Overview: The proposed new Financial Accountability Regime (FAR)
The government has released a proposal paper seeking feedback on plans to extend the Banking Executive Accountability Regime (BEAR) to all Australian Prudential Regulation Authority (APRA) regulated entities, and on making the Australian Securities and Investments Commission (ASIC) a joint administrator of the regime as recommended by the Hayne Commission.
The expanded regime will be called the Financial Accountability Regime (FAR).
Who will the FAR apply to?
In addition to all ADIs already subject to the BEAR, the new Financial Accountability Regime (FAR) will cover general and life insurers, private health insurers, superannuation entities, and licensed non-operating holding companies.
Following the implementation of the FAR to prudentially regulated entities, the government will consult on extending the FAR to solely ASIC regulated entities.
Why are the changes being made?
The aim is to increase the accountability and transparency of APRA-regulated entities
The Financial Accountability Regime (FAR) will extend the strengthened responsibility and accountability framework that currently applies to directors and the most senior executives of ADIs across all APRA regulated industries. The proposal paper says that the purpose of this is to 'increase the transparency and accountability of financial entities in these industries and improve risk culture and governance for both prudential and conduct purposes'.
Consistent with this, when announcing the consultation Treasurer Josh Frydenberg said that the proposed changes 'will ensure that senior executives of these financial entities will be more accountable for the activities of the organisation for which they are responsible and, consistent with the BEAR, impose strict consequences for those who fail to perform their roles with competence, honesty or integrity'.
Implementing Financial Services Royal Commission Recommendations
The proposal paper nominates implementation of the following recommendations as the government's 'first priority'.
- Recommendation 3.9 – the BEAR be extended to all Registrable Superannuation Entity (RSE) licensees.
- Recommendation 4.12 – the BEAR be extended to all Australian Prudential Regulation Authority (APRA) regulated insurers.
- Recommendation 6.6 – the Australian Securities and Investments Commission (ASIC) and APRA jointly administer the BEAR.
- Recommendation 6.7 – the obligations be amended to make clear that an authorised deposit-taking institution (ADI) and accountable person must deal with APRA and ASIC in an open, constructive and co-operative way.
- Recommendation 6.8 – the BEAR should be extended to all APRA regulated financial services institutions and that APRA and ASIC should jointly administer those new provisions.
Executive BEAR product responsibility
The FAR will also incorporate the government's response to recommendation 1.17 which 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 paper states that the 'work and outcomes' of the earlier consultation (see: Governance News 03/07/2019) will be 'subsumed into the FAR'.
[Note: The indicative list of particular responsibilities that APRA and ASIC may prescribe under the FAR includes product responsibility. See: Attachment B of the proposal paper].
Implementing Capability Review Recommendation 4.3: new 'non-objections power' for APRA
In addition, as recommended by the APRA Capability Review (see: Governance News: 19/07/2020), the government proposes 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'.
APRA's decision would be reviewable by the Administrative Appeals Tribunal.
What does the proposed FAR regime look like and how is it different from BEAR?
Similar to the BEAR, the FAR will impose: 1) accountability obligations; 2) key personnel obligations; 3) accountability map and accountability statement obligations; 4) notification obligations; and 5) deferred remuneration obligations on APRA-regulated entities. However, the FAR is not a facsimile of the BEAR.
[Note: Attachment A of the proposal paper (at p 11) includes a table summarising the key differences between the BEAR and the FAR.]
No additional accountability obligations (for entities) under the FAR
Similar to the BEAR, an entity will be required to take reasonable steps to:
- conduct its business with honesty and integrity, and with due skill, care and diligence
- deal with APRA in an open, constructive and cooperative way
- deal with ASIC in an open, constructive and cooperative way
- in conducting its business, prevent matters from arising that would adversely affect the entity's prudential standing or prudential reputation (applicable only to APRA regulated entities)
- ensure that each of its accountable persons meets their accountability obligations (the number of roles and responsibilities in the list prescribed by regulators for the purposes of defining an accountable person has been expanded under the FAR)
- ensure that each of its significant or substantial subsidiaries that are not subject to the FAR, comply with all of the other obligations as if the subsidiary were subject to the FAR (to the extent that the obligations are relevant to the subsidiary).
The proposal paper cautions that 'FAR entities with outsourcing arrangements will need to ensure that the FAR entity and accountable persons have adequate control and oversight of activities covered by the FAR'.
Additional obligation on accountable persons
Similar to the BEAR, accountable persons will be obliged to:
- act with honesty and integrity, and with due skill, care and diligence;
- deal with APRA in an open, constructive and cooperative way (noting that this will not displace legal professional privilege);
- deal with ASIC in an open, constructive and cooperative way (noting that this will not displace legal professional privilege); and
- to take reasonable steps in conducting those responsibilities to prevent matters from arising that would adversely affect the prudential standing or prudential reputation of the entity.
New obligation: In addition to these, the FAR proposes to introduce a new obligation requiring accountable persons to take reasonable steps in conducting their responsibilities as an accountable person to ensure that the entity complies with its licensing obligations.
The additional obligation 'extends the obligations of accountable persons beyond only conduct that adversely affects prudential standing or reputation of the entity to conduct that affects entities complying with obligations under each of the respective licensing regimes that apply' the proposal paper states.
