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FAR will come into effect 1st July 2022 (or six months after commencement) for ADIs and 1st July 2023 for other classes of entity.
It imposes four sets of obligations:
The structure and intent of FAR will seem very familiar to readers who are across the Banking Executives Accountability Regime (BEAR). This pre-dated the Royal Commission and has impacted larger banks from 1 July 2019 and smaller banks from 1 July 2020.
However, all but the largest banks will find FAR to be a reduced burden compared to BEAR. Insurers and Superannuation Funds will be faced with a range of new obligations although many have known this reform was inevitable and have been preparing by studying the BEAR.
FAR introduces the concept of directors and most senior and influential executives as accountable persons and directly regulates those persons, not merely the entities which employ them.
Accountable entities – generally APRA regulated financial institutions (FIs) – cover Authorised Deposit-Taking Institutions (ADIs), General Insurers (GI), Life Insurers (LI), Private Health Insurers (PHI), RSEs and non-operating holding companies (NOHCs).
Significant related entities will be captured via obligations on the Accountable entities, including the need to take steps to ensure related entities comply, and require 40% of variable remuneration for directors and most senior and influential executives deferred for four years.
The requirement to prepare accountability maps and statements will apply to larger entities, however size threshold has not been specified. It appears this will be addressed by yet to be released regulations. Notification requirements apply to all entities regardless of size.
FAR will be regulated by APRA and ASIC jointly, or APRA only where the entity does not hold an AFSL or ACL. This is uncharted waters for the regulators and the practical aspects of collaborative supervision will be need to be worked through to ensure coherent coordination.
There is notable interplay and contradictions between FAR and the final version of CPS511 released in August 2021, in particular:
- 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.
This often results in the SOOA and Local Agent (Local CEO) of the branch as the accountable persons.
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:
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.
Objectives which entitle an accountable person to variable remuneration are quite broad and can be financial or non-financial, qualitative or quantitative, objective or subjective.
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.
Merely ceasing employment or retiring from the workforce would not enable the deferral period to be shorter.
The deferral period starts on the later of:
Most remuneration packages provide for a financial bonus for the financial year.
For example, for year ending 30 June 2024, a bonus may apply if the organisation meets Objectives 1, 2 & 3. The decision to award the bonus is made by the Board on 23 July 2024. In this case the deferral period would start on 24 July 2024 and end on 24 July 2028.
The Regulator retains significant power to override board and remuneration committee decisions. Aspects which the Regulator can determine include:
The FAR is explicitly aligned with the new CPS511 Remuneration standard applying to APRA regulated entities.
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.
The consequences for an individual who is disqualified are potentially very broad and would effectively render it difficult for them to work in any accountable entity in a senior role, as no accountable entity is able to register them as an accountable person. However this stops short of a “banning order” style of prohibition.
