More executives to face personal responsibility under proposed Financial Accountability Regime (FAR)

The Federal Treasury has started the year by releasing a Proposal Paper outlining a revised Financial Accountability Regime (FAR), which would extend the current BEAR accountability framework to a wider range of regulated financial institutions.

The Hayne Royal Commission made a number of recommendations relating to extending the Banking Executive Accountability Regime (BEAR). This Proposal Paper is the Government’s first step towards implementing five of the Commission’s 76 recommendations.

FAR supersedes BEAR and, according to the Proposal Paper, provides a mechanism to extend the regime to all Superannuation Funds and Insurers, including Private Health Insurers.

It follows that many more executives will face the personal responsibility that comes with being an “accountable person”.

 

This revised approach signals some good news for small and mid-sized financial institutions.

In the spirit of proportionate regulation, Treasury proposes two size-based regimes to determine the extent of compliance required. Entities will either be classified as:

  1. Core Compliance Entities (CCEs); or
  2. Enhanced Compliance Entities (ECEs).

For the purpose of FAR, Enhanced Compliance Entities are:

Entity type

Metric

ADIs > $10 billion assets
General Insurers > $2 billion assets
Private Health Insurers > $4 billion assets
RSE Licensees > $10 billion assets

While Treasury states this Proposal Paper addresses five of the Royal Commission’s recommendations, APRA has already taken steps towards addressing one of these recommendations – publishing its own BEAR-style accountability maps in December 2019.

 

Different compliance requirements await ADIs and non-ADIs. It is important all financial institutions take key steps in assessing their current and future obligations.

For ADIs – lessening the compliance burden

ADIs who are CCEs would no longer need to submit accountability maps and statements, nor would they need to notify APRA of any changes made to these maps and statements.

For non-ADIs – prepare for additional responsibilities

For all non-ADIs, FAR will represent an additional compliance burden with real consequences for remuneration for all “accountable persons”.

It is important to note that the proposed FAR contains a list of 17 “particular responsibilities” for all entities who are not branches. The list of accountable persons will likely need to grow beyond those currently applicable under BEAR.

Important advice for all financial institutions

All financial institutions are urged to consider the impact of these proposed changes on their business. As a start:

  • Determine whether your business is a CCE or ECE, then compare your current responsibilities against those identified in BEAR accountability maps.
  • Review the summary of the penalty regime applicable to FAR. While our view is that the maximum penalty is unlikely to be imposed in all but the most significant contraventions, the penalty regime has increased in recent times. Penalties can be the greater of:
    • $10.5 million;
    • Three times the benefit obtained by the contravention; or
    • 10% of annual turnover.

A few additional considerations

It is important to note that this is a Proposal Paper and will be subject to consultation. If your organisation wishes to make a submission it must do so by 14 February 2020.

The FAR Proposal Paper does not address the Federal Government’s additional commitment to extend the current BEAR (or soon to be FAR) to holders of Australian Financial Services licenses who are not APRA regulated. The timeframe for this is not specified in the paper, however the Government’s roadmap indicates this will be consulted on and introduced by the end of 2020.

For those considering the interaction between the new Prudential Standard CPS511 and FAR, there are some inconsistencies. Most notably, CPS511 adopts a definition of “significant financial institution” which involves much higher asset-based thresholds than those identified for CCEs and ECEs. CSP511 is also silent on its application to Private Health Insurers.

Time will tell whether these inconsistencies will receive further clarification.

Unsure of how this applies to your financial institution?

We have significant experience working with ADIs to implement BEAR, and we are well placed to assess the impacts of FAR, identify “accountable persons” and produce accountability maps and statements.

If you need any guidance navigating these proposed changes, we are here to assist you.