How far we’ve come: Financial Accountability Regime passes Senate

Introduction

Following a lengthy parliamentary process, the Financial Accountability Regime Act 2023 (Cth) (the “Act”) was passed in the Senate on 5 September 2023 and is now awaiting Royal Assent.

As previously reported, the Act 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 (“BEAR”). The regime will be jointly regulated by the Australian Prudential Regulation Authority ("APRA") and the Australian Securities Investments Commission (“ASIC”) (together, the “Regulators”).

Amendments proposed by the Australian Greens in relation to direct financial penalties for individual accountable persons do not feature in the final Act. However, as identified in our previous commentary financial penalties could still potentially be imposed on individuals in certain circumstances under new ancillary liability provisions.

In this note, we summarise the approach for financial services participants to identify their FAR-regulated entities and people. This approach will be informed by regulator guidance, which it is understood ASIC will now provide following the Act’s passage through parliament.^[1] The regulator guidance should provide FAR-regulated entities with a useful roadmap to identify their accountable entities, significant related entities and accountable persons.^[2]

Further information regarding the Financial Accountability Regime under the Act (“FAR”) and detailed analysis regarding the more substantial changes from the BEAR regime can be found in our previous alerts:

Identifying accountable entities and significant related entities

FAR applies directly to “accountable entities” and indirectly to “significant related entities” of accountable entities.

Accountable entities

The following financial services participants are accountable entities under FAR:

Authorised Deposit-taking Institutions (“ADIs”);
general insurers, life companies and private health insurers;
non-operating holding companies (NOHCs) of ADIs, general insurers and life companies; and
trustees of APRA-regulated superannuation funds (“RSE licensees”).

Significant related entities

(a) ADIs, insurers and their NOHCs

An entity will be a significant related entity (“SRE”) of an accountable entity (other than an RSE licensee) if:

it is a subsidiary of the accountable entity; and
it (or its business or activities) has (or is likely to have) a material and substantial effect on the accountable entity (or on the accountable entity’s business or activities).

A body corporate will be a subsidiary of an accountable entity if the accountable entity:

controls the composition of the body corporate’s board; or
is in a position to cast, or control the casting of, more than 50% of the maximum number of votes that may be cast at a general meeting of the body corporate; or
holds more than 50% of the issued share capital of the body corporate; or
the body corporate is a subsidiary of a subsidiary of the accountable entity.

(b) RSE licensees

An entity will be an SRE of an RSE licensee if:

it is a “connected entity” of an RSE licensee; and
it (or its business or activities) has (or is likely to have) a material and substantial effect on its accountable entity (or on the accountable entity’s business or activities).

A “connected entity” is defined by reference to the Superannuation Industry (Supervision) Act 1993 (Cth) and captures several entities including:

subsidiaries of the RSE licensee;
other related bodies corporate of the RSE licensee (for example, parent companies and related party service providers (sister companies)); and
entities with certain control relationships with the RSE licensee.

(c) Identifying SREs

In determining which entities will be SREs subject to FAR, financial services participants should:

consider their group structure and identify all subsidiaries and connected entities of their accountable entities; and
consider the relationships and arrangements between their accountable entities and any subsidiaries and connected entities identified in (i). This should include a consideration of the nature/extent of any subsidiaries’ and connected entities’ financial, operational and reputational impact on their respective accountable entities (including the accountable entities’ business and activities).

The Regulators will consider and confirm the list of accountable entities and significant related entities which institutions propose prior to the commencement of FAR. Regulator guidance in this respect is expected to be released soon after the Act passes parliament.^[3]

Accountable persons

An individual will be an accountable person of an accountable entity if any of the following apply:

1. they hold a position in the accountable entity or in another body corporate of which the accountable entity is:

(a) a subsidiary (of a non-RSE licensee) or a connected entity (of an RSE licensee); and

(b) because of that position they have actual or effective 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 the accountable entity’s relevant group (noting that the relevant group of an accountable entity means that accountable entity and its significant related entities);

2. they hold a position in, or relating to, the accountable entity and because of that position they have a responsibility, relating to the accountable entity, prescribed by the Minister rules; or

3. they hold a position in an accountable entity that is a position prescribed by the Minister rules.

An individual will be an accountable person of an SRE if:

1. they hold a position in the SRE; and

2. because of that position they have actual or effective 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 the accountable entity’s relevant group (noting that the relevant group of an accountable entity means that accountable entity and its significant related entities).

What’s next?

The Financial Accountability Regime (“FAR”) will apply to ADIs and NOHCs of ADIs six months after commencement of the Act (anticipated to be March 2024) and to any new entrants beyond that, from the time they become an ADI or a NOHC of an ADI, replacing the current Banking Executive Accountability Regime. The FAR will apply to general insurers and life companies (and their respective NOHCs), private health insurers and RSE licensees 18 months after commencement of the Act (anticipated to be March 2025).

We understand that APRA and/or ASIC still intend to release guidance in relation to FAR and the finalised Minister rules prior to the Act’s commencement. However, in the interim APRA and ASIC have released early consultation drafts of the:

“regulator rules”, to be made under subsection 105(1) of the FAR Act;
“ADI key functions descriptions”; and
“transitional rules” for ADIs (banks).^[4]

The draft regulator rules propose a list of the functions in an ADI for which an “Accountable Person” must be responsible. They key functions listed are largely peripheral and do not include many core responsibilities listed under the BEAR (10 identified responsibilities), or the list in the draft “Minister Rules” released by Treasury in 2022 (14 responsibilities). The regulator rules identify an additional 20 functions for which an Accountable Person must be responsible, some of which are “subsets” of the responsibilities listed in the draft Minister Rules.

The process for identifying accountable entities, significant related entities and accountable persons is an iterative and consultative process that can take some time. This is particularly true for FAR-regulated entities that were not previously regulated by BEAR. To add to the complexity, in our experience there is no uniform approach to implementing FAR due to the differing ways organisations are structured, and the other legal and regulatory obligations that financial services institutions need to discharge in addition to FAR. King & Wood Mallesons has advised extensively on the implementation of BEAR and FAR, as well as ongoing accountability governance and issues management. If you would like to discuss how FAR will affect your institution, please reach out to our key contacts or your usual King & Wood Mallesons contact.