The Financial Accountability Regime (FAR Bill) Draws Closer

    

The long-awaited Financial Accountability Regime (FAR Bill) will come into effect for the Australian banking industry on 15 March 2024 and for the Australian superannuation and insurance industries on 15 March 2025.

Key Points and Updates About the FAR


  • From 15 March 2024, the comes into effect for the banking industry, applying to authorised deposit-taking institutions (ADIs) and their authorised non-operating holding companies (NOHCs).

  • From 15 March 2025, it will also apply to the insurance industry, extending to insurance entities, ADIs, and their authorised NOHCs.

  • As of February 2024, the Minister Rules are still awaiting finalisation.

  • The FAR replaces the Banking Executive Accountability Regime (BEAR) and is jointly administered by APRA and ASIC.

  • Key Changes from BEAR to FAR include an increased focus on enforcement outcomes, all directors and most senior executives will become accountable persons subjected to broad obligations, and remuneration of accountable persons will see updated minimum requirements.

In February 2019, The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (AKA the Hayne Royal Commission in reference to commissioner Kenneth Hayne) made several recommendations in its final report of the banking and superannuation industry.

A significant outcome of the Hayne commission's recommendations was the Financial Accountability Regime Bill 2023 (FAR) that replaces the Banking Executive Accountability Regime (BEAR). On 5 September 2023, the Commonwealth Parliament passed the FAR, which then received Royal Assent on 14 September 2023.

The FAR aims to create a stronger responsibility and accountability framework for APRA-regulated entities and define the obligations of directors and senior executives of financial entities in the banking, insurance and superannuation industries including accountability, key personnel, deferred remuneration and notification to Regulators.

ASIC Deputy Chair Sarah Court explains, “We believe the regime will increase transparency and accountability in financial institutions (FIs) and help embed a culture of accountability for misconduct at an individual level – accountable individuals will need to understand and closely engage with their obligations under the FAR.”

What Do Australian Financial Institutions Need to Know About the FAR?

MyComplianceOffice-Financial-Accountability-Regime-FIThe FAR replaces the Banking Executive Accountability Regime (BEAR), which commenced in 2018, and is jointly administered by The Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC)—collectively, the “Regulators”.

From 15 March 2024, the regime will apply to authorised deposit-taking institutions (ADIs) and their authorised non-operating holding companies (NOHCs). However, as the Minister Rules are still awaiting finalisation, APRA and ASIC say they understand that firms may need additional time to confirm compliance with the new FAR requirements beyond its initial 15 March deadline.

APRA and ASIC expect FIs to continue submitting applications for the registration of new accountable persons and ensure compliance with core or enhanced notification obligations as soon as possible—and no later than 30 June 2024. See the APRA and ASIC Letter on FAR Commencement and Implementation for further details.

 

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?

MyComplianceOffice-Financial-Accountability-Regime-02The 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”.

As of February 2024, it is worth noting that details such as which executives are considered “accountable persons”, and various “prescribed responsibilities” still await the Financial Services Minister’s sign-off and settling of the ministerial rules.

 

Accountability Transitioning

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.

 

The Obligations of Accountable Persons

MyComplianceOffice-Financial-Accountability-Regime-03Accountable 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.

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