The Financial Accountability Regime (FAR) Bill 2022 was released on 8 September 2022. It essentially reflects the previous FAR Bill 2021 with no substantive changes, meaning FAR will proceed on the basis previously outlined.
The FAR Bill 2022 implements the recommendations of the Financial Services Royal Commission by establishing a new accountability regime for institutions and their senior executives in the banking, insurance, and superannuation sectors, expanding upon the existing Banking Executive Accountability Regime. The regime will be jointly regulated by the Australian Prudential Regulation Authority and the Australian Securities Investments Commission.
The regime will apply to the banking industry six months after commencement of the FAR Bill 2022 and to any new entrants beyond that, from the time they become an ADI or a non-operating holding company. The regime will apply to the insurance and superannuation industries 18 months after commencement of the FAR Bill 2022. For the banking industry, we expect the regime to commence sometime in mid-2023, and for the insurance and superannuation industries 12 months after that in 2024, although timing is yet to be confirmed.
In a welcome development the refreshed Bill does not impose direct financial penalties for individual accountable persons as a sanction for breaching their accountability obligations (as was being promoted by some consumer advocates and others before the previous Senate Committee). However, the Bill does still leave open the potential for financial penalties to be imposed on an individual under ancillary liability provisions as identified in our previous commentary.
Ministerial rules released
Treasury has also released the draft FAR Minister Rules 2022 (Rules) for consultation, with this process open until 7 October 2022. The rules contain the prescribed positions and responsibilities which cause an individual to be an accountable person of an accountable entity.
Relevantly for directors, the prescribed positions include the position of member of the board of directors (or equivalent) of the accountable entity. This is consistent with the approach under BEAR where each director of an ADI was an accountable person.
The prescribed accountable roles and responsibilities appear to go beyond the CEO and their direct reports in some respects, and also now include responsibility for management or control of the business activities of a significant related entity (SRE) of the accountable entity. Notwithstanding the emphasis and focus being placed on individuals with senior executive responsibility for the management of prescribed activity or function, we expect the draft Rules may present some challenges for organisations seeking to confine their cohort of accountable persons to their senior executive team.
The prescribed roles also now notably exclude end-to-end product responsibility despite the consultation materials for FAR having previously indicated these responsibilities would be included. Treasury had previously placed significant emphasis on ensuring all steps in the financial product and services value chain (design, delivery and maintenance of client products and services) were captured as FAR accountable persons. While this is a departure away from the recommendations of the Financial Services Royal Commission, it is a welcome change that avoids the need for either: (i) accountable entities having to create a new role responsible for end-to-end product management; or (ii) having to undertake a potentially complicated analysis of the responsibilities of current executives (including middle managers) who are partly responsible for each type of financial product or service.
In addition to the prescribed positions and responsibilities under the Rules, FAR also retains a general principles test (that is, management or control of a significant/ substantial part of the ADI/ relevant group’s operations), in line with the current position under the BEAR, but instead of the ‘relevant group’ including the ADI and its subsidiaries (as is the case under BEAR), FAR defines ‘relevant group’ as the accountable entity and its SREs (which may not include all subsidiaries).
The Rules also provide (among other things) when an accountable entity meets the enhanced notification threshold based on total assets reported to APRA. This is the total asset size above which an entity is required to comply with enhanced notification obligations to the regulator. These obligations include:
- providing the regulator with an accountability statement for each accountable person, including providing notification to the regulator of material changes to those statements;
- providing the regulator with an accountability map, and notifying the regulatory when material changes are made to the accountability map; and
- taking reasonable steps to ensure that each of the entity’s significant related entities complies with the requirements above.
The thresholds for enhanced notification are as previously flagged by the Treasury.
