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For banks, insurers, and super funds, accountability goes FAR
Australia | Publication | September 2022
Content
Introduction
The Financial Accountability Regime Bill 2022 (the FAR Bill) was introduced into Federal Parliament on 8 September 2022. It will implement the new Financial Accountability Regime (FAR), one of the few outstanding reforms recommended by the Financial Services Royal Commission.
The FAR replaces the existing Banking Executive Accountability Regime (BEAR), and extends it to cover APRA-regulated insurers and registrable superannuation entity (RSE) licensees. It also creates enhanced obligations for certain large entities that exceed specified asset thresholds.
The FAR Bill retains the same key features as those introduced in a Bill by the Morrison Government in October 2021, which lapsed following dissolution of the last Federal Parliament. Table 1 below details important requirements that entities should be aware of.
In addition to the FAR Bill, the Government released for consultation the Draft FAR Minister Rules 2022 (the Draft Rules) on 12 September 2022. The Draft Rules prescribe particular responsibilities and positions that cause a person to become an accountable person under the FAR, such as the senior executive with responsibility for management of an entity’s anti-money laundering function. The Draft Rules also determine the entities that will be subject to enhanced notification rules under the FAR, as summarised in Table 2 below.
Risks for business are spread FAR and wide
The lead-time to appropriately prepare for these changes cannot be underestimated, in particular for insurance and superannuation entities not previously subject to the BEAR. Entities must develop and implement new comprehensive risk and reporting frameworks, policies and procedures. This should include, for example, identification of accountable persons and reporting structures, updating governance policies to reflect roles and responsibilities and training staff on FAR requirements. Entities will also need to understand obligations in respect of ‘significant related entities’, noting there are unique requirements for RSE licensees in this context.
For Authorised Deposit-taking Institutions (ADIs) in the banking industry that have already made arrangements to meet their obligations under the BEAR, it may be tempting to view the FAR as ‘business as usual’. However, certain obligations under the FAR differ from the BEAR and, as with any new regulation, it represents an ideal opportunity for all ADIs to re-visit, review and revise internal practices, processes and frameworks to ensure they remain efficient and effective going forward, as well as adapting to new requirements.
For all entities, attention should also turn to the interaction of the FAR with other spheres of regulation. For example, entities not only need to consider how deferred remuneration decisions under the FAR interact with employee contractual arrangements and relevant employment laws, but how these obligations sit with requirements under relevant prudential guidance, like APRA’s Prudential Standard CPS 511 Remuneration.
Preparation will go FAR
The Draft Rules will remain open for consultation until 7 October and it is anticipated that the FAR Bill will be referred to a Senate Committee for review. Subject to the Bill securing passage without significant change – to this end, its similarity to the lapsed 2021 effort by the now Opposition can only strengthen its chances – the timetable for these changes being passed into law is likely to be late 2022 or early 2023.
It is worth noting that some commencement, application, and transitional provisions concerning the FAR, including the formal termination of the BEAR, are contained in a separate, potentially more politically contentious Bill – the Financial Sector Reform Bill 2022. As such, it will be important to monitor progress of both Bills in Parliament in order to properly understand ultimate compliance requirements and timeframes.
Nevertheless, entities should act now to familiarise themselves with the accountability framework imposed by the FAR. Some of the key questions entities should be considering at this time to ensure they are in the best position to avoid non-compliance include:- Are my organisation’s internal structures, systems and procedures updated, or able to be updated, to discharge my obligations as an accountable entity under the FAR?
- Have I identified all of my relevant significant related entities and understood my obligations in respect of those entities?
- Who are the accountable persons within my business and for which matter(s) are they accountable? Am I required to submit accountability statements and accountability maps to the Regulator? What happens if an accountable person leaves my organisation?
Norton Rose Fulbright Australia has extensive experience advising on the legal, regulatory and practical application of the BEAR and stands ready to help entities wishing to understand how to discharge their new or extended obligations under the FAR.
Table 1 – Key Features of the FAR Bill
| To which entities does the FAR apply? |
The FAR applies to the following ‘accountable entities’:
The FAR will apply to Australian entities, as well as entities incorporated and operated outside Australia where they are captured as ‘significant related entities’ based on various statutory tests, including of materiality and substance. The FAR also applies directly to ‘accountable persons’, for example Directors, CEOs, and other senior executives of accountable entities reporting directly to the CEO. |
| What does the FAR require? |
The FAR imposes four core sets of obligations, relating to both prudential and conduct matters:
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What are the consequences of non-compliance with the FAR? |
ASIC and APRA will jointly administer the FAR. An accountable entity that fails to comply with its obligations can be subject to significant civil penalties up to the greater of Accountable entities can also be subject to other compliance action, including directions, enforceable undertakings and injunctions. The regulator can also direct an accountable entity to reallocate the responsibilities of its accountable persons, or those of a significant related entity. An accountable person who fails to comply with their obligations may see their variable remuneration reduced, or be disqualified by the regulator from being an accountable person. In certain limited circumstances, such as non-compliance with compliance or enforcement action, criminal penalties can apply. |
| From when does the FAR apply? |
The FAR applies to the banking industry six months after its commencement, and to any new entrants beyond that from the time they become an ADI or a NOHC. The FAR will apply to the insurance and superannuation industries 18 months after commencement, and to any new entrants beyond that from the time they become licensed. |
Table 2 – Enhanced notification thresholds in the Draft Rules
| Accountable entity | Total Asset Size (AUD) |
| ADIs | 10 billion |
| General insurers | 2 billion |
| Life companies | 4 billion |
| Private health insurers | 2 billion |
| RSE licensees | 10 billion |
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