Consultation on draft legislation to establish the Financial Accountability Regime

19 minute read  19.07.2021 Kate Hilder, Siobhan Doherty

The government has released long awaited draft legislation that will establish the Financial Accountability Regime. We provide an overview and discussion of the key measures.

Key takeouts

Draft Financial Accountability Regime Bill 2021 has been released for consultation: Government has released for consultation an exposure draft of the legislation to establish the Financial Accountability Regime (FAR) (which will replace the Banking Executive Accountability Regime or BEAR). FAR proposes to extend strengthened, but BEAR-like accountability requirements, to other APRA-regulated entities and to the directors/senior executives of those entities in accordance with the government's response to several Hayne Commission recommendations.

Proposed timing: The deadline for submissions on the proposal paper is 13 August 2021. If legislated in its current form, the new regime will apply to:

  • authorised deposit-taking institutions (ADIs) and their authorised non-operating holding companies (NOHCs) from the later of 1 July 2022 or six months after commencement of the legislation; and
  • insurers (and their registered or authorised NOHCs) and registrable superannuation entity (RSE) licensees from the later of 1 July 2023 or 18 months after the commencement of the legislation.

Similar (but not the same) as the BEAR?

Though the structure of the FAR is broadly similar to the BEAR, FAR is proposed to differ in a number of respects including (among others) that:

  • the regime will be jointly administered by APRA and ASIC (although there is some division of responsibilities);
  • FAR will incorporate end-to-end executive product responsibility requirements;
  • smaller entities will be exempt from requirements to provide accountability statements/maps to the regulators;
  • all FAR entities will be subject to the same deferred remuneration obligations, regardless of size or seniority of accountable person role; and
  • accountable persons will be subject to an additional accountability obligation (ie not included in existing BEAR obligations) in relation to ensuring the entity complies with specified financial services laws. The draft legislation does not introduce potential civil penalties for accountable persons, a key departure from the January 2020 FAR proposal paper.

Some details are yet to be finalised: Some details of the regime (eg the definitive list of 'prescribed responsibilities' or positions of accountable persons, the threshold for determining which accountable entities fall into the 'enhanced compliance' category and details/regulatory guidance around the joint administration of the regime and regulatory expectations) are yet to be finalised.


Purpose of the FAR? The aim is ultimately to strengthen and increase individual and entity level accountability across the financial services sector, including for non-financial conduct risk. The draft explanatory memorandum states: 'A key objective of the Financial Accountability Regime is to improve the operating culture of entities in the banking, insurance and superannuation sectors and to increase transparency and accountability across these sectors - both in relation to prudential matters and conduct related matters'.

Overview: The proposed new Financial Accountability Regime (FAR)

Following the release of a proposal paper in January 2020 (summarised in The proposed new Financial Accountability Regime: new minimum standards for entities, boards and senior management across the economy?), the government is consulting on draft legislation proposing to establish the long-awaited FAR. In broad terms, the proposed reforms are largely consistent with those contemplated in the January proposal paper.
The deadline for submissions to the consultation is 13 August 2021.

A high level overview of the key measures is below.

What is the FAR?

If legislated, the FAR (which will replace the BEAR) proposes to extend strengthened, but broadly BEAR-like accountability requirements to other APRA-regulated entities and to the directors/senior executives of those entities. This is in accordance with the government's response to several Hayne Commission recommendations.

Importantly, unlike the existing BEAR, the FAR will be administered jointly by the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC).

Why is the FAR being introduced?

The FAR will implement the government's response to the following Hayne recommendations.

  • Recommendation 3.9 – the BEAR be extended to all RSE licensees
  • Recommendation 4.12 – the BEAR be extended to all APRA regulated insurers
  • Recommendation 6.6 – ASIC and APRA jointly administer the BEAR
  • Recommendation 6.7 – the obligations be amended to make clear that an ADI and accountable persons must deal with APRA and ASIC in an open, constructive and co-operative way
  • Recommendation 6.8 – the BEAR be extended to all APRA-regulated financial services institutions and that APRA and ASIC should jointly administer those new provisions.

