APRA releases Financial Accountability Regime (FAR) legislation

There is notable interplay and contradictions between FAR and the final version of CPS511 released in August 2021, in particular:

• Highly paid material risk takers concept.
• Specified roles concept.
• Requirements for the role of the Board.
• Requirement for a Board Remuneration Committee.
• Concept of a Remuneration Framework and Remuneration Design.
• Requirement for Remuneration Framework to be reviewed annually and subject to a three year Comprehensive review.
• Deferral of variable remuneration:
  • CEOS 60% over six years
  • Other senior managers 40% over five years
  • Highly paid material risk takers 40% over four years.
• Clawbacks over previous two years.
• Application dates are different – CPS511 applies in three tranches on 1/1/23, 1/7/23 & 1/1/24.
• SFIs & non SFIs thresholds are specified e.g. ADIs $20b in assets.
• Prohibitions on indemnification and hedging of variable remuneration.

- Focus on individual accountability and individual consequences
- Race to regulate remuneration
- Doesn’t deal with quantum of fixed remuneration

Significant related entities for non RSEs will include subsidiaries where the effect on the accountable entity is material and substantial.

For RSEs, the test will be more complex and include related bodies corporate of the licensee, entities with control relationships with the licensee. This also includes a connected entity as defined in S10 of the SIS Act and S50AAA of the Corporations Act.

A related entity of an RSE can be a significant related entity of more than one RSE, however for other types of accountable entity a related entity can be a significant related entity of only one accountable entity.

• Senior executive responsibility for management or control of the accountable entity or a substantial part of the entity or aspect of its operations.
• Typically only CEO and C-level executives.
• Can be an accountable person of multiple accountable entities.
• For foreign branches of ADIs and insurers, the accountable persons are only those who have responsibilities regarding the entity’s Australian operations.

1. Accountable entities are obliged to:

a. Take reasonable steps to conduct their business with honesty and integrity, with due care skill and diligence and in a manner that prevents adverse impact on its prudential standing.

b. Goes beyond BEAR obligations by requiring the entity to deal in an open constructive and cooperative way with APRA and ASIC

c. Take reasonable steps to ensure its accountable persons comply with their accountability obligations

d. Take reasonable steps to ensure its significant related entities comply with the accountability obligations

e. Ensure that accountable persons collectively are responsible for the entire business operations of the entity and cover all responsibilities prescribed in the Rules (yet to be released)

f. Register accountable persons with the regulator before they commence in an accountable person role

g. Ensure the accountable person has not been disqualified by the regulator

h. Notify the regulator when the entity believes it has breached its obligations

i. Notify the regulator of material changes to information on the register about an accountable person

j. Comply with information requests in the context of an investigation

2. Accountable persons

a. Obligations mirror those of the entity in a – c above, however only extend to laws impacting the accountable person’s area of responsibility within an entity.

Other points to note:

• Notifications must be made within 30 days of the event or change.
• There is a 90 day period of grace to register accountable persons filling an unforeseen or temporary vacancy.
• The Explanatory Memorandum (EM) provides a specific example of failing to act with due skill, or failing to act with due diligence, being treated as a failure to comply with accountability obligations.
• Multiple accountable persons can have accountability for the same area of operation. This will result in joint and several liability and does not allow for shifting of responsibility from one or more persons to one or more other persons.
• An accountable person and accountable entity must take reasonable steps to support proactive compliance rather than having a “set and forget” approach.

Accountable entities and significant related entities must defer 40% of their accountable persons’ variable remuneration for each financial year, for four years.

Entities must have a remuneration policy which enshrines the ability to defer and/or cancel variable remuneration.

Variable remuneration is that which is conditional upon the person meeting certain objectives. It can be paid in shares or cash and by the accountable entity or other related entities.

The deferral period may be shorter than 4 years if the person ceases to be an accountable person due to death, serious illness, disability, incapacity. Regulatory approval is not required.

The deferral period starts on the later of:

• The day after the decision was made for the person to be able to earn the variable remuneration, or;
• The first day of the performance period, if the variable remuneration is measured by reference to that period

The Regulator retains significant power to override board and remuneration committee decisions. Aspects which the Regulator can determine include:

• Who is an accountable person
• The amount of variable remuneration
• The deferral period

The FAR is explicitly aligned with the new CPS511 Remuneration standard applying to APRA regulated entities.

• Where the deferred remuneration is less than $50,000 ie total variable remuneration is $125,000.
• Where the remuneration is 100% fixed with no variable component.
• Persons filling a temporary or unforeseen vacancy for 90 days or less.
• Non SFEs do not have to provide accountability maps & accountability statements to the regulator.

SFEs face additional obligations to provide accountability maps and accountability statements to the regulator within 30 days.

As expected, a broad range of powers is afforded to the regulators including ability to disqualify an accountable person, exchange of information without the obligation to notify the entity or person who is the subject of the information, conduct investigations, impose civil penalties, and also issue directions and enter into Enforceable Undertakings. A range of obligations such as registering accountable persons within 21 days of receipt of notification and maintaining registers has also been implemented.