03 February 2020

Treasury’s proposals for a new Financial Accountability Regime

This article was written by Diana Nicholson, Tim Bednall and Rebecca Williams.

Treasury has released a Proposal Paper for the Financial Accountability Regime (“FAR”).  When legislated, FAR will impose a raft of significant new obligations on regulated entities, directors and senior management for many in the financial services industry. 

What is the FAR?

The proposed Financial Accountability Regime is part of the Federal Government’s response to the recommendations of the Financial Services Royal Commission regarding governance, accountability and culture, including the recommendation to expand the scope of the current Banking Executive Accountability Regime (“BEAR”). 

FAR will impose a stronger accountability framework on APRA-regulated entities and their senior executives and directors.  The Government’s stated intention is to “increase the transparency and accountability of financial entities in [APRA regulated] industries and improve risk culture and governance for both prudential and conduct purposes”.

The new regime will be both an expansion of BEAR – to cover a broader range of APRA-regulated entities – and a strengthening of the obligations imposed by BEAR on institutions and individuals. When legislated, FAR will replace BEAR in its entirety.

Which institutions will be affected?

All small, medium and large authorised deposit-taking institutions (“ADIs”) currently subject to BEAR will be affected by the proposed expansion of the regime.

In addition, FAR will extend to:

  • all operators of APRA-regulated superannuation entities (RSE licensees);
  • all general and life insurers, and private health insurers; and
  • all licensed non-operating holdings companies.

While the Royal Commission recommended a staggered commencement of the new regime, the Proposal Paper does not specify an implementation timetable.

Separate to the Royal Commission’s recommendations, the Government has also committed to expanding BEAR to entities solely regulated by ASIC (e.g., AFSL holders which are not also otherwise regulated by APRA).  Those entities are not covered by the current Proposal Paper, and the Government will consult on this after FAR is implemented for APRA regulated entities. 

How is this different to BEAR?

If legislated in the form outlined in the Proposal Paper, FAR would:

  • expand the regime to cover all RSE licensees, insurers and licensed non-operating holding companies (as well as all ADIs);
  • be jointly administered by APRA and ASIC;
  • require FAR entities to identify and register accountable persons for an increased number of roles and responsibilities.  This will include individuals who have senior executive responsibility for any significant business division/s, dispute resolution, remediation programs, breach reporting, or setting incentives.  It would also include an accountable person with end to end accountability for management of each product offered by the entity, although the scope of this responsibility remains subject to further consultation. Certain responsibilities are also prescribed for insurers (e.g. responsibilty for the actuarial and underwriting functions) and for RSE licensees (e.g. financial advice services).  Under BEAR, a single individual can fulfil multiple prescribed responsibilities;   
  • impose new Accountability Obligations on both the FAR entity and on individual accountable persons.  This would include a new obligation on accountable persons to take reasonable steps, in conducting the responsibilities of their position, to ensure that the entity complies with its licensing obligations.  This places conduct matters squarely within FAR’s domain, going beyond BEAR’s original focus on prudential standing and prudential reputation;
  • impose potential civil penalty liability on individual accountable persons (who, under BEAR, are already subject to the risk of disqualification, remuneration consequences and dismissal).  This could potentially impose material new liability on persons who have not historically been subject to liability as officers under the Corporations Act;
  • increase the maximum possible civil penalties for institutions, and potentially the range of breaches for which a civil penalty might be imposed; and
  • simplify institutions’ obligations to defer executive remuneration and submit “accountability statements” and “accountability maps” to APRA and ASIC.

A table summarising the key additional requirements of FAR, relative to BEAR, is below.


Topic

BEAR

Proposed FAR

Affected entities and classification 

  • Only ADIs
  • Entities are classified as small, medium or large ADIs, depending on their total resident assets
  • All ADIs, RSE licensees, general and life insurance licensees, private health insurance licensees, and licensed non-operating holding companies. FAR entities are also to take reasonable steps to ensure their significant or substantial subsidiaries comply
  • Entities to be classified as “core compliance” or “enhanced compliance” for the purposes of their accountability map and statements obligations
  • Entitles solely regulated by ASIC (e.g. AFSL holders not otherwise regulated by APRA) not affected at this stage

Regulator

  • APRA only
  • Dual administered by APRA and ASIC

Accountable Persons

 

A person will be an accountable person ("AP") if they either:

  • satisfy the “general principle” test – i.e. management / control of a significant / substantial part of the ADI / group’s operations
  • have a prescribed responsibility – i.e. nine prescribed executive functions, plus all directors
  • The current dual limbed approach would be retained, with seven new prescribed responsibilities for all FAR entities and additional responsibilities for insurers, RSE licensees and foreign branches.  This includes persons with senior executive responsibility for:
  • Significant business division/s
  • Dispute resolution
  • Remediation programs
  • End-to-end management of a product / product group and service provision (although these remains subject to a separate consultation process)
  • Setting incentives (for staff and customers)
  • Breach reporting
  • For insurers and RSE licensees, certain specified functions including claims and benefits entitlements handling, investments, actuarial and underwriting functions (for insurers), and financial advice services and retirement offerings (for RSE licensees)
  • Specified responsibilities for foreign branches (which provides welcome clarity), including SOOAs, Compliance Committee members for EFLICs, and Australian agents of Category C insurers
  • Accountability for these roles may attach to executives below the ExCo level, and may attach to executives in relation to multiple FAR entities within a corporate group
  • Application of some of these responsibilities to a single person will be challenging within typical corporate structures – for example, incentives frameworks will often be set by the Board on the advice of the Remuneration Committee, while the Board may also approve incentives for certain management, executives approve incentives for their teams, and the human resources function advises in relation to incentives generally