In addition, the FAR will incorporate the government's response to Hayne recommendation 1.17. This recommended that APRA should determine a responsibility (under the BEAR) within each ADI for all steps in the design, delivery and maintenance of all products offered to customers, and any necessary remediation for customers in respect of any of those products (executive BEAR product responsibility).

The draft explanatory memorandum makes clear that the new individual and firm-level accountability framework that will be introduced by the FAR is intended to lift the standard of risk and governance culture across the financial sector, consistent with the spirit of the Hayne recommendations. The explanatory memorandum states:

'A key objective of the Financial Accountability Regime is to improve the operating culture of entities in the banking, insurance and superannuation sectors and to increase transparency and accountability across these sectors - both in relation to prudential matters and conduct related matters'.

Who will the FAR apply to?

Accountable entities

If legislated, the FAR will impose accountability obligations on 'accountable entities', ie. APRA-regulated entities authorised by the regulator to carry on a banking, insurance or superannuation business. This group includes:

  • ADIs and their authorised NOHCs
  • general insurers and their authorised NOHCs
  • life insurers and their registered NOHCs
  • private health insurers
  • RSE licensees

These obligations will also apply to foreign accountable entities (in the banking or insurance sectors) but only to the operations of their Australian branch.
While the FAR will not impose direct legal obligations on the 'significant related entities' of accountable entities (see: s11 and s12 of the draft Bill), accountable entities will be required under the new regime to take 'reasonable steps' to ensure that their 'significant related entities' comply with certain FAR obligations.

Accountable persons

The board and certain senior executives within accountable entities, referred to in the draft Bill as 'accountable persons', will also be directly regulated by the FAR and face sanctions for non-compliance with their FAR obligations.

Accountable entities will need to determine who within their organisation is an 'accountable person' by reference to two considerations:

  • whether the person holds a position (either within the accountable entity or within a significant related entity) that has 'executive responsibility for management or control of the accountable entity or a significant or substantial part or aspect of the operations of the accountable entity or the accountable entity and its group of significant related entities'; and
  • whether the person holds one (or more) of the prescribed responsibilities or positions listed in rules to be made by the Minister. These rules will be finalised following a separate consultation which is expected to commence in September/October 2021. Attachment A at p6 of the policy proposal paper accompanying the draft legislation includes a full list of proposed prescribed responsibilities and positions.

Application to a much broader range of functions within FAR entities

The draft explanatory memorandum indicates that, in practice, the FAR is intended to apply to a fairly limited group – ie. to 'only include the directors and senior executives of an entity, such as the Chief Executive Officer and officers reporting directly to the Chief Executive Officer' rather than to lower level executives. However, the indicative list of prescribed responsibilities and positions is still much broader than under the BEAR.

The proposed FAR accountability framework

Similar to the BEAR, the FAR will impose:

  1. accountability obligations;
  2. key personnel obligations;
  3. notification obligations; and
  4. deferred remuneration obligations on APRA-regulated entities.

Accountability obligations

Accountable entities

Similar to the BEAR, the FAR would require accountable entities to take reasonable steps to:

  • conduct their business with honesty and integrity, and with due skill, care and diligence;
  • deal with APRA and ASIC in an 'open, constructive and cooperative way';
  • in conducting its business, prevent matters from arising that would (or would be likely to) adversely affect the entity's prudential standing or reputation; and
  • ensure all accountable persons and each of the entity's significant related entities meet their accountability obligations under the FAR.

Accountable persons

Similarly, accountable persons will be required to: a) act with honesty and integrity, and with due skill, care and diligence; b) deal with APRA and ASIC in an open, constructive and cooperative way; and c) take reasonable steps in conducting their responsibilities to prevent matters from arising that would (or would be likely to) adversely affect the entity’s prudential standing or reputation.

