BEAR’s original focus on prudential standing and prudential reputation;
- impose potential civil penalty liability on individual accountable persons (who, under BEAR, are already subject to the risk of disqualification, remuneration consequences and dismissal). This could potentially impose material new liability on persons who have not historically been subject to liability as officers under the Corporations Act;
- increase the maximum possible civil penalties for institutions, and potentially the range of breaches for which a civil penalty might be imposed; and
- simplify institutions’ obligations to defer executive remuneration and submit “accountability statements” and “accountability maps” to APRA and ASIC.
A table summarising the key additional requirements of FAR, relative to BEAR, is below.
Implications for accountability in financial services
While dual administration and the extension of BEAR to new entities has been anticipated since the Royal Commission released its report a year ago, the FAR proposal reflects a significant expansion of the regime and its consequences. In particular, the introduction of new Accountable Person roles, expanded Accountability Obligations and civil penalties for individuals would materially alter the accountability landscape for senior management and directors – including by imposing heightened standards on individuals who have not been subject to directors’ and officers’ duties under corporations laws. Affected entities will need to carefully consider whether their existing operating structures and governance arrangements align to the proposed approach.
It is unclear weather the new requirements of FAR will also apply to APRA, ASIC and their respective accountable persons, in line with the recommendations of the Royal Commission. APRA and ASIC published their accountability statements in December 2019.
The Government intends to consult on and introduce legislation to Parliament by the end of 2020.
No implementation timetable has been proposed at this stage. The Royal Commission report recommended sequential implementation (starting with the largest RSE licensees, then the remaining RSE licensees, largest insurers, other insurers). Whether the Government (informed by APRA’s BEAR experience) also prefers sequential implementation over a single commencement date remains to be seen.
The deadline for submissions to Treasury’s consultations is next Friday 14 February 2020. If you are interested in making a submission, the listed contacts would be pleased to hear from you.