The Government of Australia has proposed a new regime called the Financial Accountability Regime (FAR) to extend the existing Banking Executive Accountability Regime (BEAR) to all financial entities regulated under the Australian Prudential Regulation Authority (APRA). This is in response to the Government’s commitment to implement recommendations of the Financial Services Royal Commission.
The FAR is intended to increase the transparency and accountability of financial entities in these industries and improve risk culture and governance for both prudential and conduct purposes. The FAR will also require financial entities to clarify responsibilities attaching to particular officers and positions. As a result, individuals will be held to account for failure to perform their obligations.
Similar to the BEAR, the FAR will impose the following:
- Accountability obligations
- Key personnel obligations
- Accountability map and accountability statement obligations;
- Notification obligations
- Deferred remuneration obligations
Beyond all Authorised Deposit-taking Institutions (ADIs) that are subject to the BEAR, the FAR will be extended to all other APRA regulated entities:
- All general and life insurance licensees
- All private health insurance licensees
- All Registrable Superannuation Entity (RSE) licensees
- Licensed non-operating holding companies.
Classification of Entities under FAR
Entities will be classified as either core compliance entities or enhanced compliance entities. Core compliance entities will be subject to all the obligations under the FAR except for the requirement to submit accountability maps and statements to APRA and ASIC. Enhanced compliance entities will be required to meet all obligations under the FAR. This will replace the small, medium, and large classification of ADIs under the BEAR.
Keeping it Simple – Decrypting the FAR
Below are some key terms in FAR and their related explanation:
Accountable Persons – An Accountable Person of a FAR entity or a subsidiary of a FAR entity should be in a senior executive position with actual or effective management or control of the entity, or the management or control of a substantial part of the operations of the entity and its significant and substantial subsidiaries. The responsibilities to be assigned to an Accountable Person shall be prescribed by APRA and Australian Securities and Investment Commission (ASIC). All Accountable Persons should be registered with APRA and ASIC.
Accountability Maps and Statements – An Accountability Map shows the reporting lines and lines of responsibilities within a FAR entity. The details pertaining to areas of responsibility for which Accountable Persons have control are recorded in Accountability statements. Enhanced compliance entities (which include RSE licensees with total assets greater than $10b) must submit accountability maps and accountability statements to APRA or ASIC. Entities will be required to update the relevant regulator within 30 days of the change occurring.
Obligations – These include the necessary actions to be taken by entities, key personnel, and accountable persons to comply with the FAR guidelines. For the complete list of obligations please refer to FAR Proposal Paper.
Remuneration – FAR entities will be required to defer 40% of the 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. Entities will not be required to defer variable remunerations if it is not a feature of a particular accountable person’s remuneration structure.
The maximum penalties under the FAR will be the greater of the following:
- 50000 penalty units.
- If the court can determine -the benefit derived or detriment avoided by the body corporate because of the contravention, multiplied by three.
- 10 percent of the annual turnover of the body corporate, but to a maximum monetary value of 2.5 million penalty units.
Additional Penalties added under FAR:
- Accountable persons will be liable for civil penalties under the FAR.
- Veto the appointment or reappointment of senior executives and directors.
- Under the FAR, the court must consider the impact on fund members in setting the penalty in respect of RSE licensees.
Key Challenges in Implementing FAR
The key challenges in implementing FAR include
- complex organizational structures
- lack of trust in the third-party implementers
- improper operation procedures
- lack of initiative from the top management
- broken systems
- associated implementation costs
- building the culture of accountability
- excessive manual intervention
In order to address these challenges, it is suggested that companies approach FAR in a phased manner by step-wise automation of the key workflows. This ensures that the costs are under control while being able to reduce unnecessary manual intervention by automating key processes one after another.
Our Approach to FAR Implementation
To give you a fair idea of how we at Aurion approach FAR implementation, please refer to the below infographic which depicts the proposed workflow related to one of the key processes in FAR – Registration of an Accountable Person with ASIC/APRA.
Before the registration of an Accountable Person, there is a lot of information that needs to be collected and shared with all the key personnel involved in the FAR activity who are scattered across the organization. These key activities in this registration process may include
- approval processes related to the addition of a new accountable person
- termination/resignation of an existing accountable person
- approval from the Accountable Person for roles and responsibilities assigned
- reporting the changes to APRI/ASIC
- triggering relevant workflow emails whenever necessary
How to start and not stop at the end of this article piece?
I would recommend starting simply by just taking this approach, which has negligible risk, simple and yet an amazingly effective positive step towards our goal of a proactive strategy
A) Take pen -paper or manual method (start now)
As outlined earlier i.e. Registration of an Accountable Person with ASIC/APRA, Start elaborating FAR Recommendation and draft the details as per your Organization Structure. Indeed, this causes efforts, but this will pave the way for better clarity around unknown risks.
B) Take help from technology
We have helped our customers in the identification, definition, and implementation of the FAR recommendations underpinned by the elements of Lean, Digital technology, and Analytics.
If you are a CEO/COO/CIO/Managing Director/General Manager who is spending more time in reactive/preventive mode than future-facing, please reach out for an exploratory conversation.
Our Contact details
Pradeep Mishra (Director and Co-founder)
Ashok Mulchandani (Partner – Business Success and Strategic Transformation)
Please feel free to leave your suggestions and thoughts in the comment box below!