Financial Accountability Regime (FAR): What you need to know

The Hayne Royal Commission made a number of recommendations on extending the scope of the Banking Executive Accountability Regime (BEAR) to other financial services entities. Our banking and financial services team outlines the new obligations and accountabilities under the upcoming regime.

Broadly, the proposed Financial Accountability Regime (FAR) sets out conduct standards and financial consequences for 'accountable persons' in the event of failure of accountability and responsibility. FAR entities will be required to apply to the Australian Prudential Regulation Authority (APRA) or the Australian Securities and Investments Commission (ASIC) to register a person as an accountable person.

Who is governed by the FAR?

The FAR’s initial implementation extends to all APRA regulated entities; that is, not only ADIs but also:

• all general and life insurance licensees;
• all private health insurance licensees;
• all RSE licensees; and
• licensed non-operating holding companies.

Depending on the type of entity, entities will be classified as either 'core compliance entities' or 'enhanced compliance entities'.  Core compliance entities will be subject to a lighter regulatory burden.[1]

It is intended that the regime will extend to solely ASIC regulated entities in due course; following implementation of the FAR to APRA regulated entities.

What obligations does the FAR impose?

Similar to the BEAR, the FAR will impose the following obligations:

• accountability obligations;
• key personnel obligations;
• accountability map and accountability statement obligations;
• notification obligations; and
• deferred remuneration obligations.

Note, however, that core compliance entities will not need to comply with the accountability maps and accountability statements obligation.

Accountability

Similar to the BEAR, a FAR 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;
• for APRA regulated businesses, in conducting business, prevent matters from arising that would adversely affect the entity’s prudential standing or prudential reputation;
• ensure that each of its accountable persons meets their accountability obligations; and
• ensure that each of its significant or substantial subsidiaries that are not subject to the FAR, comply as if the subsidiary were subject to the FAR.

Key Personnel

Similar to the BEAR, the key personnel obligations of a FAR entity will be to:

• ensure that the responsibility of accountable persons cover all aspects of the operations of the entity and its significant or substantial subsidiaries;
• ensure that none of the accountable persons are prohibited under the FAR;
• comply with APRA and ASIC directions to reallocate responsibilities; and
• take reasonable steps to ensure that each of the entity’s subsidiaries that is not a FAR entity complies with obligations (2) and (3) above.

Accountable person obligations

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);
• 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; and
• take reasonable steps in conducting their responsibilities as an accountable person to ensure that the entity complies with its licensing obligations.

Note, obligation 5 is a new obligation under the FAR.

Deferred remuneration obligations

FAR entities will be required to defer 40% of the variable remuneration for all of their accountable persons for a minimum of four years, but only if the amount that would be deferred is greater than $50,000 AUD. Entities will not be required to defer variable remunerations if it is not a feature of a particular accountable person’s remuneration structure.

Accountability Maps and Statements

Enhanced compliance entities (which include RSE licensees with total assets greater than $10b) must submit accountability maps and accountability statements to APRA or ASIC. An accountability map must show reporting lines and lines of responsibility within the entity. The accountability statements for each accountable person will detail the areas of responsibility over which they have effective management and control. Entities will be required to update the relevant regulator within 30 days of the change occurring.

Notification obligations

As under the BEAR, FAR entities will be required to notify APRA or ASIC of the following events:

• a person ceasing to be an accountable person;
• the entity becoming aware that it has breached its accountability or key personnel obligations, or an accountable person has breached their accountability obligations;
• the dismissal or suspension of an accountable person because the person has failed to comply with their accountability obligations; and
• the reduction of the variable remuneration of an accountable person by the entity, because the accountable person has failed to comply with their accountability obligations.

A notification submitted to either ASIC or APRA will be shared in the case of dual regulated entities.

Non-objections power

Under the FAR, APRA will be granted a 'non-objections power' which enables it to veto the appointment or reappointment of accountable persons if APRA holds existing information that conflicts with the obligations that the accountable person will need to perform, strengthening APRA’s capacity to pre-emptively regulate governance, culture and accountability risks.

Submission process

The Treasury proposal paper is available here.

Feedback on the best implementation of the proposed model is sought by 14 February 2020.

Individuals proposed to be covered by the regime are those in senior executive positions with actual or effective management and control. An indicative prescribed list is published in the proposal paper and includes: all directors, and senior executives with responsibility for management of all business activities, financial resources, risk, operations, IT and information management, Internal audit, Compliance, HR, AML, dispute resolution, client or member remediation and breach reporting.

See the full list of likely included roles in the proposal paper.

What does this mean for RSE Licensees?

It is obviously early days and the proposal paper is still under consultation. However, we think the likely outcomes for RSE Licenses, and other APRA regulated entities will be requirements to:

• review organisational structures to understand where authority and accountability resides;
• identify individuals as accountable persons, having regard to the prescribed list and a principles based approach;
• consider whether demonstrable compliance with the obligations may require revision to design and documentation of internal processes, job descriptions and roles, and reporting lines;

watch this space in respect of 'variable remuneration' and observe how the deferral of 40% variable remuneration for 4 years (if greater than $50,000) will affect RSE licensees and other prudentially regulated entities. The proposal will certainly add complexity to the remuneration landscape (and perhaps cause recruitment and retention challenges) for

[1] Note, ASIC and APRA will be granted a residual discretion to reclassify entities.