Accountability Obligations

Imposes standards of conduct on both APs and ADIs, relating to:

  • honesty and integrity;
  • open, constructive and cooperative dealings with APRA; and
  • taking reasonable steps to prevent matters arising that would adversely affect the ADI’s prudential standing or prudential reputation

The existing accountability obligations would be retained, with two new obligations: 

  • Additional obligation on APs to take reasonable steps in conducting their responsibilities to ensure that the entity complies with its licensing obligations – this is not limited to matters affecting the entity’s prudential standing or reputation
  • Additional obligation on APs and entities to have open, constructive and cooperative dealings with ASIC (which mirrors the existing obligation in relation to dealings with APRA)

Deferred remuneration obligations

  • ADIs required to defer a specified proportion of each AP’s variable remuneration for 4 years, if the deferred amount would exceed $50,000
  • Deferred proportion depends on the AP’s role (e.g. CEOs treated differently to other APs) and the size of the ADI
  • FAR entities required to defer 40% of variable remuneration for 4 years for all APs, if the deferred amount would exceed $50,000 – this is a more streamlined approach than BEAR
  • FAR will not limit the effect of the new Prudential Standard CPS 511, or impact on APRA’s ability to set separate prudential standards on remuneration. There are several aspects of the draft CPS 511 that do not align to BEAR, and it is not clear how the new requirements would sit with FAR if the new prudential standard were introduced in the form consulted on.

Accountability maps and statements

  • All ADIs required to submit accountability maps and statements to APRA, and notify APRA of all changes to them
  • Only “enhanced compliance” FAR entities will be required to submit accountability maps and statements to APRA / ASIC, and will only be required to notify APRA / ASIC of “material changes” (i.e. changes to accountabilities). “Core compliance” entities will not be required to do so, although will still be expected to identify and register appropriate accountable persons and will likely benefit from an accountability mapping exercise
  • “Enhanced compliance” entities would be: ADIs with “total assets” over A$10 billion, general insurers over $2 billion, life insurers over $4 billion, private health insurers over $2 billion, and RSE licensees over $10 billion (for all RSEs under trusteeship of a given licensee) – it is not yet clear that this is the same “total resident assets” test as for BEAR
  • However, “core compliance” entities could be re-classified to “enhanced” by regulators

Registration and approval of Accountable Persons 

  • APRA generally registers APs 14 days after receiving the relevant documents (with power to request additional information if required)
  • Individuals can act temporarily in an AP role without being registered for up to 28 days, but then must be registered
  • APRA to have “reserve power” to veto registrations / re-registrations of individuals as APs where it holds relevant information about the individual – any veto decision would be subject to internal review and review by the Administrative Appeals Tribunal
  • Individuals can act in an AP role for a longer period, expected to be 90 days, without registration – but will be taken to be the AP during that period

Penalties

  • Individual APs not exposed to civil penalties (but subject to disqualification by APRA and to remuneration consequences and / or dismissal by ADI)
  • For ADIs, civil penalties may apply where a breach of BEAR relates to “prudential matters”. The maximum civil penalty amount depends on the size of the ADI, up to $210 million per breach
  • For individuals, APs may be subject to civil penalties for breaching their accountability obligations, up to a maximum of $1.05 million (or three times the benefit derived or detriment avoided by the breach)
  • For FAR entities, civil penalties do not appear to be limited to breaches relating to “prudential matters” but may apply to any breach of FAR.  Maximum penalties will be the greater of: (i) $10.5 million; (ii) 10% of annual turnover, up to $525 million; or (iii) three times the benefit derived or detriment avoided by the breach
  • RSE licensees to be prohibited from using trust assets to pay civil penalties, with the court able to consider the penalty’s impact on fund membership


Implications for accountability in financial services

While dual administration and the extension of BEAR to new entities has been anticipated since the Royal Commission released its report a year ago, the FAR proposal reflects a significant expansion of the regime and its consequences. In particular, the introduction of new Accountable Person roles, expanded Accountability Obligations and civil penalties for individuals would materially alter the accountability landscape for senior management and directors – including by imposing heightened standards on individuals who have not been subject to directors’ and officers’ duties under corporations laws.  Affected entities will need to carefully consider whether their existing operating structures and governance arrangements align to the proposed approach. 

It is unclear weather the new requirements of FAR will also apply to APRA, ASIC and their respective accountable persons, in line with the recommendations of the Royal Commission.  APRA and ASIC published their accountability statements in December 2019.   

Timetable

The Government intends to consult on and introduce legislation to Parliament by the end of 2020.

No implementation timetable has been proposed at this stage. The Royal Commission report recommended sequential implementation (starting with the largest RSE licensees, then the remaining RSE licensees, largest insurers, other insurers).  Whether the Government (informed by APRA’s BEAR experience) also prefers sequential implementation over a single commencement date remains to be seen.

What’s next?

The deadline for submissions to Treasury’s consultations is next Friday 14 February 2020. If you are interested in making a submission, the listed contacts would be pleased to hear from you. 

Key contacts

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