On 3 October 2023, the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) published an information package to support the financial services industry in implementing the Financial Accountability Regime (FAR).
The information package comprises three documents:
- the Joint Administration Agreement between APRA and ASIC (together, the Regulators);
- a joint information paper providing guidance for authorised deposit-taking institutions (ADIs) on the transition to FAR (for ASIC purposes: Regulatory Guide 278 ‘ADIs: Transitioning to the Financial Accountability Regime’); and
- an ADI accountability statement guidance and template.
1. Joint Administration Agreement between APRA and ASIC
The arrangements in the Joint Administration Agreement build upon APRA and ASIC’s Memorandum of Understanding, and set out the roles for each Regulator in administering FAR consistent with the twin peaks model:
- APRA’s role is to focus on impacts to the prudential soundness of regulated entities as well as the financial stability of the overall system; and
- ASIC’s role is to focus on impacts to market integrity and consumer protection in the financial system and payments system.
Key takeaways from the Joint Administration Agreement include:
- Monitoring and supervision: The Regulators have agreed to take a ‘risk-based and outcomes-focused’ approach to monitoring and supervision under FAR, including surveillance, engagements, reviews and resolving technical queries.
- Single portal and point-of-contact: There will be a single reporting portal – APRA Connect – for accountable entities to use to report to the Regulators, and a single point-of-contact – FAR@apra.gov.au - so that accountable entities can contact the Regulators to raise queries or requests.
- Delegation of powers: Where FAR requires the Regulators to agree before exercising certain powers, the Regulators have agreed that one Regulator may delegate their power to commence proceedings to the other Regulator.
- Investigations and enforcement: The Regulators have agreed to identify the objectives of investigations and establish the role of each Regulator, including the appropriate lead, prior to the commencement of an investigation.
- Industry communication: In addition to guidance on FAR implementation, the Regulators have agreed to provide information about ongoing compliance expectations under FAR, including minimum expectations, better practice examples, thematic review findings and details of disqualifications under FAR and other enforcement activity.
- Information sharing: The Regulators have agreed to share information voluntarily obtained through administering FAR where it is relevant to the other Regulator’s responsibilities or mandate. It is safe to assume all information you share with one Regulator will be shared with the other Regulator, and that information shared with the Regulators for other purposes may be used for FAR-related purposes. The Regulators are not required to notify you prior to sharing information or documents with each other under FAR.
2. Joint information paper for ADIs on transitioning to FAR (Regulatory Guide 278 ‘ADIs: Transitioning to the Financial Accountability Regime’)
2.1 Key activities for ADI transition
The joint information paper has been released to help ADIs transition from the Banking Executive Accountability Regime (BEAR) to FAR. It helpfully includes the following guidance on key activities for ‘enhanced’ and ‘core’ ADIs. The thresholds for determining whether an ADI is an enhanced or core entity will be set out in the final Minister rules (the draft Minister rules propose that an ADI with an asset size greater than $10 billion will be an enhanced ADI).[1]
The draft Minister rules provides that if one accountable entity in a corporate group is classified as an enhanced entity, then all other accountable entities within that corporate group will also be classified as enhanced entities.
KEY ACTIVITIES FOR A LARGE, COMPLEX (ENHANCED) ADI
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KEY ACTIVITIES FOR A SMALL, SIMPLE (CORE) ADI WITH NO SUBSIDIARIES
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Example
uses 2
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Identify which of its subsidiaries will become significant related entities (SREs) |
Allocate additional prescribed responsibilities to existing or new accountable persons |
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Allocate additional prescribed responsibilities to existing or new accountable persons |
Allocate all applicable key functions to the relevant accountable persons |
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Allocate all applicable key functions to the relevant accountable persons |
Update internal accountability documentation |
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Update existing accountability statements and prepare accountability statements for new accountable persons |
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Update accountability map |
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2.2 Other key takeaways
- There will be a two-step process for ADI submission of FAR information, involving:
- draft submissions of documents (marked up where relevant to show the changes from documents submitted under BEAR) to the Regulators commencing from November, which the Regulators will review and give feedback on; and
- formal submissions of documents updated to reflect that feedback.
More detailed process and timelines for these submissions will be released as part of the final Regulator Rules and Transitional Rules.
- While ADIs will not be required to re-register accountable persons already registered under BEAR, they will need to check information previously submitted and update it as necessary to ensure it meets additional FAR obligations (including to reflect additional prescribed responsibilities, any additional accountable entities and any SREs in the group, and additional information required to be included in the FAR register not previously required under BEAR).
- ADIs can apply for registration of new accountable persons under FAR from one month before the commencement of FAR, meaning there will be some overlap with ADIs registering under BEAR. APRA will manage these processes in parallel, but strongly encourages ADIs to submit applications under FAR rather than under BEAR if the effective date of appointment is on or after FAR commences, and submitted within two weeks before FAR commencement.
- Subject to the outcome of the recent consultation on the proposed ADI key functions, ADIs will need to assess which of the key functions apply, and then allocate them to the relevant accountable person or persons. The Regulators have reiterated that key functions do not create new responsibilities for accountable persons, and that the assignment of a key function to an accountable person does not automatically mean that accountable person has end-to-end accountability in relation to that key function. (KWM has expressed several concerns about the proposed Regulator rules concerning key functions, including concerns that proposed key functions are too granular in the context of FAR, and the allocation of key functions will affect management structures and create new management responsibilities for accountable persons.)
- Individual accountability statements need to reflect ‘actual accountability as it operates in practice’ within the ADI and its relevant group.
