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Proposed Financial Accountability Regime (FAR): A summary

Proposed Financial Accountability Regime (FAR)

On 22 January 2020, the Australian Government released a Proposal Paper on the Financial Accountability Regime (FAR) to replace the Banking Executive Accountability Regime (BEAR) and to extend accountability provisions to all APRA regulated entities. Joint administration is also proposed to extend to both APRA and ASIC.

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This follows on from the Federal Government’s commitment to extend the BEAR based on recommendations flowing from the Financial Services Royal Commission, namely:

  • Recommendation 3.9 – the BEAR be extended to all Registrable Superannuation Entity (RSE) licensees
  • Recommendation 4.12 – the BEAR be extended to all Australian Prudential Regulation Authority (APRA) regulated insurers
  • Recommendation 6.6 – ASIC and APRA jointly administer the BEAR
  • Recommendation 6.7 – the obligations be amended to make clear that an authorised deposit-taking institution (ADI) and accountable person must deal with APRA and ASIC in an open, constructive and co-operative way
  • Recommendation 6.8 – the BEAR should be extended to all APRA regulated financial services institutions and that APRA and ASIC should jointly administer those new provisions

Additional Commitment – the Government made a further commitment to extend the executive accountability regime to entities regulated solely by ASIC, and is proposing to progress this further commitment following the initial implementation of the regime to all APRA regulated entities.

Purpose of the Proposal Paper

The Proposal Paper outlines the proposed FAR model in extending accountability frameworks across superannuation entities, general, life, and health insurers, and licensed non-operating holding companies. ASIC regulated entities are expected to be brought into the scope of the regime at a later date.

The Government intends to consult on, and introduce legislation by the end of 2020 although the timeframe for implementation is yet to be decided.

Key proposed changes

Authorised deposit-taking institutions (ADIs) are now subject to the BEAR will transition to the FAR and be classified as “core” or “enhanced” compliance entities (depending on size and complexity). These classifications will replace the small, medium and large classification of ADIs under the BEAR.
 

Entity type Metric used to determine Enhanced Compliance
ADIs Total assets > $10 billion
General insurance Total assets > $2 billion
Private health insurers Total assets >$2 billion
RSE licensees Total assets >$10 billion
*This refers to combined total assets of all RSEs under the trusteeship of a given RSE licensee.

 

Transitional arrangements will apply to ADIs to ensure that obligations which have been met under the BEAR (and which will be the same under the FAR) will be taken to have been met. For example, an accountable person registered under the BEAR may not need to re-register under the FAR. Although the FAR adopts the essential structure of the BEAR, there are differences to reflect:

  • that APRA and ASIC will jointly administer the regime, and that many detailed aspects will be set by APRA and ASIC to allow greater flexibility in recognition of the broader range of industries and number of entities subject to the FAR; and
  • the commencement of the stronger penalty framework for corporate and financial sector misconduct, most notably the proposed introduction of civil liability for individual accountable persons.

The proposed FAR regime is modelled on the UK’s Senior Managers’ and Certification Regime (SMCR), where the accountability and conduct framework is dually regulated by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).

Scope of the regime

Accountability statements, accountability maps, key personnel obligations, notification obligations, deferred remuneration obligations, and penalties will apply to enhanced compliance entities (as they did under the BEAR). Core compliance entities will also be subject to FAR provisions with the exception of having to submit Accountability Statements and Maps to the regulator.

Details of how solely ASIC regulated entities would be brought into the regime, including the thresholds that may determine the scope of entities, and the responsibilities that may be prescribed for accountable persons, will be consulted on following implementation of the FAR to APRA regulated entities. Nevertheless, we would encourage solely ASIC regulated entities to be proactive and start reviewing requirements under FAR; consider what accountable obligations and particular responsibilities there are and what impact these could have. Our experience in implementing BEAR for ADIs to date indicates that allowing sufficient time for planning (as well as delivery) will stand firms in good stead.

Accountable persons

Similar to the BEAR, a principles-based element and a prescriptive element will be applied, with APRA and ASIC prescribing the list of accountable persons. The Proposal Paper includes a longer indicative list of prescribed responsibilities for each type of FAR entity (including the ability to prescribe additional particular responsibilities over time as well as being able to prescribe particular responsibilities in respect of foreign entities subject to the FAR).

