The Financial Accountability Regime (FAR)

Written by Diana Nicholson, Tim Bednall, Rebecca Williams and Daniel Goldblatt.

On 16 July 2021, the Federal Treasury published an exposure draft of the Financial Accountability Regime Bill 2021 (Draft Legislation).

The Financial Accountability Regime (FAR) will extend and replace the current Banking Executive Accountability Regime (BEAR) from mid-2022.

This article provides a summary of certain key issues raised in KWM's submission to Treasury regarding the Draft Legislation. We also made further submissions on other aspects of the Draft Legislation which are not summarised here.

We have published a series of alerts that provide an overview of FAR and how it will affect authorised deposit-taking institutions (ADIs), registered superannuation entity licensees (RSE licensees) and regulated insurers, as well as their directors and senior executives who will become "accountable persons". Read our previous alerts:

Onerous new obligation on individuals to ensure compliance with financial services laws

Proposal

The Draft Legislation broadly preserved the existing "accountability obligations" for individual "accountable persons" under BEAR. It also proposed a new "accountability obligation" which would require each of them to "take reasonable steps to ensure that accountable entity complies with" a long list of financial services laws, including FAR itself, the Banking Act, Insurance Act, Private Health Insurance (Prudential Supervision) Act and the Superannuation Industry (Supervision) Act, and other financial services laws including as specified under the Corporations Act.

Based on our discussions with Treasury and industry, we understand that the intention behind the proposed new obligation was to reflect the new "conduct focus" of FAR, per the Royal Commission's recommendations. In that sense, the new obligation would mirror the existing "prudentially focused" obligation on accountable persons to take reasonable steps to prevent matters that adversely affect their entity's prudential standing or reputation.

Like BEAR, the Draft Legislation contemplates an inclusive definition of matters that will be relevant to whether a person has taken those "reasonable steps" (in section 20). Treasury proposes to insert two further limbs into that definition, requiring that an accountable person must:

take appropriate action to ensure compliance in relation to those matters; and
take appropriate action in response to non-compliance or suspected non-compliance.

Submissions

In our view, this new obligation risks inconsistency with the financial services legislation with which it requires compliance. In developing and legislating those financial services laws, the legislature has already considered how best to ensure entities comply with those laws. The existing legislation also establishes standards of liability, defences and safe harbours, reflecting the balance that the legislature considered appropriate at the time those laws were made and which have been tested by Courts and adopted by industry practice. These potential inconsistencies create a real risk of individuals potentially being liable for the same underlying conduct under both the prescribed legislation and FAR, further muddying the waters in an already saturated regulatory sector.

This approach also further entrenches a stepping stones approach to directors' and officers' liability for a company's breach of financial services laws, extending it to individuals who might not ordinarily be considered officers. Read our previous alerts about stepping stones in the Corporations Act context:

Ancillary civil penalty liability for individuals

Proposal

Treasury's previous FAR proposal (released in February 2020) flagged that civil penalties would become applicable to individual accountable persons for breaches of their accountability obligations. Fortunately, individual civil penalties were not specifically prosecuted in the Draft Legislation. However, the Draft Legislation did contemplate that individual accountable persons (and others) could be subject to 'ancillary' civil penalty liability in the event they are involved in a breach by the entity (eg, by aiding, abetting, counselling or procuring).

Submissions

The potential inclusion of ancillary liability for individuals is concerning. FAR already creates an extensive "primary" liability regime for accountable persons. These provisions already carry specific consequences, including disqualification and limiting remuneration. We understand that Treasury is aware of the concerns surrounding ancillary liability and will release a further proposal for consultation soon.

Further, the Draft Legislation does not include clear guidance as to the penalties associated with ancillary liability. In our submission, we put to Treasury that the maximum penalties available under FAR's ancillary liability regime should be capped to ensure that it is materially smaller than the penalties which apply to accountable entities.

Extension of FAR to "significant related entities" of RSE licensees

Proposal

Under the Draft Legislation, a body corporate will in most circumstances be a significant related entity of an RSE licensee if it is (i) a connected entity of the RSE licensee, and (ii) it has a material and substantial effect on the accountable entity or its business or activities.

Submissions

In our submission, we argued that the proposed legislation will substantially increase the regulatory impact of FAR without achieving the regulatory benefits intended by the Draft Legislation or the Financial Services Royal Commission.

In particular, the proposed definition of "connected entities" in the Draft Legislation has unfortunate consequences for significant related entities of RSE licensees. Under the current drafting several entities will be captured by the "connected entities" definition, including parent companies and related party service providers (e.g. sister companies). These changes have the consequence of subsidiaries being responsible for ensuring their parent and sister companies comply with FAR. The proposed regime therefore creates a competitive disadvantage for RSE licensees who are part of a broader corporate group compared to stand‑alone RSE licensees. We understand Treasury are considering this further and we look forward to reviewing the revised proposal.

New prescribed responsibilities

FAR contemplates a new accountable person being appointed for "end-to-end product responsibility", despite previous industry feedback. In our experience, implementing end-to-end product responsibility will be extremely challenging for accountable entities and their group. This is because, amongst other things:

end-to-end product responsibility will overlap with the new design and distribution obligation legislation;
it is challenging for a single person to have the necessary skillset to be responsible across multiple areas of an organisation; and
the definition of "product" is unsatisfactory under the Draft Legislation.

We also consider that the responsibility should be reframed as applying to the design, governance, management and monitoring of the end-to-end product value chain instead of responsibility for execution of individual components of that chain.

In addition, Treasury has proposed that new accountable persons be appointed as responsible for compliance frameworks, breach reporting frameworks, dispute resolution frameworks, and remediation frameworks. Management of these functions are not typically executive-level responsibilities, which is incongruous with Treasury's expectation that accountable persons will typically be direct reports to the CEO. Typically the "first line" business is responsible for handling regular customer or member complaints, and we have suggested that Treasury should provide further guidance as to whether these arrangements will be disturbed by FAR.

Where to from here?

Treasury has acknowledged the concerns raised by industry submissions, which we hope to see translate to changes in revised draft legislation. Treasury has previously indicated it intended to put the Draft Legislation before Parliament during the Spring parliamentary sittings although this timing remains to be confirmed.

We understand that Treasury next intends to consult further on discrete aspects of FAR (i.e. transitional provisions and certain rules which will need to be made by the Minister).

This article provides a high-level overview of the key points from KWM's submission. If you are interested in receiving the KWM submission in its entirety or have any other queries in relation to how FAR will affect you, please contact Diana Nicholson or Tim Bednall or your usual KWM contact.