What APRA-regulated entities need to know about the regime
5 min read
On Friday 16 July, Treasury released for consultation various documents in relation to the eagerly awaited Financial Accountability Regime (FAR). These include the draft Bill, Explanatory Memorandum, Information Paper and Policy Paper. Interested parties have up until 13 August 2021 to lodge a submission, with Treasury stating its intention is for the legislation to pass in the Spring 2021 sitting of Parliament.
In this Insight we provide a brief snapshot of the new regime as well as an overview on timing, and key considerations all APRA-regulated entities will need to start thinking about.
- ADIs will need to assess how to transition from the Banking Executive Accountability Regime (BEAR) to the FAR, taking into account some of the key changes under the new regime. These include enhanced accountability for four areas, new obligations imposed on accountable persons and extension to their non-operating holding companies (NOHCs).
- Other APRA-regulated entities who do not have the benefit of the foundation of the BEAR will have a lot to grapple with in the coming months to ensure their accountability frameworks can achieve compliance. Entities will need to focus on how to:
- map accountabilities across their organisation to individual accountable persons;
- clarify governance structures to align with the new accountability framework; and
- in the case of 'enhanced' compliance firms, record these accountabilities on paper.
Timings and guidance for the regime
Treasury's stated intention is that the legislation will pass in the Spring sitting of Parliament, and then progressively come into force:
- for ADIs and their NOHCs from the later of 1 July 2022 or six months after commencement of the regime;
- for other APRA-regulated entities (including insurers and registrable superannuation entities), from the later of 1 July 2023 or 18 months after commencement.
To assist with implementation, Treasury has indicated that the regulators intend to publish joint regulatory guidance and engage with accountable entities to:
- understand how ADIs intend to transition from the BEAR to the FAR;
- request from 'enhanced' compliance entities draft accountability maps and statements for review and comment; and
- seek from 'core' compliance entities, other information such as a draft list of accountable persons.
Snapshot: Financial Accountability Regime Bill 2021
Financial Accountability Regime
|What entities will it apply to?
- All APRA-regulated entities, including insurers and RSEs.
- ADIs currently subject to the BEAR will automatically transition to FAR.
- NOHCs of the above.
|How will entities be classified?
- ‘Core’ and ‘enhanced’ compliance entities will replace current classification under BEAR of ADIs as small, medium or large. For all entities (except NOHCs) the relevant metric will be total asset value.
- Only 'enhanced' compliance entities will be required to submit accountability maps and statements.
|Who are accountable persons?
- Like BEAR, there is a general principle that a person is an Accountable Person if they have senior executive responsibility for a significant or substantial part of the entity.
- Also like BEAR, there will be a list of functions (eg finance, risk, IT, HR) for which there must be an accountable person. Unlike BEAR, this list will be set by Ministerial Direction (no doubt to give flexibility).
- Of interest to ADIs, the policy paper suggests that the following new functions will be prescribed:
- end-to-end product;
- dispute resolution;
- remediation; and
- breach reporting.
- There will be additional prescribed accountabilities for NOHCs, RSE licensees and general insurers.
|What are the key obligations?
- Accountable entities will be required to comply with similar obligations to those currently under the BEAR. These include obligations in respect of:
- accountability, including general obligations for the entity to conduct its business with honesty and integrity, and with due skill, care and diligence, and prevent matters from arising that would (or would be likely to) adversely affect its prudential standing or reputation;
- key personnel;
- accountability maps and statements;
- notifications to the Regulator (which will now be via a prescribed form, and include two new notification events);
- deferred remuneration; and
- to deal both ASIC and APRA in an open, constructive and co-operative way.
- An accountable entity will also have obligations in relation to 'significant related entities' whose poor behaviour has the potential to adversely affect the prudential standing or reputation of the entity itself.
- Accountable persons are also regulated under BEAR and are obliged to, among other things, act with honesty and integrity, and with due skill, care and diligence and deal with APRA and ASIC in an open, constructive and co-operative way. A key extension from BEAR is that accountable persons are also obliged to take reasonable steps to ensure compliance by the entity with certain laws relating to the financial sector, which are within their area of responsibility.
|Who will regulate FAR?
|FAR will be jointly administered by ASIC and APRA. However, for those entities that do not hold an AFSL or ACL, administration of the regime will generally only be exercisable by APRA.
|How will FAR be administered and enforced?
- Stronger penalties for contraventions of FAR will apply. For an entity, a civil penalty the greater of 50,000 penalty units, 3x value of the benefit derived/detriment avoided or 10% of annual turnover up to 2.5 million penalty units.
- For an accountable person, disqualification or reallocation of their responsibilities. The draft Bill has not taken up a previous proposal that accountable persons also be subject to penalties for breaches of their obligations, but does leave open a potential 'back-door' for individuals to be subject to a civil penalty for a FAR breach by the accountable entity via the ancillary liability provisions in s92 of the Regulatory Powers Act 2014.
- Similar to BEAR, there are a variety of tools APRA and ASIC may rely upon to administer the regime. These include information gathering and investigation powers, power to issue directions relating to non-compliance, and powers to disqualify an accountable person.
|Other points of note
|The draft Bill provides additional detail on what amounts to taking 'reasonable steps'. This includes taking appropriate action to ensure compliance and in response to non-compliance, or suspected non-compliance.
- Sept to Dec 2021 – passage of FAR through Parliament.
- End of 2021 – FAR legislation passed.
- 2022 to 2023 – regulators to consult with in-scope entities and publish guidance to aid implementation.
- Later of 1 July 2022 or six months post commencement – regime comes into force for ADIs and their NOHCs.
- Later of 1 July 2023 or 18 months post commencement – regime comes into force for other APRA regulated entities.