New responsibilities for accountable persons to be introduced by the FAR are those who have senior executive responsibility for:

  • management of a significant business division
  • management of the entity’s dispute resolution function (internal and external)
  • management of client or member remediation programs (encompassing hardship considerations where relevant)
  • service provision and maintenance (i.e. the services equivalent to product responsibility)
  • the setting of incentives (including incentives for staff and outward facing incentives such as loyalty programs); and
  • breach reporting.

Accountability roles specific to FAR entities that are foreign branches have been revised, and accountability roles specific to insurers and RSE licensees have been introduced (i.e. senior executives in charge of claims and benefits handling functions, investments, actuarial, underwriting and financial advice services will be captured).

The introduction of an accountable role for senior executive responsibility for end-to-end management of a given product or product group has also been proposed. This includes but is not limited to, all steps in the design, delivery, maintenance, and any necessary remediation of customers in respect of the product or product group. It appears that the timing will run parallel with the Product Design and Distribution Obligations ASIC Regulatory Guide consultation and more specific details may be clarified as these discussions progress.

New obligation

As required under the BEAR, accountable persons are to act with honesty and integrity, due skill, care and diligence; deal with APRA (and ASIC) in an open, constructive and cooperative way (without displacing legal professional privilege); and to take reasonable steps in carrying out responsibilities to ensure prudential standing and reputation of the entity is not adversely affected.

A new obligation under the FAR requires accountable persons to also take reasonable steps in conducting their responsibilities to ensure that the entity complies with its licensing obligations. KPMG would encourage FAR entities to take this opportunity to review their Governance Frameworks to determine how they propose to comply with these obligations having regard to the proposed oversight and responsibility of the accountable person. This particular obligation will be more of a challenge for accountable persons given the breadth of licensing obligations and the features of most governance frameworks with collective board and committee responsibilities.

Deferred remuneration obligations

The FAR proposes that entities defer 40 percent of variable remuneration for all of their accountable persons for a minimum of four years, but only if the amount that would be deferred is greater than $50,000 AUD. This is in contrast to the existing BEAR regime where the quantum to be deferred depends on the size of the ADI (i.e. small, medium or large) and provides for a ‘lesser of’ calculation between variable remuneration and total remuneration to determine the amount to be deferred. Entities will not be required to defer variable remuneration if variable remuneration is not a feature of a particular accountable person’s remuneration structure.

Variable remuneration includes remuneration which is “conditional on the achievement of pre-determined objectives and can be forfeited if those requirements are not met.” We would expect this to include performance tested variable remuneration, as well as service based awards (such as equity vesting on the condition of continued employment). If an accountable person breaches their FAR obligations, the entity must have remuneration policies that allow for a reduction in variable remuneration.

The classification of FAR entities into core and enhanced categories will not impact the deferred remuneration obligations, nor will it limit a regulator’s ability to apply additional requirements on remuneration under draft CPS 511.

Opportunity for enhanced frameworks and next steps

We believe the proposed FAR provides an opportunity for the financial services industry to enhance governance frameworks and corporate culture to drive better outcomes for customers, stronger long-term performance for shareholders and ensure increased accountability to broader stakeholders to strengthen trust. While the Government has indicated that FAR legislation is expected by the end of 2020, the timeframe for implementation of the regime (including the transitional arrangements for APRA and ASIC entities) remains uncertain. Our experience with implementing the BEAR for ADIs would suggest that early planning and mobilisation is prudent.

We think this is an opportunity for entities to:

  • clarify roles and responsibilities
  • clarify the scope and charters of governance committees
  • enhance risk controls and governance frameworks
  • strengthen conduct and accountability culture
  • strengthen remuneration practices.

A logical first step would be to conduct a current state assessment to take stock of how accountabilities and responsibilities are currently structured, and whether they are consistently documented in key artefacts (such as terms of reference, frameworks, role descriptions, and KPIs).

The BEAR established clear standards of conduct by imposing strengthened responsibility and accountability frameworks. The FAR is intended to further enhance transparency and accountability, as well as improve risk culture and governance for both prudential and conduct purposes.

KPMG has the depth of experience in supporting entities with implementation of a similar model in the UK (SMCR), and the BEAR locally, thus we are well placed to help clients successfully plan and prepare for the transition.

If you have any queries regarding the FAR consultation, or would like to set up some time to discuss how we can help, please don’t hesitate to contact us.

© 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Liability limited by a scheme approved under Professional Standards Legislation.

KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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