Legislation has passed both Houses of the Australian Parliament to introduce the Financial Accountability Regime (FAR).
The 2023 Bill establishes a financial accountability regime to impose obligations on directors and senior executives of financial entities in the banking, insurance and superannuation industries. These obligations will cover accountability, key personnel, deferred remuneration and notification to Regulators (meaning APRA and ASIC collectively, or only APRA where it is the sole Regulator).
The Financial Accountability Regime Bill 2023 and the Financial Accountability Regime (Consequential Amendments) Bill 2023 passed without further amendment on 05 September 2023. It will likely be assented to by the Governor-General in the same month.
Assuming assent is given in September 2023, the FAR will apply to the banking sector from March 2024 and the insurance and superannuation sectors from March 2025.
Note - More recent updates have occurred since the publishing of this article.
The Journey So Far
The previous Banking Executive Accountability Regime (BEAR) applied only to Authorised Deposit-Taking Institutions (ADIs). ADIs are financial institutions licensed by APRA to carry on banking business, including accepting deposits from the public, including banks, building societies, and credit unions.
Before the first introduction of FAR in 2021, consumer advocates CHOICE argued that BEAR had little impact on regulating ADIs due to a lack of fines imposed on financial institutions (FIs) and executive disqualifications or bonuses revoked under the regime. Patrick Veyret remarked in an AFR article, “If the BEAR’s impact is measured in financial terms – by the amount of executive remuneration clawed back or the amount of fines issued – then its impact has been precisely zero.”
On the other hand, data from APRA and Macquarie University indicated that BEAR had “improved culture and behaviour by assigning individual responsibility to bankers”, as also reported by the AFR.
FAR will now replace BEAR and extend its reach from ADIs to all Accountable Entities, such as private health insurers, superannuation licensees, general insurers and life insurers.
The original FAR Bill was introduced into the House of Representatives on 29 October 2021. Although two years have passed, the FAR Bill 2023 only contains one significant change, aiming to clarify the scope of the Minister’s exemption powers for Accountable Entities. Entities that have already begun preparations for FAR can, therefore, confidently carry on the process.
Key Changes from BEAR to FAR
Increased Regulatory Administration
It is expected that FAR will see substantially more enforcement actions of regulatory breaches than its predecessor. While BEAR was solely administered by APRA, FAR will be jointly administered by APRA and ASIC - the latter of which has shown a robust enforcement history. In the first half of 2023 alone (01 Jan - 30 Jun), ASIC issued 74 financial services enforcement outcomes, charged 18 individuals in criminal prosecutions, and saw $109.1m in civil penalties imposed by the courts.
Greater Focus on Regulatory Compliance Obligations
In a 2020 information paper by APRA, the Regulator noted in its findings that “large ADIs had different levels of understanding of the actions being taken by individual accountable persons to fulfil their obligations”. FAR will see all directors and most senior executives identified as accountable persons subjected to broad obligations.
Accountable persons will be obliged to act with honesty and integrity and with due skill, care and diligence, and to take reasonable steps in preventing breaches of specified financial services laws. These obligations are a welcome development in supporting compliance with regulations for Australian FIs.
Expansion of Obligations
FAR will apply to relevant actions taken by an accountable entity, such as data risk and cyber security management, anti-money laundering (AML), scams and hardship, and more. The adequacy of these arrangements will be broadly imposed by FAR and place obligations on individual accountable persons as well as their accountable entities.
Remuneration Under the Financial Accountability Regime
FAR requires a minimum of 40% of variable remuneration for accountable persons to be deferred for a minimum of 4 years (with cliff-vesting after 4 years). The variable amount will be reduced by a figure proportionate to any accountability obligation failures under the regime.
Accountable entities will need to consider any changes within remuneration arrangements to accommodate the related requirements in FAR, APRA Prudential Standard CPS 511, and APRA Prudential Standard CPS 510 Governance.
Who Are Accountable Persons Under FAR?
The FAR Bill notes that “the conduct of a business is ultimately determined by its directors and its most senior and influential executives”. Directors and executives of accountable entities will be regulated as accountable persons under FAR.
In practicality, accountable persons are likely to include directors and senior executives, such as the Chief Executive Officer and officers reporting directly to the Chief Executive Officer. The FAR Bill also notes that “lower-level executives are generally not expected to be accountable persons under the Financial Accountability Regime”.
Accountable persons with existing BEAR registration will have their registration automatically transitioned to FAR - where that person continues to be accountable under FAR. Re-registration is not required for these persons. However, it should be noted that changes in responsibilities for these accountable persons due to the transition must be flagged with the Regulator.
Anyone who became an accountable person under BEAR temporarily will be assumed to be the temporary accountable person under the FAR. Additionally, any pending registrations of accountable persons under BEAR will be considered as applications under the FAR.
Accountable entities can register new accountable persons 30 days before the FAR is enacted for the banking industry.
The Obligations of Accountable Persons
Accountable persons are required under the FAR to act with “honesty and integrity, and with due skill, care and diligence, and to deal with APRA and ASIC in an open, constructive and cooperative way”. Any breach of these obligations may result in disqualification from being an accountable person.
Accountable persons must also take reasonable steps to avoid breaches of FAR and related legislation. Such measures should include having appropriate governance, risk, and control (GRC) systems in place, safeguards against inappropriate delegations of responsibility, and appropriate actions taken in response to actual or suspected non-compliance.
Reporting of FAR Breaches
Accountable entities must provide the Regulator with:
- Information about the entity and its accountable persons.
- Certain events relating to the accountable persons of the entity.
- Certain breaches of obligations under the Financial Accountability Regime by the entity or its accountable persons.
Reporting of breaches has also been enhanced from BEAR to FAR, now requiring notification to the Regulator when the accountable entity reasonably believes a violation of key personnel obligations has occurred or where a material change has been made to the registry information of accountable persons.
In general, notification must be made within 30 days of the event and submitted by the Regulator’s approved form.
How Technology Helps Firms Remain Compliant with FAR
As firms transition from BEAR to FAR, a perfect opportunity exists to review how the entity monitors and reports its compliance with regulations.
Regulatory Technology (RegTech) solutions, such as MyComplianceOffice (MCO), equip firms with highly efficient means of capturing their accountable persons’ functions, responsibilities, and activities.
The Role Monitoring and Assurance (RMA) solution within MCO’s Know Your Employee (KYE) suite empowers compliance teams with a comprehensive dashboard of employee and accountable person information. With a comprehensive view, compliance teams can be assured of appropriate qualifications and authorisations required for individuals’ roles. They can also easily manage ongoing reviews and certification of individuals to ensure they are meeting the requirements of their role - and of regulators where accountable persons are concerned.
Learn more about how MCO’s RMA solution can help your firm:
- Manage annual certification processes and Fit & Proper assessments.
- Quickly generate certificates and reports for regulators, including Statement of Responsibilities (SoRs) & Responsibility Maps.
- Identify, record, and report conduct rule breaches.
- Monitor changes to senior managers roles and responsibilities.
- Strengthen the overall conduct and accountability culture.
Download your detailed Role Monitoring and Assurance brochure now.