The Situation: In early 2019, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry ("Banking Royal Commission") recommended the expansion of the Banking Executive Accountability Regime ("BEAR") to apply to all entities regulated by the Australian Prudential Regulation Authority ("APRA") across the banking, insurance, and superannuation sectors.
The Result: In July 2021, the Australian Government released an exposure draft of its proposed Financial Accountability Regime ("FAR") bill to expand the accountability framework for directors, senior executives and subsidiaries under BEAR to include not only authorised deposit-taking institutions ("ADIs"), but also general, life and private health insurance licensees, registered superannuation entity ("RSE") licensees, and licensed non-operating holding companies.
Looking Ahead: The draft legislation is expected to be put before Parliament in late 2021. If enacted, FAR will substantially expand the existing accountability framework under BEAR, both in terms of the entities and individuals who are subject to the regime and the scope of their obligations, with the regime to be administered jointly by APRA and the Australian Securities and Investments Commission ("ASIC").
BEAR, which came into effect throughout 2018 and 2019, imposed extensive accountability obligations on ADIs and expanded APRA's enforcement powers. You can read our previous Commentary on BEAR here.
In response to recommendations by the Banking Royal Commission, the Australian Government proposes to extend BEAR to all entities regulated by APRA, including general, life and private health insurance licensees, RSE licensees, and licensed non-operating holding companies ("NOHCs"). In January 2020, the Government released a proposal paper describing the proposed expansion of BEAR. In July 2021, the Government released an exposure draft of the Financial Accountability Regime Bill 2021 and various explanatory materials. Public consultation on the exposure draft closed in August 2021, and the Bill is expected to be put before Parliament in the coming months. If enacted, FAR will apply to ADIs already subject to BEAR from the later of 1 July 2022 or 6 months after the commencement of the legislation. It will apply to all other APRA-regulated entities from the later of 1 July 2023 or 18 months after the commencement of FAR.
Key Changes from BEAR
The most significant reforms include:
- Accountable entities: Under FAR, accountable entities will include all APRA-regulated entities including ADIs that are currently subject to BEAR, RSEs, and insurers and all of those entities' NOHCs. With the exception of NOHCs, accountable entities will be classified according to total asset value as either "core compliance entities" or "enhanced compliance entities". Only the more asset rich enhanced compliance entities (comprising ADIs and RSEs with total assets greater than A$10 billion, general and private health insurers with total assets greater than A$2 billion, and life insurers with total assets greater than A$4 billion) will be required to submit accountability statements and maps to APRA.
- Accountable persons: As is the case under BEAR, accountable persons under FAR will include individuals who have actual or effective senior executive responsibility for management or control of an accountable entity or a significant or substantial part or aspect of the operations of the entity or the entity's relevant group. This will include all members of the board of directors and c-suite, as well as the heads of significant business divisions of the accountable entity, such as internal audit and human resources. An accountable person will also include a person who holds one or more positions or responsibilities prescribed by Ministerial Direction, including those responsible for functions such as anti-money laundering, dispute resolution, client or member remediation programs, breach reporting and end-to-end product responsibility. Senior executives with responsibility for certain key functions within insurers and superannuation entities will also be accountable persons. The Government's stated intention is that middle or lower management personnel will not be accountable persons.
- Accountability obligations: Under BEAR, accountable persons have obligations to act with honesty and integrity, and with due skill care and diligence, deal with APRA in an open, constructive and cooperative way, and take reasonable steps in conducting their responsibilities to prevent matters from arising that would adversely affect the prudential standing or reputation of the ADI. Those obligations will be expanded under FAR to include taking reasonable steps to ensure that the entity complies with certain financial services legislation, and dealing openly, constructively and cooperatively with ASIC. The regulators will be given wide-ranging powers to investigate suspected contraventions and enforce compliance.
- Civil penalties for accountable entities: BEAR imposes maximum civil penalties for ADIs based on the entity's asset size. Under FAR, the maximum penalty for all accountable entities will be significantly higher, being the greater of A$11.1M; or three times the amount of the benefit derived or detriment avoided because of the contravention; or 10% of the annual turnover of the entity up to a maximum of A$555M.
Potential Exposure of Individuals
The 2020 proposal paper contemplated substantial civil penalties for individuals for non-compliance with accountability obligations of up to A$1.11 million or three times the benefit derived or detriment avoided by the contravention. In a welcome development, those civil penalties have been removed from the exposure draft of the FAR legislation. There remains a risk however, though untested, that individuals may be subject to a civil penalty under ancillary liability provisions under section 92 of the Regulatory Powers (Standard Provisions) Act 2014.
The proposed legislation maintains APRA's power to disqualify accountable persons, on seven days' notice and with ASIC's agreement, from acting as an accountable person from an accountable entity. It also empowers the regulator to direct an accountable entity to reallocate key personnel obligations in certain circumstances and imposes obligations on accountable entities to defer certain variable remuneration of accountable persons for up to four years. Notably however, the exposure draft does not empower the regulator to veto the appointment or reappointment of directors and senior executives if APRA is of the opinion that a person is not suitable, or has ceased to be suitable, to hold a position as an accountable person, which was contemplated by the proposal paper.
Another development that will be welcomed across boardrooms relates to the availability of indemnities and insurance. While the exposure draft maintains the current prohibition under BEAR that a related body corporate cannot indemnify or pay to insure an accountable entity against the consequences of breaching their accountability obligations, the prohibition has been removed in the case of accountable persons. The prohibition on indemnification by a related body corporate is likely to be particularly problematic for superannuation trustees.
Four Key Takeaways
- If passed by Parliament, FAR will significantly expand the operation of BEAR to include insurers, superannuation funds and licensed non-operating holding companies, likely from 1 July 2023. These organisations will need to undertake significant work over the next 12 to 18 months to ensure that they have appropriate structures, systems, and processes in place to ensure compliance once FAR comes into force.
- FAR will also significantly expand the definition of accountable persons, and introduce new obligations for accountable persons, for both ADIs (from 1 July 2022) and other APRA-regulated entities. Individuals who are or will be accountable persons should take proactive steps to ensure that they understand the scope of their obligations, the consequences of non-compliance, and that their organisations have appropriate systems and processes in place to facilitate compliance. It may be appropriate in some instances for individuals to consider seeking independent legal advice.
- While the penalty and disqualification provisions under BEAR are relatively untested, the potential threat of enforcement for non-compliance with FAR remains significant. Accountable entities could face civil penalties of up to A$555M or three times the benefit derived and detriment avoided from a contravention. Further, APRA has the power to disqualify individuals from acting as accountable persons if they fail to comply with their obligations under FAR.
- Similar to BEAR, FAR prohibits related bodies corporate from indemnifying an accountable entity, or paying for insurance for the accountable entity, against the consequences of breaching FAR obligations (save for any liability for legal costs). However, unlike BEAR, FAR does not prohibit indemnifying or insuring accountable persons. While FAR does not contemplate accountable persons being exposed to civil penalties for non-compliance, such individuals should seek to ensure that they have in place an appropriate deed of access, indemnity and insurance, and that the relevant organisation's D&O policy indemnifies the costs of them engaging independent professional advisers (such as lawyers and public relations advisers) in connection with investigation and enforcement action under FAR.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.