On 5 September 2023, the Commonwealth Parliament passed the Financial Accountability Regime Bill 2023 (FAR), which was first introduced on 28 October 2021. FAR received Royal Assent on 14 September 2023 and will have a staggered roll out, applying to: (1) the banking industry in late March 2024, and (2) insurance and superannuation sectors in late March 2025.

What are the Financial Accountability Regime reforms?

FAR replaces and extends the Banking Executive Accountability Regime (BEAR), which currently only applies to authorised deposit-taking institutions (ADIs), to the superannuation and insurance sectors, and establishes a Compensation Scheme of Last Resort for consumers who have suffered financial losses and received a relevant determination from the Australian Financial Complaints Authority (AFCA).

FAR represents the Federal Government's commitment to address the systemic issues of misconduct across the financial services sector that were identified in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). The final report of the Royal Commission made the following recommendation in relation to extending BEAR:

  • Recommendation 3.9 – extend provisions modelled on the BEAR regime to registrable superannuation entity licensees.
  • Recommendation 4.12 - extend provisions modelled on the BEAR regime to insurers regulated by the Australian Prudential Regulatory Authority (APRA).
  • Recommendation 6.7 – to make it clear that ADIs and their accountable persons must deal with APRA and Australian Securities and Investments Commission (ASIC) in an open, constructive, and cooperative way.
  • Recommendation 6.8 – to have APRA and ASIC jointly administer the extended BEAR regime.

FAR will apply to 'Accountable Entities', which include ADIs, authorised non-operating holding companies of ADIs, general insurers, authorised non-operating holding companies of general insurers, life companies, registered non-operating holding companies of life companies, private health insurers and registrable superannuation entity licensees.

Under FAR, senior executives individuals who have actual or effective senior executive responsibility for the management or control of the whole or substantial part of an Accountable Entity will be identified as an 'Accountable Person'.

Going forward, FAR will be jointly regulated by APRA and ASIC; previously BEAR had only been regulated by APRA. It is presently unclear how the regulators will work together or divide the obligations between them. The regulators are expected to release regulatory guidance on how they will jointly administer the FAR shortly. However, it is anticipated that ASIC will ASIC will only administer FAR for accountable entities that hold an Australian Financial Services License or are Australian credit licensees. As well as the ability to seek civil penalties (addressed below), ASIC and APRA will have broad powers to seek court orders for compliance, injunctions, enforcement undertakings and direction to address non-compliance.

What are the obligations of Accountable Entities under FAR?

FAR imposes four core sets of obligations on Accountable Entities:

  • Accounting obligations
  • Notification obligations
  • Key personnel obligations
  • Deferred remuneration obligations.

Obligations (Category)

Requirements

Accountability obligations

An Accountable Entity must take reasonable steps to:

  1. Conduct its business with honesty, integrity, due skill, care and diligence.
  2. To deal with ASIC and APRA in an open, constructive and cooperative way.
  3. To prevent matters from arising that would (or would be likely to) adversely affect the entity's prudential standing or reputation.
  4. To ensure that each of its Accountable Persons meet their accountability obligations.
  5. To ensure that each of its significant Related Entities meet their accountability obligations.

Notification obligations

An Accountable Entity must notify ASIC and/or APRA of the following events:

  1. When a person ceases to be an Accountable Person of the Accountable Entity or of a Significant Related Entity.
  2. When an Accountable Person of the Accountable Entity or of a Significant Related Entity is dismissed or suspended because the person has failed to comply with one or more Accountability Obligations.
  3. When the variable remuneration of an Accountable Person of the Accountable Entity or Significant Related Entity is reduced because the person has failed to comply with one or more Accountability Obligations.
  4. When the Accountability Entity has reasonable grounds to believe that:
    1. the Accountable Entity has failed to comply with one or more Accountability Obligations, or Key Personnel Obligations; or
    2. an Accountable Person has failed to comply with one or more of the Accountability Obligations.
  6. A material change occurs to information about an Accountable Person.

Key personnel obligations

An Accountable Entity must:

  1. Ensure that the responsibilities of Accountable Persons cover all aspects of the operations of the Accountable Entity's corporate group.
  2. Ensure that no Accountable Person is prohibited from being an Accountable Person under FAR.
  3. Comply with each direction that ASIC or APRA gives to the Accountable Entity under FAR.
  4. Take reasonable steps to ensure that each of the Significant Related Entities complies with the Key Personnel Obligations as if that entity were an Accountable Entity.

Deferred remuneration obligations

Accountable Entities and their Significant Related Entities are required to defer at least 40% variable remuneration (for example, bonuses and incentive payments) for each of their Accountable Persons for a minimum of four years, if the variable remuneration is above A$50,000.