New obligation: In addition to these obligations, the FAR would introduce a new obligation (ie. not included in existing BEAR obligations) requiring accountable persons to take reasonable steps in conducting their responsibilities as an accountable person to ensure the entity complies with specified laws governing the entity (see: s19(d) of the draft Bill).

Section 20 of the Draft Bill sets out a non-exhaustive list of what may constitute reasonable steps in meeting this and the other relevant accountability obligations listed above, being the following (the last two of which are additions from the equivalent list in the BEAR legislation):

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

End to end product responsibility

It's also proposed that individual end-to-end product responsibility will be 'subsumed' into the FAR by including it in the list of 'prescribed responsibilities and positions' for accountable persons, to be set by the Minister. This would implement the government's response to Hayne Recommendation 1.17.
Accordingly, Attachment A of the policy proposal paper includes the position of: 'Senior executive responsibility for management of the accountable entity’s end-to-end product responsibility'. It's suggested that this is likely to be the CEO of a small accountable entity or the head of a business division in a more complex accountable entity.

Key personnel obligations

If legislated, accountable entities will be required to ensure that:

  • the responsibilities of their accountable persons (ie. the accountable persons of the accountable entity and its significant related entities) cover all aspects of their business;
  • every accountable person is registered with the regulators before occupying an accountable person role (with certain exceptions, eg. where the person holds the position for 90 days or less); and
  • accountable person applicants have not been disqualified by the regulators from holding an accountable person position.

Accountable entities will need to sign a declaration that a person seeking registration as an accountable person is suitable to hold the position.

To streamline this process, an information paper accompanying the draft legislation flags that registration of accountable persons will occur through a single portal. This portal will also function as a single point of contact for FAR-related requests, queries and data collection more generally, on an ongoing basis. Information submitted by accountable entities through the single portal would be made available to both APRA and ASIC, removing the need for entities to submit the same information to each regulator separately.

Registration of accountable persons – no veto power over new appointments

As recommended by the APRA Capability Review, the original proposal document released in January 2020 proposed to give APRA a new (reserve) 'veto' power over the appointment/reappointment of directors and senior executives 'where APRA holds existing relevant information regarding a particular person that conflicts with the obligations that would be placed on him or her as an accountable person'.

This has not been included in the draft Bill. Under the draft Bill, provided that an application to register a person as an accountable person:

  • is complete and submitted in the approved form;
  • includes a signed declaration that the accountable entity is satisfied the person is suitable to be an accountable person;
  • is accompanied by an accountability statement for the person (where required); and
  • is supplemented by any further information requested by the regulators in relation to the application, the regulators will register the person 21 days after the day the application is submitted. Where further information has been requested, the regulators will register the person 21 days after it is provided to the regulators (see: s38 of the Draft Bill).

Deferred remuneration obligations

Broadly, the FAR would require all accountable entities and their significant related entities to defer at least 40% of the variable remuneration for each of their accountable persons for a minimum of four years (except in limited circumstances), if the amount that would be deferred is AU$50,000 or more. Interestingly, proposed CPS 511 would require a higher deferral of 60% for CEO’s of significant financial institutions (as defined).

The explanatory memorandum explains this four year deferral requirement has been drafted to align with the provisions of APRA's proposed prudential standard (CPS 511 Remuneration) (summarised in Take two: APRA consults on new less prescriptive remuneration requirements).

Variable remuneration means so much of a person's total remuneration (including cash and equity based remuneration) that is conditional on the achievement of objectives, such as performance metrics and service requirements according to the explanatory memorandum.

There would be no requirement to defer variable remuneration if variable remuneration is not a feature of a particular accountable person's remuneration structure (eg, if the accountable person receives only fixed pay (eg, salary and superannuation) or directors fees).

Under s23 of the Draft Bill, accountable entities will also need to ensure their remuneration policy 'requires' a reduction in the variable remuneration of accountable persons who fail to comply with their accountability obligations. The reduction must be proportionate to the failure (potentially to zero) and need not be limited to variable remuneration relating to a period in which the failure occurred.

