Accountability for all is not too FAR
The Banking Executive Accountability Regime (“BEAR”) has applied to large authorised deposit-taking institutions (“ADIs”) in Australia since July 2018 and small and medium ADIs since July 2019. In January 2020, following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Treasury issued a Proposal Paper which set out the intention to implement recommendations 3.9, 4.12, 6.6, 6.7 and 6.8 to extend BEAR to all APRA-regulated entities and provide joint administration to ASIC as the conduct regulator through the introduction of the Financial Accountability Regime (“FAR").
The purpose of FAR is to implement a strengthened responsibility and accountability framework for directors and the most senior and influential executives in financial services organisations. The regime is intended to complement and reinforce the existing regulatory framework, rather than replace it or create a substantial new set of obligations and mandatory requirements.
Almost 18 months on, Treasury has released the Exposure Draft Legislation (“ED”) (together with the Draft Explanatory Materials, Information Paper on Joint Administration, and Policy Proposal Paper on Prescribed Responsibilities and Positions). We have set out the key elements of the regime below.
Accountable entities:
The regime imposes strengthened obligations on certain entities in the banking, insurance and superannuation sectors. It does so by regulating accountable entities, noting that some corporate groups may have multiple accountable entities. These accountable entities generally include those that are licensed or authorised by APRA to carry on banking, insurance or superannuation business. More specifically:
‘Significant related entities’
An accountable entity also holds obligations in relation to its significant related entities. For entities other than RSE licensees, this will generally include a subsidiary that has a material and substantial effect on the accountable entity and the ED provides factors to consider when determining this. For RSE licensees, a wider variety of entities may be captured, depending on the RSE licensee’s operating structure and control relationships. This recognises the variety of structures in the industry. A connected entity of a RSE licensee (such as a general insurer or a controlled investment company) could have a material and substantial impact on the RSE licensee. This requires some careful attention and may lead to a larger AP group than first anticipated.
Accountable persons (“APs”):
The conduct of the accountable entity is controlled by its directors and most senior and influential executives. These will typically be the individuals that are identified as APs. An individual will be subject to the regime if they are an AP of an accountable entity. An AP will be defined using a prescriptive element and a principles-based element.
‘Prescriptive element’
The prescriptive element considers whether the individual holds a listed position in or relating to the entity. That is, a ‘prescribed responsibility’ as set out in the list of prescribed responsibilities and positions. In this document, Treasury details a long list of prescribed responsibilities and positions including, for example, oversight of the accountable entity, management or control of the business activities of the accountable entity, management of the accountable entity’s financial resources, risk controls and risk management, operations, anti-money laundering, and end-to-end product management. It provides additional specific prescribed responsibilities for insurers, RSE licensees, Australian branches of foreign accountable entities and authorised/registered NOHCs. Given the wide reach of some of the responsibilities whereby multiple AP may have accountability, joint accountability (whereby they will be jointly and severally liable for related breaches) may be unavoidable.
‘Principles-based element’
This general-principle test considers whether the individual:
- Holds a position in the accountable entity or a significant related entity; and
- Has senior executive responsibility for management or control of the accountable entity or a significant or substantial part or aspect of the operations of the accountable entity or its group of significant related entities.
It is worth noting that one person can be an AP of multiple accountable entities within the same group and can hold multiple prescribed responsibilities or positions.
Accountability obligations:
FAR establishes accountability obligations on both accountable entities and accountable persons which relate to conduct and prudential matters. These are set out below:
The accountable entity has three further areas of obligations in which they must abide.
i) Deferred remuneration obligations
Under the regime, accountable entities and their significant related entities must defer at least 40% of the variable remuneration of each of their APs for a minimum of four years (if the variable remuneration is greater than $50,000 AUD) and may reduce the amount of variable remuneration that vests due to a breach of an AP’s FAR obligations. This reduction should be proportionate to the failure to comply on the AP’s part.
The regime also requires accountable entities to have a remuneration policy stipulating that variable remuneration may be reduced where there has been a breach of accountability obligations, that reduced variable remuneration must not be paid, and that reasonable steps are taken to ensure their significant related entities comply.
ii) Notification obligations
There are strict requirements for an accountable entity to provide certain information to the regulators about the entity and its APs. All accountable entities must comply with the core notification obligations, while a select subset (those that fall within the below table) are required to comply with the enhanced notification obligations. It is worth noting that, where an accountable entity within a corporate group meets the enhanced notification threshold, all other accountable entities within that group (including any licensed NOHCs) will need to comply with the enhanced notification obligations irrespective of whether they meet the enhanced notification threshold.
iii) Key personnel obligations
Accountable entities are required to ensure that the responsibilities of their APs collectively cover all parts or aspects of their business including the significant related entities. This includes:
- Having APs who are responsible for all the prescribed responsibilities and positions;
- Not having APs for responsibilities which have been excluded by the regulators;
- Registering an AP with the regulators prior to them occupying the role; and
- Ensuring that the AP is not disqualified by the regulators.
It is worth noting that APs who are temporarily filling a foreseen or unforeseen vacancy have up to 90 days before they are required to be registered with the regulators. They will still be considered an AP during this timeframe, however they will not be subject to the deferred remuneration requirements.