What are the obligations of Accountable Persons?

Under FAR, Accountable Persons are required:

  1. To be registered.
  2. To act with honesty and integrity.
  3. To act with due skill, care and diligence.
  4. To act in a manner that prevents actual or likely adverse impact to their accountable entity's prudential standing.
  5. To deal in an open and constructive way with APRA and ASIC.
  6. To take reasonable steps to prevent matters from arising that would (or would be likely to) adversely affect the Accountable Entity's prudential standing (which is to be considered within the entity's industry as well as among the general public) or prudential reputation.
  7. To take reasonable steps to conduct their responsibilities in a way that prevents matters from arising that would (or would be likely to) result in material contravention by the Accountable Entity of various legislation:
    1. The Financial Accountability Regime Act 2023
    2. The Banking Act 1959
    3. The credit legislation (within the meaning of the National Consumer Credit Protection Act 2009)
    4. The Financial Sector (Collection of Data) Act 2001
    5. The financial services law (within the meaning of section 761A of the Corporations Act 2001)
    6. The Insurance Act 1973
    7. The Life Insurance Act 1995
    8. The Private Health Insurance (Prudential Supervision) Act 2015
    9. The Superannuation Industry (Supervision) Act 1993
    10. Regulations, instruments, directions or orders made under a law referred to in any of subparagraphs (a) to (i).

The regulators of FAR (i.e. ASIC and APRA) will be empowered to disqualify an Accountable Person of an entity or class of entities regulated by the regime. The regulators may also direct an accountable entity to reallocate the responsibilities of its Accountable Persons to address risks of non-compliance.

Penalties for non-compliance

If an Accountable Entity breaches its obligations under FAR, the maximum penalty will be the greater of:

  • 50,000 penalty units (currently c. A$15.65 million).
  • Three times the benefit derived and detriment avoided because of the contravention, which refers to the sum of: (i) the total value of all benefits obtained; and (ii) the total value of all detriments avoided by one or more persons reasonably attributable to the contravention.
  • 10% of annual turnover of the body corporate, capped at 2.5 million penalty units (currently c. A$782.5 million).

Individuals may incur liability if they attempt, aid, abet, counsel, procure or otherwise directly or indirectly involved with conduct that contravenes FAR in such a way that causes the Accountability Entity to incur a civil penalty. The maximum penalty imposed on an individual under FAR is the greater of:

  1. 5,000 penalty units (currently c. A$1.565 million).
  2. If the court can determine the benefit derived and detriment avoided because of the contravention – that amount multiplied by three.

Impact for insurers

FAR will impact insurers as an entity but also with those who underwrite certain line of business, such as professional indemnity or Directors' and Officers' (D&O) insurance.

For insurers, the extension of BEAR to include the insurance sectors will require them to review their framework and processes across their business before they come into force in late March 2025. Of particular importance will be engagement with the Accountable Person to ensure that they and the insurer can demonstrate compliance with FAR. Insurers (and the Accountable Person) will also need to be mindful of end-to-end product responsibility, ensuring a holistic management of the product chain, including when outsourced. The regime imposes very broad obligations on insurers and their Accountable Person(s).

FAR will also affect insureds (entities and insured persons), not least as a result of the penalties and regulatory actions available to APRA and ASIC. Regulated entities will be reviewing their insurance programs (particularly their D&O insurance and professional indemnity cover) to ensure that they have adequate cover them, their directors and officers, and the Accountable Person(s). There is no prohibition in FAR with regard to indemnification of Accountable Person(s) relating to breaches and penalties of FAR. Therefore, we anticipate entities will be reviewing the extent of the cover available under their D&O policies, as well as other policies to ensure adequate cover with respect to any regulatory investigations.

Insurers and insureds should note however that under section 97 of the Financial Accountability Regime Act 2023 (Cth), Accountable Entities cannot be indemnified against the consequences of breaching any obligations under FAR by a significant related entity (e.g. a subsidiary). The legislation is, however, silent on whether the Accountable Entity itself can insure against breaches of FAR by an entity that is not a 'significant related entity'.

For D&O insurers, directors and officers will be expected to take reasonable steps to prevent material contraventions of FAR. Further, in view of the obligations imposed upon Accountable Person(s), insurers should consider whether their insurance proposal forms include questions directed towards an entity's compliance arrangements specifically with respect to accountability, notification, deferred remuneration, and key personnel obligations. Contraventions of such obligations will be likely result in investigations and civil penalties.

Read other items in Australian Insurance Brief – November 2023