Accountable entities will also be required to take reasonable steps to ensure that their significant related entities comply with these obligations.

The deferred remuneration obligations will not apply to an accountable person:

  • while the person is filling a 'temporary or an unforeseen vacancy' (provided the person is not registered as an accountable person), for the first 90 days that they fill the position; or
  • whose deferred variable remuneration for the financial year does not meet a minimum threshold. This will be $50,000 or more, unless the Minister makes an instrument specifying a different amount.

Notification obligations

If legislated, entities will not be classified as small, medium and large (as is the case under the BEAR) but instead split into two categories: 'core compliance entities' (which will not be required to submit accountability maps/statements to the regulators) and 'enhanced compliance entities' (which will have to do so).

  • Core compliance entities: All accountable entities will be required to provide the regulators with certain 'core' information about the entity and its accountable persons (set out in s29 of the draft Bill). This information includes: notifying the regulators if a person ceases to be an accountable person; notifying the regulators if the entity 'reasonably believes' that it has breached its key personnel or accountability obligations' (and/or when an accountable person has breached their accountability obligations) and/or when a 'material change' occurs to information included on the register of accountable persons about an accountable person.
  • Enhanced compliance entities: Entities that meet an 'enhanced notification threshold' will be required also to provide accountability statements and accountability maps to the regulators and to notify the regulators of material changes to these documents.

What is the threshold?

The threshold to determine which accountable entities will need to comply with the enhanced notification requirements will be specified in rules to be set by the Minister. A 'Questions and Answers' document accompanying the draft Bill indicates (consistent with the original proposal) that the enhanced notification requirements may apply to the following entities:

  • ADIs with total assets > $10b
  • RSE licensees with total assets > $10b (ie combined total assets of all RSEs under the trusteeship of a given RSE licensee.)
  • General and private health insurers with total assets > $2b
  • Life insurers with total assets > $4b

NOHCs?

The Question and Answer document also suggests that where an accountable entity within a corporate group meets the enhanced notification threshold, 'all other accountable entities within that corporation group including any licensed NOHCs would need to comply with the enhanced notification obligations irrespective of whether they meet the enhanced notification threshold'.

The same documents states that consultation on the threshold requirements is planned to occur in September/October 2021.

Compliance mechanisms

The draft Bill will give the regulators a variety of tools to administer/enforce compliance with FAR obligations. These include (among others):

  • the power to direct an accountable entity to reallocate responsibilities of its accountable persons
  • the power to require accountable entities, significant related entities and accountable persons to provide information or documents to them
  • the power to conduct investigations (including examinations) into possible FAR contraventions
  • the power to disqualify a person from being an accountable person for a period
  • the power to accept enforceable undertakings
  • the power to seek an injunction order from a Court
  • the power to apply to a Court for an order to enforce a requirement made under the Act

Civil penalties

If legislated, an accountable entity that breaches its FAR obligations may also be subject to a civil penalty. It's proposed that the maximum penalties under the FAR will be the greater of the following: a) 50,000 penalty units; b) the benefit derived/detriment avoided by the entity because of the contravention, multiplied by three (where this can be determined by the court); or c) 10% of the annual turnover of the body corporate (capped at $525m or 2.5m penalty units).

The draft explanatory memorandum states that 'in practice, it is intended that courts would determine which method provides the greatest penalty, and then use discretion to impose an appropriate penalty up to that amount'.
The original proposal suggested that individual accountable persons might also face civil penalties under the FAR. However, this has not been included in the draft Bill.