Application to a much broader range of functions within FAR entities
Importantly, it's proposed that FAR obligations (which will be prescribed by ASIC and APRA) will extend to a significantly larger list of functions than is the case under the BEAR.
An indicative list of 'particular responsibilities' for each entity type is included in attachment B to the proposal (at p 14). It's proposed that, APRA and ASIC will be able to prescribe additional particular responsibilities over time and will also be able to prescribe particular responsibilities in respect of foreign entities subject to the FAR.
Smaller entities will be exempt from the requirement to submit accountability maps and statements to the regulators
Smaller BEAR entities have provided feedback to APRA that preparing, submitting and updating accountability maps and statements under the BEAR is a significant compliance burden. Coupled with this, APRA has found that accountability maps and statements are of 'most benefit for large and more complex institutions as they provide further clarity about their accountability arrangements'.
Accordingly, it's proposed that under the FAR, only entities with total assets over a certain limit (enhanced compliance entities) will be required to submit accountability maps and statements to the regulators.
To further reduce the compliance burden, the paper also proposes that accountability maps and statements submitted to either APRA or ASIC will be shared in the case of dual regulated entities.
Streamlining classifications: Core compliance entities and enhanced compliance entities
Under the FAR, 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' (who will not be required to submit accountability maps/statements) and 'enhanced compliance entities' (who will have to do so).
It's proposed that total assets will be the metric used to determine which category an entity fits into.
- Enhanced compliance entities:
- ADIs with total assets ˃$10bn
- RSE licensees with total assets ˃$10bn (ie combined total assets of all RSEs under the trusteeship of a given RSE licensee)
- general insurers and private health insurers with total assets ˃$2bn
- life insurers with total assets ˃$4bn
- Core compliance entities will not be required to submit accountability maps/statements to the regulators (but will be subject to all other FAR obligations).
It's proposed that regulators will be able to reclassify entities as core or enhanced. Further, core compliance entities may be required to submit accountability maps and statements where regulators form a view this would benefit the entity's governance accountability.
Transition arrangements for ADIs: The paper proposes that ADIs now subject to the BEAR will transition to the FAR, and be classified as core or enhanced compliance entities (depending on size and complexity) from commencement of the legislation to implement the FAR.
Deferred remuneration requirements
All FAR entities (regardless of their size) will be required to defer 40% of the variable remuneration — which the paper define as 'the proportion of an accountable person's total remuneration that is not guaranteed because it is conditional on the achievement of pre-determined objectives and can be forfeited if these objectives are not met' — for all of their accountable persons for a minimum of four years (but only if the amount that would be deferred is greater than AU$50,000).
However, entities will not be required to defer variable remuneration if variable remuneration is not a feature of a particular accountable person’s remuneration structure.
Further, entities must have remuneration policies that allow for a reduction in variable remuneration in the event that an accountable person breaches their FAR obligations.
The proposal paper notes that the FAR will not impact APRA's ability to set separate prudential standards in respect of prudentially regulated entities on remuneration.
Larger maximum penalties will apply under the FAR
Penalties for (all) FAR entities
It's proposed that the maximum penalties under the FAR will be the greater of the following: either a) $10.5m (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). This aligns with the maximum penalty framework under the Corporations Act 2001 (Cth) (Corporations Act), Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), National Consumer Credit Protection Act 2009 (Cth) (Credit Act) and Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act). The proposal paper states that when considering whether to impose a civil penalty, the court will be required to consider the impact that the penalty has on the viability of prudentially regulated entities.
The paper states that RSE licensees will be prohibited from using trust assets to pay a civil penalty arising from breaching an obligation under the FAR. Further, the proposal notes that provision will be made for the court to have regard to the impact of the penalty on the trustee’s superannuation fund membership.
Penalties for individuals
Accountable persons will also be liable for civil penalties for breaches of their accountability obligations (there is no equivalent BEAR obligation). It's proposed that the maximum penalties will be the greater of the following: either a) $1.05m (5,000 penalty units) or; b) the benefit derived or detriment avoided because of the contravention, multiplied by three (where the court can determine it).
Consistent with the proposed penalties for entities, maximum civil penalties will be consistent with the newly introduced maximum penalties for individuals under the Corporations Act, ASIC Act, Credit Act and Insurance Contrasts Act.
Breach notification obligations
Under the FAR, it's proposed that entities will be required to notify APRA and/or ASIC when they become aware that they have breached either their accountability or key personnel obligations.
Timing: No implementation timeframe?
- The deadline for submissions to the consultation is 14 February. The proposal paper asks that submissions focus on how the proposals should be implemented rather than whether they should be implemented.
- The Government intends to consult on and introduce legislation by the end of 2020 to implement the model.
- The government has not yet determined an implementation timeframe for the FAR and intends to consult on timeframes as part of the consultation on exposure draft consultation.
Commenting on the proposed changes, MinterEllison Partner Mark Standen said that the release of the proposals reflects a broader shift in expectations around accountability.
'The proposed changes are not unexpected.
Industry has been on alert since the recommendations of the Hayne Commission were released last year. What is interesting is that the emerging importance of accountability principles in the financial services industry likely represents a new minimum standard for entities, boards and senior management across the economy.'
[Sources: Treasurer Josh Frydenberg media release 22/01/2020; Proposals Paper: Implementing Royal Commission Recommendations 3.9,4.12, 6.6, 6.7 and 6.8 Financial Accountability Regime]