One of the recommendations following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was to extend the accountability regime known as the Banking Executive Accountability Regime (BEAR) across the Australian financial services industry.
While the Government plans to extend the accountability regime across all APRA and ASIC regulated entities, they are starting the rollout with all APRA regulated entities (authorised deposit-taking institutions (ADIs), registrable superannuation entities (RSEs), life, general and private health insurers and non operating holding companies (NOHCs)). The regime will be known as the Financial Accountability Regime (FAR).
Summarily, FAR will require senior executives and all board members to be registered with APRA or ASIC. Being registered under FAR will require senior executives and board members to have accountabilities and obligations individually assigned to them. Consequences of breaching FAR include penalties, both for individuals and entities, and adjustments to remuneration entitlements. Further details on how the FAR is proposed to work can be found at the end of this article.
The Government’s FAR proposal does not set out an effective date, however legislation is expected to be introduced into Parliament in the spring sitting and passed by the end of 2020. We believe that it is the industry’s preference for the application date of the FAR to align to the new remuneration standard (CPS 511), however this is becoming increasingly unlikely to happen. The effective date of FAR may be as early as 1 July 2021 but we expect to know more details on timing when the draft legislation and information paper are released in July 2020.
Enhancing accountability in a member outcomes environment
Superannuation trustees are currently implementing significant changes to embed member outcomes considerations through their business operations. These reforms, together with improved governance and risk management practices, are currently dominating trustee priorities. The uplift in strategic decision making that is accompanying the implementation of the member outcomes reforms is causing many trustees to reconsider how they are delivering outcomes to members and whether they need to pivot their strategies to better meet member needs. As part of this process, trustees are identifying who in their business (and which material service providers) are responsible for delivering their desired member outcomes. At the same time, trustees need to be clarifying roles and responsibilities with material service providers to ensure a shared sense of purpose in the pursuit of better outcomes for members. Bringing a FAR lens to these deliberations is increasingly being seen as an effective way to implement the principles of both sets of reforms.
There is also an opportunity for Trustees Directors and Executives to proactively effect change by reinforcing a culture of accountability as member outcomes become part of the fabric of their business.
In addition to the member outcomes activities above, there are some key ’no regrets’ activities that trustees can start acting on now, including:
- Consider what the FAR will mean for your organisation;
- Identify and consider who your organisation’s accountable persons population could be;
- Draft accountability statements and an accountability map to utilise the benefits of the FAR;
- Develop a reasonable steps framework which supports accountable persons in the discharge of their accountability obligations;
- Set financial and non-financial consequences as part of setting accountable persons expectations; and
- Communicate effectively and engage early with your organisation’s key stakeholders (including vendors and accountable persons delegates).
To enhance successful implementation of the FAR, ownership of the program is critical and needs to be identified upfront with appropriate representation across the business (such as people and culture, risk, compliance, legal and member services). RSEs can get ahead by establishing ownership and setting up a project team to drive implementation of the program. The ownership of the regime should sit with a senior executive who will be the contact point for the board and senior executives as the identified accountable persons.
Each organisation is structured differently and careful consideration must be given as to who is the most senior executive with accountability for particular key aspects of the operations of the business. Further, particularly for RSEs, outsourcing should be considered, and a senior executive should be identified who will be accountable for the outsourced activity. Outsourcing and service level arrangements may need to be further developed and defined.
Implementation tips
There is no need to wait for the legislation to be passed to start working on the implementation of FAR. Experience with BEAR showed that many firms did not prepare early enough and did not achieve the potential benefits of implementing an accountability regime.
Under an effective accountability regime, it is important to have robust governance, culture, risk, accountability and remunerations frameworks in place. RSEs should take the learnings from their APRA self-assessments and enhance any of their existing artefacts. This will form part of the reasonable steps taken to demonstrate how accountable persons have discharged their responsibilities.
Another key consideration are the remuneration requirements. RSEs will need to invest time to comply with the FAR and ensure accountability is enforced via remuneration outcomes. Remuneration policies should be updated before the regime comes into force. This is because the FAR is expected to apply to any variable remuneration payments made on or after the application date (similarly to the implementation of the BEAR), so remuneration policies and plans need to be updated ahead of time.
Additionally, as APRA-regulated entities, RSEs will need to comply with the remuneration requirements set out under the Draft CPS 511 (previously SPS 510). Now is the time to plan ahead and align potential remuneration changes under FAR and CPS 511 collectively, to your organisation’s remuneration review cycle. Experience from implementing the BEAR suggests that the effort and complexity should not be underestimated.