Joint administration/enforcement of the FAR

  • Division of responsibilities
    •  If legislated, ASIC will be limited to administering or enforcing the FAR in relation to 'an accountable entity that holds either an Australian financial services licence or an Australian credit licence, its significant related entities and accountable persons of these entities' (though this will not limit ASIC's powers to make legislative instruments under the Bill); and
    • APRA will enforce and administer the FAR in relation to all other entities, their significant related entities and the accountable persons of those entities (with the exception of the power to make a legislative instrument).
  • Collaborative approach

    • The draft Bill specifies a number of situations where the regulators would be required to form an agreement prior to making certain decisions or exercising certain powers eg the decision to disqualify an accountable person.
    • The draft Bill requires APRA and ASIC to enter into an arrangement outlining their general approach to administering and enforcing the FAR within six months of the commencement of the Bill, and before exercising certain powers/performing certain functions. If the regulators fail to reach an agreement, the Minister may determine an arrangement for this purpose.

An information paper accompanying the draft Bill provides more detail around how the joint administration of the FAR is expected to work, though this is 'subject to change depending on the finalisation of the FAR legislation' and may 'evolve as the regulators refine' their approach to joint administration of the regime.

The information paper flags that the regulators are expected to issue joint regulatory guidance prior to the commencement of the FAR, with any industry specific guidance released prior to the commencement of the FAR for each of the specific industries.

Proposed timing and plan for implementation of the FAR

  • The deadline for submissions to the consultation is 13 August 2021. The FAR legislation is being prepared for introduction and passage in the 2021 Spring sittings of Parliament.
  • Public consultation on the transitional and consequential provisions is expected to commence in August/September 2021.
  • Public consultation on the Minister's rules in relation to the list of prescribed responsibilities and positions and the enhanced notification thresholds is expected to commence in September/October 2021.

If legislated in its current form

  • the FAR will apply to ADIs and their authorised NOHCs from the later of 1 July 2022 or six months after commencement of the legislation. At this point, the BEAR would be repealed; and
  • the FAR would commence for insurers, their licensed NOHCs and RSE licensees from the later of 1 July 2023 or 18 months after the commencement of the FAR.

It's anticipated that the regulators will publish guidance to support implementation prior to the commencement of the changes. This guidance may include:

  • guidance on preparation of accountability statements and maps which may involve the regulators
  • publishing a suggested template and/or a list of key functions
  • guidance on what constitutes material changes that trigger notification obligations
  • industry specific guidance.

Preparing for the FAR

Given that the introduction of the FAR has been anticipated for some time, many financial services firms have already taken steps to review their existing governance structure and frameworks in anticipation.

In light of the detail now available in the draft Bill, and in light of the impact that the COVID-19 pandemic has had on working arrangements and the flow-on effects for supervision and oversight, entities may wish to revisit these reviews, as part of their broader FAR planning processes.

Accountable entities should expect to engage with the regulators

The information paper states that the regulators will engage with accountable entities ahead of formal implementation of the regime to support them in their preparations. It's suggested that in addition to taking the opportunity to 'properly examine and strengthen existing governance frameworks where appropriate' accountable entities should be prepared to engage with the regulators on the following issues:

  • for ADIs, the regulators may seek to understand how they intend to transition from the BEAR to the FAR including how they intend to meet their new and expanded obligations;
  • for 'enhanced compliance entities' the regulators will request draft accountability maps and statements to be provided for review and comment as part of the pre-implementation process; and
  • for 'core compliance entities' the regulators will request information about their preparations eg a draft list of accountable persons.

Broader implications: a new minimum governance standard across the financial services sector?

In the time that has elapsed since the Hayne Commission and following the release of the initial FAR proposal in January 2020, stakeholder expectations around executive accountability for non-financial risk (including accountability for cultural failings) have risen dramatically in Australia and internationally. The new accountability framework that will be introduced by the FAR is arguably very much in alignment with these increased expectations.

Over time, we expect that the FAR is likely represent a new minimum standard for boards and senior management across the economy.

[Source: Treasury Consultation: Financial Accountability Regime – July 2021]

Interested in this topic? You can find regular coverage of Hayne Commission-related developments in our weekly newsletter Governance News.

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