Financial Services Update
23 Jan 2020
BEAR has gone to(o) FAR
Legal Updates
The Financial Accountability Regime (FAR) will replace and extend the Banking Executive Accountability Regime (BEAR) to all APRA-regulated entities
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What you need to know
- BEAR will be replaced by FAR, which will extend BEAR to all APRA-regulated entities, including authorised non-operating holding companies (NOHCs)
- FAR will be jointly administered by APRA and ASIC
- Following the implementation of FAR to APRA-regulated entities, further consultation will be held to extend FAR to solely ASIC-regulated entities
- FAR entities will be classified as either core compliance entities or enhanced compliance entities, depending on the size of their total assets. Core compliance entities will be exempt from the requirement to submit accountability statements and maps to APRA/ASIC
- FAR potentially expands the scope of accountable persons by increasing the list of particular responsibilities which define who an accountable person is. Particular responsibilities will differ for each entity type\
- FAR will introduce a new accountability obligation which requires accountable persons to take reasonable steps in conducting their responsibilities to ensure the entity complies with its licensing obligations
- FAR will significantly increase the maximum penalties that can be imposed on entities, and introduce civil penalties for accountable persons
- Legislation will be introduced to enact FAR by the end of 2020, but it is likely that implementation will be phased
Which entities are in scope of FAR?
- FAR will apply to all APRA-regulated entities i.e. general, life and private health insurers, RSE licensees and authorised NOHCs, in addition to ADIs
- The Treasurer will be given a power to extend FAR to all solely ASIC-regulated entities. The Government anticipates that, following the implementation of FAR to APRA-regulated entities, further consultation will be undertaken to extend FAR to solely ASIC-regulated entities
- The Minister, APRA and/or ASIC will have the power to exempt further entities or classes of entities from the regime, which is expected to occur in limited and exceptional cases
Will the focus of BEAR change in light of FAR?
- Yes. As an APRA-administered regime, the focus of BEAR was on prudential issues. As FAR will be jointly administered by APRA and ASIC, Treasury has indicated that FAR will serve "both prudential and conduct purposes"
- The overall objective of BEAR and FAR is to increase the transparency and accountability of financial entities and improve risk culture and governance
How will entities be classified under FAR?
- The distinction between small, medium and large ADIs under BEAR will be replaced by "core compliance" and "enhanced compliance" entities under FAR
- Core compliance entities will be exempt from the requirement to submit accountability maps and statements to APRA/ASIC (but must still register accountable persons with APRA/ASIC). Enhanced compliance entities must comply with all obligations under FAR
- Whether an entity is a core or enhanced compliance entity will be determined by the size of its total assets
- APRA/ASIC will have the power to reclassify a core compliance entity as an enhanced compliance entity if it is of the view that the entity would "benefit from the requirement to develop and submit accountability maps and statements"
Who will be an accountable person under FAR?
- FAR retains the "general principle" and "particular responsibility" definition of an accountable person
- However, the list of particular responsibilities for an ADI has been expanded to include senior executive responsibility for:
- management of a significant business division;
- management of the entity's dispute resolution function;
- management of client or member remediation programs;
- end-to-end management of a product, and any necessary remediation of customers in respect of the product;
- service provision and maintenance;
- the setting of incentives; and
- breach reporting - The work and outcomes of APRA's previous consultation on end-to-end product responsibility will be subsumed into FAR
- The list of particular responsibilities for a foreign ADI branch is proposed to now specifically include the SOOA. APRA/ ASIC will be empowered to prescribe particular responsibilities for a foreign ADI branch subject to FAR
- The list of particular responsibilities for an insurer or RSE licensee is proposed to include (in addition to those which apply to an ADI) senior executive responsibility for:
- management of the insurer’s or RSE licensee’s claims and benefits entitlement handling functions;
- management of the insurer’s or RSE licensee’s investment function;
- management of the insurer’s or RSE licensee’s actuarial function;
- management of the insurer’s underwriting of its insurance business;
- management of the RSE licensee’s financial advice service (if any);
- management of the RSE licensee’s insurance offerings; and
- management of the RSE licensee’s retirement offerings
Can APRA veto the registration of an accountable person?
- Yes. Under FAR, APRA will have a "non-objection" power to prevent an individual from being registered as an accountable person
What are the accountability obligations of an entity under FAR?
- The accountability obligations of an entity under FAR will be the same as under BEAR, save for two main differences:
- in addition to dealing with APRA openly, constructively and cooperatively, an entity must deal with ASIC in the same way; and
- an APRA-regulated entity must ensure that only "significant or substantial" subsidiaries (as opposed to all subsidiaries as was the case under BEAR) must comply with FAR
What are the accountability obligations of an accountable person under FAR?
- The accountability obligations of an accountable person under FAR will be the same as under BEAR, save for two main differences:
- in addition to dealing with APRA openly, constructively and cooperatively, an accountable person must deal with ASIC in the same way; and
- an accountable person must "take reasonable steps in conducting their responsibilities as an accountable person to ensure that the entity complies with its licensing obligations"
What are the remuneration obligations under FAR?
- 40% of an accountable person's variable remuneration is required to be deferred for a minimum of four years, but only if the amount to be deferred is greater than $50,000
- Entities will need to comply with heightened requirements under APRA's proposed Prudential Standard CPS 511 Remuneration in addition to what will be required under FAR
What are the notification obligations under FAR?
- Only "material" changes to accountability maps and statements will need to be promptly notified to APRA/ASIC – all other changes can be notified on an annual basis
- APRA/ASIC will issue guidance on what is meant by "material" changes
What are the penalties for entities under FAR?
- FAR significantly increases the maximum penalty that may be imposed on an entity for breaches of its obligations under FAR
- The maximum penalties for entities under FAR is the greater of:
- 50,000 penalty units ($10.5 million);
- the benefit derived, or detriment avoided, by the entity because of the breach, multiplied by three; or
- 10% of the annual turnover of the entity, up to a maximum of 2.5 million penalty units ($525 million) - The proposed maximum penalty under FAR is aligned with the increase in certain corporate and financial sector penalties introduced in 2019 in the Corporations Act 2001
- FAR does not of itself give rise to criminal liability for entities
What are the penalties for accountable persons under FAR?
- Accountable persons remain subject to disqualification by either APRA/ASIC
- However, FAR also imposes civil penalties on accountable persons
- The maximum penalties for accountable persons under FAR is the greater of:
- 5,000 penalty units ($1.5 million); or
- the benefit derived, or detriment avoided, by the entity because of the breach, multiplied by three - The proposed maximum penalty under FAR is aligned with the increase last year in the penalties that may be imposed on directors and offices under the Corporations Act 2001
- It is not proposed that FAR itself will give rise to criminal liability for accountable persons
Will existing ADIs need to transition from BEAR to FAR?
- Yes. BEAR will be superseded by FAR. However, transitional arrangements will apply to limit any compliance burden arising from the transition. For example, it is not expected that an ADI will need to re-register existing accountable persons under FAR
- ADIs should consider the new particular responsibilities and also whether they are a core compliance entity or an enhanced compliance entity under FAR
Important timeframes
- Treasury is calling for written submissions on by 14 February 2020.
- Legislation to implement FAR will be introduced by the end of 2020. However, this does not mean that FAR is required to be implemented by end-2020. The Government intends to consult on timeframes as part of the consultation on the exposure draft legislation and has flagged that there is likely to be a phased implementation
Authors: Jonathan Gordon, Partner; Silvana Wood, Counsel; Dominic Tran, Associate
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