Consultation and collaboration
Treasury is consulting with industry on how to practically implement FAR to ensure the best possible outcomes. The formal consultation period closed on 14 February with over 40 industry responses received. The ASFA FAR working group met with Treasury, APRA and ASIC on 20 February 2020. Further guidance (such as an explanatory memorandum and regulatory information papers) on some of the key practical issues of implementation of the legislation is expected to be released in July 2020 following the release of the FAR exposure draft. We hope that ASIC and APRA will work together to jointly produce helpful guides to assist firms in their FAR implementation projects.
FAR details – Government’s proposed model
Under the FAR, entities will be classified as Core compliance entities or Enhanced compliance entities.
- Core compliance entities (Total Assets <$10bn*): will be subject to all obligations under the FAR except for a requirement to submit an Accountability Map and Statements to APRA and ASIC (however the Accountability Map can be subject to regulatory review at any time).
- Enhanced compliance entities (Total Assets >$10bn*): will be required to meet all the obligations under the FAR.
*the combined total assets of all RSEs under the trusteeship of a given RSE licensee.
Like BEAR, the FAR will impose the following:
- entity obligations;
- accountable person obligations;
- accountability map and accountability statement obligations;
- registration
and notification obligations; - deferred remuneration obligations; and
- penalties
Entity obligations
Similar to the BEAR, all entities including RSE licensees will be required to take reasonable steps to:
- conduct its business with honesty and integrity, and with due skill, care and diligence;
- deal with APRA and ASIC in an open, constructive and cooperative way;
- in conducting its business, prevent matters from arising that would adversely affect the entity’s prudential standing or prudential reputation;
- ensure that each of its accountable persons meets their accountability obligations; and
- ensure that each of its significant or substantial subsidiaries that are not subject to the FAR, comply with all the above obligations as if the subsidiary were subject to the FAR (to the extent that the obligations are relevant to the subsidiary).
As per the BEAR, the key personnel obligations for the entity will be to:
- ensure that the responsibilities of accountable persons cover all aspects of the operations of the entity and its significant or substantial subsidiaries;
- ensure that none of the accountable persons are prohibited under the FAR;
- comply with APRA and ASIC directions to reallocate responsibilities; and
- take reasonable steps to ensure that each of the entity’s subsidiaries that is not a FAR entity complies with obligations (2) and (3) above.
Accountable person obligations
There are heightened accountable person obligations under the FAR of which accountable persons will be obliged to:
- act with honesty and integrity, and with due skill, care and diligence;
- deal with APRA and ASIC in an open, constructive and cooperative way (noting that this will not displace legal professional privilege);
- take reasonable steps in conducting those responsibilities to prevent matters from arising that would adversely affect the prudential standing or prudential reputation of the entity; and
- take reasonable steps in conducting their responsibilities as an accountable person to ensure that the entity complies with its licensing obligations*
*New obligation under the FAR
Accountability statement and accountability map obligations
It is proposed that only enhanced compliance entities will be required to provide APRA and ASIC with an accountability map and individual accountability statements, showing which accountable person is responsible for the various activities of the entity’s business. Although core compliance entities will not be required to submit accountability statements and maps, they are required to undertake a process to identify and register their accountable persons to cover all aspects of their business.
Registration and notification obligations
FAR will be governed by both APRA and ASIC. ‘Accountable persons’ are required to be registered with APRA or ASIC. It is proposed that changes to the accountable persons population should be communicated to APRA and ASIC prior to any future senior appointments. APRA will be able to veto the appointment or reappointment of senior executives and directors, but this is expected to be a reserve power.
Deferred remuneration obligations
All core compliance and enhanced compliance entities will be required to defer 40 per cent of executives’ variable remuneration for at least four years. Entities will be required to have a remuneration policy that allows for a reduction in variable remuneration. It is unclear at this stage whether there will be a prescriptive requirement around the reduction that should be applied. Entities subject to CPS 511 will need to comply with those heightened requirements including for deferred remuneration arrangements.
Penalties
Under the FAR, there are penalties for the organisation as well as for individual accountable persons.
The maximum penalties for an entity under the FAR will be the greater of the following:
- 50,000 penalty units (currently $10.5m);
- 3x the benefit derived or detriment avoided by the body corporate because of contravention; or
- 10 per cent of annual turnover of the body corporate, to a maximum of 2.5m penalty units (currently $525m)
Similar to BEAR, APRA has disqualification power to remove an individual from their role and in extreme cases, prevent them from taking any similar role in the industry in the future. Unlike BEAR, accountable persons will be liable for civil penalties under the FAR. The maximum penalties will be the greater of:
- 5,000 penalty units (currently $1.05m);or
- 3x the benefit derived or detriment avoided because of the contravention.
As under the BEAR, entities will be prohibited from indemnifying or paying the cost of insuring accountable persons against the consequences of breaching the FAR. However, the proposed reforms will not prevent executives from obtaining insurance that they would otherwise be permitted to obtain to cover the financial loss arising as a result of a civil penalty being imposed against them for a breach of the FAR.
