Financial Accountability Regime – Roadmap for future governance reforms?

The Financial Accountability Regime (FAR) has finally become law after a number of years of policy development and debate in Parliament. The FAR has significant implications for the directors of banks, insurers and superannuation entities. It may also represent a model or roadmap for how the government approaches governance reforms in other industries and across the economy.

Development of the FAR was the subject of a number of recommendations of the Financial Services Royal Commission, which envisaged that the existing Banking Executive Accountability Regime (BEAR) would be extended to all superannuation and insurance entities. In simple terms, the objective of the FAR is to lift the transparency and accountability practices of the entities with resulting prudential and conduct benefits.

All directors and senior executives of these entities are classified as ‘accountable persons’ and will be subject to individual obligations. These obligations include acting with honesty and integrity and with due skill, care and diligence. They will also be obliged to take reasonable steps to prevent material contraventions of specified financial services laws.

While there are no direct personal civil liability provisions, regulators do have the power to disqualify an accountable person for a breach under the FAR.

The obligations under FAR are relevant to how the entity undertakes its business operations, including product design and distribution, marketing, customer engagement and remediation, anti-money laundering, data management and cyber security resilience.

Other key elements of the FAR are:

• Deferred remuneration obligations on the variable remuneration of accountable persons. These requirements are in addition to the Australian Prudential Regulation Authority’s (APRA) remuneration obligations under CPS 511 Remuneration;
• A register of accountable persons will be published on a regulator website, which will include details of their responsibilities and any disqualifications; and
• Increased penalties and regulatory powers. Potential civil penalties on an entity have substantially increased from the BEAR, while the regulators have enhanced enforcement and investigatory tools.

APRA/AISC joint administration

In a unique Australian regulatory arrangement, the FAR will be jointly administered by APRA and the Australian Securities Investments Commission (ASIC). The BEAR has only been administered by APRA to date.

How regulators jointly administer the FAR will be central to how the regime is both implemented by entities and how they meet requirements in an ongoing manner. Key will be the regulators establishing processes to reduce inefficient regulator processes, for example duplicated information requests.

Traditionally, APRA has adopted a prudential and supervisory approach to overseeing entities with limited use of its enforcement powers. ASIC, in contrast, readily utilises enforcement activity for conduct breaches, including director’s duties. It is unclear how regulators will work together to undertake enforcement activity and whether each regulator will have separate responsibility for monitoring compliance with different elements of the regime.

Commencement

The FAR will commence for banks on 15 March 2024 and for insurers and superannuation entities on 15 March 2025.

The BEAR will cease for the banking sector at the point the FAR commences. Registration and supporting accountability statements made under the BEAR for accountable persons, including for directors, will automatically transfer under the FAR.

Model for broader governance reforms?

We expect that the government may in the future look to the FAR as a potential model, in whole or part, for introducing new accountability and governance focused reforms in systemically important industries and sectors.

There is already a broader policy trend for introducing board level obligations that are intended to elevate accountability for particular risk or compliance areas to directors.  

Notably, under critical infrastructure reforms, the board of a critical asset owner is required to annually sign off on its risk management settings and how it has addressed material risks, including cyber risks. Board-level sign-off is also replicated under modern slavery reporting and in the aged care sector. The boards of aged care providers will shortly have to annually attest to whether the provider has complied with a series of core obligations. These reforms emerged from the recommendations of the Aged Care Royal Commission.

The upcoming final report of the Disability Royal Commission is likely to recommend new governance and accountability obligations on the boards of disability service providers. In addition, the government is examining the appropriateness of existing governance settings in the audit and consulting industries.