What is the new Financial Accountability Regime and why does it matter to licensees?

By Philip Hopley and Taylor Green

The recently enacted Financial Accountability Regime (FAR) marks a significant expansion of the existing executive accountability regime in Australia. Over the next 15 months, the FAR will come into force for all APRA-regulated entities in the banking, insurance, and superannuation sectors.

It is expected the FAR will ultimately be extended to all financial services and credit licensees. So, what are the key elements of the FAR these licensees should be aware of when designing and reviewing their own governance frameworks?

Key takeaways

• The FAR regime is finally law after more than two years of consultation and delay in implementing the replacement for the current Banking Executive Accountability Regime (BEAR). It applies to all APRA-regulated entities.
• The FAR introduces a new range of conduct and compliance obligations on entities and the senior officers who work for them. A key feature is the preparation of accountability statements and mapping.
• Given the FAR is planned to be extended to financial services and credit licensees, these licensees will have the benefit of observing the implementation of the FAR and identifying best practice elements to consider, including in their own governance arrangements.

What is the FAR?

The FAR is designed to improve the risk and governance cultures of Australia’s financial institutions. It is an extension of the current BEAR that was introduced in 2018 and applies to banks. Similar regimes operate in the UK, Singapore, and Hong Kong.

What obligations does the FAR impose?

The FAR imposes a range of obligations on institutions, known as Accountable Entities, and on the senior officers who work for them, known as Accountable Persons.

Accountable Entities and their significant related entities are required to:

• comply with conduct obligations to take reasonable steps to conduct its business:
  • with honesty, integrity, and with due care, skill, and diligence; and
  • in a manner that prevents an adverse impact on its prudential standing or reputation.
• appoint Accountable Persons and register them with APRA and ASIC.
• prepare accountability statements for each Accountable Person that contain a comprehensive statement of an individual’s responsibilities together with an accountability map showing reporting lines and responsibilities.
• take reasonable steps to ensure Accountable Persons comply with their accountability obligations.
• defer at least 40% of each Accountable Person’s variable remuneration for at least four years and have a remuneration policy in place that requires this remuneration to be reduced for non-compliance with the FAR.
• deal with ASIC and APRA in an open, constructive, and co-operative way.

Accountable Persons are similarly required to:

• comply with the same conduct obligations in relation to acting with honesty, integrity, and due care, skill and diligence.
• take reasonable steps to prevent material breaches of certain laws (mainly the FAR Legislation).
• deal with ASIC and APRA openly, constructively, and co-operatively.

There are no new direct financial penalties that may be imposed on Accountable Persons for a contravention of their accountability obligations other than exposing their variable remuneration and potentially being removed from their roles. Many Accountable Persons will have existing duties under the Corporations Act.

Accountable Entities may be subject to civil penalties for non-compliance, being the greater of $15.65 million, three times the benefit or detriment avoided because of the contravention, or 10% of annual turnover up to $782.5 million.

Why does the FAR matter to licensees?

The experience of the BEAR is that implementation is a valuable opportunity to drive cultural change by setting and refining revised expectations around conduct, culture, and governance. The FAR will be no different.

One of the main factors is the clarity that the preparation of accountability maps and statements bring in relation to the ownership of roles. This tends to create more efficient reporting structures, reduces red tape, and improves compliance.

What should licensees do next?

Licensees that are planning or undertaking scheduled reviews of their governance frameworks may like to consider the extent to which they can enhance or uplift their current settings to reflect some of the FAR’s principles. This will give licensees the opportunity to get ahead of curve in adopting best practice principles and ensure they are future-proofed for the extension of the FAR to licensed entities.

Reach out to Philip Hopley or a member of the HW Funds team to understand the regime and for help with future-proofing for the extension of the FAR.