Australian Financial Accountability Regime (FAR)  Centre

The Financial Accountability Regime Act 2023 establishes a strengthened accountability framework for financial entities in the banking, insurance and superannuation industries that are regulated by Acts under which APRA is the prudential or principal regulator.

The framework is intended to ensure that accountable entities take reasonable steps to conduct their business with honesty and integrity, and with due skill, care and diligence; and to ensure that their senior executives and other key personnel (called accountable persons) meet those same standards of conduct, and take reasonable steps to ensure compliance with applicable laws.

Timetable
FAR will replace the Banking Executive Accountability Regime (BEAR) for existing authorised deposit-taking institutions (ADIs) from 15 March 2024. The BEAR, which came into effect on 1 July 2018 and was solely administered by APRA.

BEAR deferred remuneration obligations continue to apply to ADIs until 15 September 2024 when the FAR deferred remuneration obligations will commence.

FAR will apply to any new banking entrants after 15 March 2024 from the time they become an ADI or a non-operating holding company.

FAR will apply to general insurers, life insurers, private health insurers, registrable superannuation entities licensees from 15 March 2025 and to any new entrants beyond that, from the time they become licensed.

Regulators
The FAR introduces conduct-focused prescribed responsibilities, and will be jointly administered by APRA and ASIC.

ASIC’s role is to focus on impacts to market integrity and consumer protection in the financial system and payments system.

APRA’s role is to focus on impacts to the prudential soundness of regulated entities as well as the financial stability of the overall system.

Obligations
The Financial Accountability Regime imposes four core sets of obligations:

accountability obligations—which require entities in the banking, insurance and superannuation industries and their directors and senior executives to conduct their business honesty and integrity, and with due skill, care and diligence;

key personnel obligations—which require entities in the banking, insurance and superannuation industries to nominate senior executives to be responsible for all areas of their business operations and providing that nominated accountable persons will be subject to an additional accountability obligation in relation to preventing matters from arising that may result in the entity’s material contravention of specified financial services laws;

deferred remuneration obligations—which require entities in the banking, insurance and superannuation industries to defer at least 40 per cent of the variable remuneration (for example, bonuses and incentive payments) of their directors and most senior executives for a minimum of 4 years, and to reduce their variable remuneration for non-compliance with their accountability obligations; and

notification obligations—which require:
entities in the banking, insurance and superannuation industries to meet the core notification obligations by providing the Regulator (either ASIC or APRA) with certain information about their business and their directors and most senior executives, generally within 30 days of an event occurring.

Accountable entities
The entities to which the Financial Accountability Regime applies are referred to as accountable entities.

These entities are:
• authorised deposit-taking institutions;
• authorised non-operating holding companies of authorised deposit-taking institutions;
• general insurers;
• authorised non-operating holding companies of general insurers;
• life companies;
• registered non-operating holding companies of life companies;
• private health insurers; and
• registrable superannuation entity licensees (or RSE licensees).

The accountability obligations of an accountable entity are:
(a) to take reasonable steps to conduct its business with honesty and integrity, and with due skill, care and diligence; and
(b) to take reasonable steps to deal with the Regulator in an open, constructive and cooperative way; and
(c) in conducting its business, to take reasonable steps to prevent matters from arising that would (or would be likely to) adversely affect the accountable entity’s prudential standing or prudential reputation; and
(d) to take reasonable steps to ensure that each of its accountable persons meets their accountability obligations; and
(e) to take reasonable steps to ensure that each of its significant related entities complies with each of paragraphs (a), (b), (c) and (d) as if the significant related entity were an accountable entity.

Accountable persons
While an accountable entity that breaches its accountability obligations under the FAR may be subject to civil penalties, there are no individual civil penalties for accountable persons who breach their accountability obligations.

However, the Act does prescribe civil penalties for ancillary involvement by a person (including an accountable person) in an accountable entity’s contravention of an obligation. Specifically, it prescribes that a person (including an accountable person) must not:

attempt to contravene a civil penalty provision of the Act
aid, abet, counsel or procure a contravention of a civil penalty provision of the Act
induce (by threats, promises or otherwise) a contravention of a civil penalty provision of the Act
be in any way, directly or indirectly, knowingly concerned in, or party to, a contravention of a civil penalty provision of the Act
conspire with others to effect a contravention of a civil penalty provision of the Act.

In addition to potential civil penalties for ancillary involvement, an accountable person who breaches their FAR obligations also faces other deterrents such as disqualification or loss of bonus payments.

The Financial Accountability Regime Act 2023 does not include personal fines for directors and executives but it still requires entities in the banking, insurance and superannuation industries to defer at least 40 per cent of the variable remuneration (for example, bonuses and incentive payments) of their directors and most senior executives for a minimum of 4 years, and to reduce their variable remuneration for non-compliance with their accountability obligations.