Clifford Chance

The Financial Accountability Regime Bill 2021 (Cth) (FAR) has lapsed in light of the 2022 Federal Election being called. This means that Australian entities and executives will need to revisit their obligations under the existing Banking Executive and Accountability Regime (BEAR).

The Financial Accountability Regime

The FAR was the Morrison Government's response to the Hayne Royal Commission's recommendation that the BEAR be extended to all financial services institutions regulated by APRA. BEAR is currently administered by APRA and sets out the standards for authorised deposit taking institutions (ADIs) and their executives.

The FAR would have replaced the current BEAR standards to provide a more expansive regime.

The FAR included four core sets of obligations on institutions:

1.  Accountability obligations: entities should take reasonable steps to conduct business with honesty and integrity, due skill, care and diligence in a way which prevents adverse impact on their standing. This includes the obligation for accountable persons to take "reasonable steps" to avert material contraventions.
2. Key personnel obligations: entities should ensure their areas of operations, their groups and most senior members are regulated by FAR.
3. Deferred remuneration obligations: entities should defer at least 40% of their variable remuneration of their accountable persons for a minimum of four years.
4. Notification obligations: entities should meet core notification requirements to provide regulators with certain information.

These obligations would have encompassed APRA regulated entities currently subject to BEAR, as well as: registrable superannuation entity licensees, licenced non-operating holding companies, life and general insurance licensees and private health insurance licensees.

What is the current status of FAR?

The FAR was introduced to Parliament on the 28 October 2021, with the Federal Government aiming to implement the FAR from 1 July 2022 for banks, and from 1 July 2023 for superannuation entities and insurers.

Submissions to the Senate Economics Legislation Committee (Committee) regarding the FAR noted concerns that an entirely new regime was being brought in – rather than expanding the current BEAR standards. Notwithstanding, the Committee passed the FAR with no reservations.

With the dissolution of Parliament on 11 April 2022, the FAR has now lapsed and when (and indeed, whether) an expanded regime will come into effect is now up in the air.

Neither major political party has currently indicated whether the FAR will be re-tabled, either in the same or an amended form.

The current regime under BEAR

In the meantime, ADIs and their senior executives and directors should refresh their understanding of their accountability obligations under BEAR, as set out in Part IIAA of the Banking Act 1959 (Cth).

An ADIs key obligations under BEAR include the taking of reasonable steps to:

• conduct its business with honesty and integrity, and with due skill, care and diligence;
• deal with APRA in an open, constructive and cooperative way;
• in conducting its business, prevent matters from arising that would adversely affect the ADI's prudential standing or prudential reputation;
• ensure that each of its accountable persons meets his or her accountability obligations; and
• ensure that each of its subsidiaries that is not an ADI complies with the above obligations as though it were an ADI.

It should be noted that the obligations cast upon ADIs are done so in very broad terms.

BEAR further imposes obligations on individuals who fall within the definition of "accountable persons", being individuals who exert significant influence over conduct and behaviour in an ADI. This includes board members of an ADI as well as those individuals who have effective senior executive responsibility for management or control of the ADI, or of a significant or substantial part or aspect of the operations of the ADI. This definition of accountable persons may also capture contractors in some circumstances.

Accountable persons are obliged to conduct the responsibilities of their position:

•  with honesty and integrity;
• by dealing with APRA in an open, constructive and cooperative way; and
• by taking reasonable steps in conducting those responsibilities to prevent matters from arising that would adversely affect the prudential standing or reputation of the ADI.

Other key requirements under BEAR include:

• ADIs identifying accountable persons and providing APRA with clearly defined accountability statements for each of these individuals.
• ADIs are to provide APRA with an accountability map which clearly describes the name, reporting lines and responsibilities of all accountable persons throughout the ADI and ADI subsidiaries. With the lapsing of the FAR, this requirement continues to apply to all ADIs (regardless of the amount of the ADIs total assets).
• Directors and senior executives must be registered with APRA prior to being appointed, with APRA maintaining a register of these individuals.
• The deferral of an accountable person's variable remuneration payments for a period of four years (or shorter, as approved by APRA), including up to 60% of variable remuneration for CEOs of larger ADI's and up to 40% of variable remuneration for accountable persons.

If an ADI contravenes its obligations under BEAR, it may be liable to a pecuniary penalty of up to $222 million. The size of the penalty is scaled according to the size of the ADI.

Furthermore, an accountable person who has not complied with their accountability obligations under BEAR may be disqualified by APRA. Unlike the amendments that were proposed under the FAR, accountable persons are not subject to civil penalties under BEAR.

Insurers and superannuation entities will remain excluded from the BEAR accountability obligations.

Whilst BEAR remains for now, ASIC Chair Joe Longo confirmed on 3 March 2022 that ASIC will continue to prioritise governance failures relating to non-financial risk in its corporate governance and enforcement work.