- ADIs will need to ensure that their notification procedures cover the two new events that must be notified to the Regulators under FAR:
- when the accountable entity has reasonable grounds to believe it has breached its key personnel obligations; and
- a material change occurs to information about an accountable person on the FAR register (which would include a change in the assignment of a key function),
and that the ADI takes reasonable steps to ensure its SREs comply with the notification obligations.
- Enhanced ADIs must notify the Regulators of material changes to their accountability statements and maps. The information paper sets out examples of changes that are likely to be considered material, including changes to prescribed responsibilities / positions of an accountable person, changes to accountabilities of an accountable person (e.g. where accountability is changed from ‘ensure’ to ‘oversight’), or changes to who the accountable person reports to.
- ADIs should have robust processes and procedures for assessing which of their subsidiaries are SREs, and the Regulators may query these assessments or request information regarding an ADI’s assessment processes and conclusions.
- Larger maximum penalties will apply under FAR, and potential liability for civil penalties for ancillary contraventions of FAR obligations remain. If not already, ADIs may wish to confirm whether their relevant insurance policies cover civil penalties for ancillary contraventions of FAR (which is not prohibited under FAR).
2.3 A note on deferred remuneration obligations under FAR
The FAR deferred remuneration obligations will apply to remuneration decisions that occur in the first financial year that begins six months after FAR commences. For ADIs, this means that they will complete their current BEAR remuneration performance period (assuming it aligns to the ADI’s financial year) before commencing the FAR remuneration performance period.
The information paper notes that Prudential Standard CPS 511 Remuneration (CPS 511) will apply for all ADIs by 1 January 2024 (1 January 2023 for significant financial institutions (SFIs)). FAR will require all ADIs to defer variable remuneration for accountable persons, in addition to the enhanced deferral obligations under CPS 511 for senior ‘specified role’ persons for SFIs.
CATEGORY OF PERSONS
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ACCOUNTABLE PERSONS UNDER FAR
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CERTAIN ‘SPECIFIED ROLE’ PERSONS UNDER CPS 511
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Deferral requirement |
40% of variable remuneration for 4 years |
Up to 60% of variable remuneration for up to 6 years |
The key takeaways from the information paper include:
- Deferred variable remuneration obligation: ADIs under FAR will no longer have the option of electing to defer 10-40% of the total remuneration of an accountable person. FAR requires all accountable persons to defer at least 40% of variable remuneration (and potentially more for certain specified role persons).
- Start of the deferral period: The Regulators take the view that the start of the deferral period is the start of the performance period. That position is plainly right for CPS 511, but it is not necessarily the case for FAR which includes an unhelpfully confused deferral period definition. The Regulators’ approach contained in the information paper seeks to simplify matters and should assist financial services firms.
- Value of deferred remuneration: The information paper provides that for CPS 511, deferral should be calculated on the variable remuneration ‘awarded in a financial year’. That description is not consistent with the text and structure of CPS 511, which states that the deferral period commences at the start of the performance period (see above) and in respect of remuneration disclosure includes variable remuneration awards made ‘for the financial year [but] made following the end of the financial year’. The Regulators’ description of the deferred remuneration calculation for FAR is correct.
3. ADI accountability statement guidance and template
The third document in APRA’s information package is a template accountability statement (similar in format to the previously released BEAR template), and guidance on completing the template.
Key takeaways from the guidance include:
- The Regulators expect that accountability statements will:
- clearly articulate what an accountable person is accountable for with respect to the ADI and be ‘sufficiently explicit and detailed in defining the accountable person’s responsibilities and establishing the outcome expected in relation to each responsibility’;
- be ‘comprehensive, covering all areas of responsibility of an accountable person, with no gaps in responsibility’;
- ‘align with the actual practices and governance arrangements’ of the enhanced ADI; and
- when considered collectively, ‘articulate and delineate responsibilities across’ an ADI or a relevant group.
(Note that in KWM’s view, the effect of drafting quirks in sections 10(1)(b)(ii) and 20(e) of FAR means that, unlike BEAR, the accountable entity and accountable persons have no obligations with respect to operations of subsidiaries that are not SREs.)
- The Regulators have expanded on the focus areas they called ‘key functions’ under BEAR, now renamed as ‘primary areas of focus’ (PAFs). As was the case under BEAR, this is a non-exhaustive list intended as a prompt for consideration when developing accountability statements. It is in addition to the proposed list of what are now called key functions, discussed at section 2 above.
- The Regulators expect particular attention to be given to the allocation of key functions and PAFs of prudential and conduct significance. This focus on conduct is consistent with other references in the information package to the expansion of the regime to include a conduct focus. In the joint press release on the information package, ASIC suggested it would be taking an active role in investigating individual conduct-related accountability breaches, with Sarah Court noting ‘We [ASIC] believe the regime will increase transparency and accountability in financial firms and help embed a culture of accountability for misconduct at an individual level …’
4. What’s next
4.1 ADIs
The Regulators intend to publish the final Regulator Rules and Transitional Rules for ADIs and the Key Function Descriptions shortly. They intend to include reporting form instructions to assist ADIs in providing the required information to the Regulators.
Commencing this month, the Regulators will host ADI and industry briefings, and expect ADIs to participate in pre-commencement activities.
4.2 Insurance and superannuation
The Regulators have provided the following indicative dates for key upcoming releases for the insurance and superannuation industries:
- Q1 2024: Consultation on key functions to commence.
- Q2 2024: Final Regulator rules to be released.
5. More information please!
More information can be found in our previous alerts on FAR:
- How FAR we’ve come: Financial Accountability Regime passes senate
- FAR no longer far away
- FAR far away
- FAR reaching consequences: the new Financial Accountability Regime
- FAR is here – what does it mean for insurers and insurance?
- FAR reaching consequences for super trustees
- The Financial Accountability Regime (FAR)