FAR update

Introduction

The Financial Accountability Regime (FAR) implements the recommendations of the Financial Services Royal Commission to expand the existing Banking Executive Accountability Regime (BEAR) across the Australian financial services sector.

It was established by the Financial Accountability Regime Act 2023 (Cth) (Act), which received royal assent on 14 September 2023 following a lengthy parliamentary process.

The FAR commenced for authorised deposit-taking institutions (ADIs) and their authorised non-operating companies (NOHCs) on 15 March 2024. It will commence for insurance entities, their licensed NOHCs and superannuation trustees on 15 March 2025.

The FAR imposes a strengthened responsibility and accountability framework for these entities, their directors and certain senior executives.

In this article, we summarise the key elements of this regime and some key milestones in its roll-out following its passage through parliament.

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Obligations under the FAR

The FAR introduces four core sets of obligations:

1. accountability obligations for accountable entities and accountable persons;
2. key personnel obligations;
3. deferred remuneration obligations; and
4. notification obligations.

We have discussed each of these in turn below.

Accountability obligations – under the FAR, accountable entities must take reasonable steps to:

1. conduct its business with honesty and integrity, and with due skill, care and diligence;
2. deal with the Regulator in an open, constructive and cooperative way;
3. in conducting its business, prevent matters that would (or would be likely to) adversely affect the prudential standing or prudential reputation of the accountable entity;
4. ensure that each of its accountable persons meets their accountability obligations; and
5. take reasonable steps to ensure that each of its significant related entities complies with the above obligations as if the significant related entity were an accountable entity.

Similarly, accountable persons have duties to conduct their responsibilities of their position by:

1. acting with honesty, integrity, and will due skill, care and diligence; and
2. dealing with the Regulator in an open, constructive and cooperative way; and
3. taking reasonable steps in conducting those responsibilities to prevent matters from arising that would (or would be likely to) adversely affect the prudential standing or prudential reputation of the accountable entity; and
4. taking reasonable steps to ensure their accountable entity complies with certain specified financial services legislation – including the Banking Act, credit legislation, life insurance and PHI legislation, the SIS Act and other laws relating to the provision of financial services.

Key personnel obligations – each entity must register its accountable persons with ASIC and APRA.

Deferred remuneration obligations – the FAR legislation requires a minimum of 40% of an accountable person's variable remuneration to be deferred for a period of 4 years (or longer where an accountable entity considers an accountable person is likely to have breached their accountability obligations). It also requires variable remuneration to be reduced where an accountable person breaches their accountability obligations.

Notification obligations – Under the FAR, all FAR-regulated entities “must notify APRA/ASIC of their registered persons, material changes, and relevant FAR breaches. "Enhanced notification entities” (i.e. larger scale entities) also need to submit accountability maps and accountability statements for each accountable person.

Guidance

Since the Act was passed, there have been a number of updates:

3 October 2023: APRA and ASIC commence joint administration

In October, APRA and ASIC published an information package to support the financial services industry in implementing the FAR. The information package comprised three documents:

1. the Joint Administration Agreement between APRA and ASIC (which builds upon APRA and ASIC’s Memorandum of Understanding, and set out the roles for each Regulator in administering the FAR consistent with the “twin peaks model");
2. a joint information paper providing guidance for ADIs on the transition to the FAR (for ASIC purposes: Regulatory Guide 278 “ADIs: Transitioning to the Financial Accountability Regime”) (which includes guidance on key activities for “enhanced” and “core” ADIs); and
3. an ADI accountability statement guidance and template (which is similarly in format to the previously released BEAR template).

We have previously discussed this elsewhere: APRA and ASIC commence Joint Administration of the new Financial Accountability Regime - KWM

8 March 2024: Rules finalised and regulatory guidance released

In early March, the following ministerial and regulator rules were finalised and published:

1. Financial Accountability Regime (Minister) Rules 2024 which, amongst other things, (i) prescribes certain responsibilities and positions by which directors and senior executives become Accountable Persons and (ii) sets the “enhanced notification threshold”;
2. Financial Accountability Regime Act (Information for register) Regulator Rules 2024 which prescribes information, including key functions for ADIs (which are to be included in the FAR register of Accountable Persons to the extent required by the Rules); and
3. Financial Accountability Regime (Consequential Amendments) Transitional Rules 2024 which prescribe information, including key functions, to be provided by ADIs in relation to their existing Accountable Persons under the BEAR for the transition to the FAR.

This has been further discussed here: Financial Accountability Regime – Rules finalised and further regulatory guidance released – KWM

14 March 2024: Cross-industry information package released

A week later, APRA released a consultation package for insurance and superannuation entities which included steps for these entities to take prior to the FAR commencing in March 2025 and proposed amendments to the Regulator rules and draft key functions for insurance and superannuation entities.

They also released an information package that was relevant to all industries which included:

1. an information paper to assist entities and their accountable persons in understanding and complying with their obligations under the FAR;
2. an updated accountability statement guide and template to help entities subject to the FAR enhanced notification obligations to prepare accountability statements; and
3. reporting form instructions to assist entities in reporting breaches of the FAR to APRA and ASIC.

Further assistance from KWM

Complying with the FAR involves a detailed examination of accountability practices, organisation structures, internal governance and reporting, remuneration design, and breach investigation and notification arrangements.

For assistance in this transition and for further information regarding the operation of the FAR, including guidance on significant related entity identification, reasonable steps and breach reporting, please do not hesitate to contact a member of the King & Wood Mallesons team.