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After a long wait, the Financial Accountability Regime (“FAR”) is here! To be precise, Treasury has released the Exposure Draft Legislation (“ED”) (together with the Draft Explanatory Materials, Information Paper on Joint Administration, and Policy Proposal Paper on Prescribed Responsibilities and Positions). Key points to note are summarised below.
When does FAR come into effect?
The FAR legislation is being prepared for introduction and passage in the 2021 Spring sittings of Parliament. Following this:
This includes general insurers, authorised NOHCs of a general insurer, a life company, a registered NOHC of a life company, a private health insurer or an RSE licensee (“Trustee”). Noting, the minister may declare classes of bodies corporate.
Who is captured by FAR?
Accountable persons (“APs”):
What obligations do those captured by FAR have?
The accountability obligations, both for entities and APs, remain substantially similar to those set out under BEAR and within the FAR Proposal Paper. However, there are two key deviations worth noting:
The FAR Proposal Paper included an additional obligation for APs to take reasonable steps to ensure that the entity complies with its licensing obligations. This has been changed in the ED to a requirement for APs to take reasonable steps to ensure that the accountable entity complies with a number of specified laws (including but not limited to: the Banking Act 1959, credit legislation, the Insurance Act 1973, the Superannuation Industry (Supervision) Act 1993 and the “financial services law” as defined in the Corporations Act 2001).
This requirement represents a change of focus for APs, who will now need to be confident that they understand each relevant provision, its impact on their area of responsibility and the measures taken by the entity to comply. This re-instils the importance of having a robust obligations register in place which maps compliance obligations to respective APs, and of providing APs with adequate education as needed.
2. Matters arising that would adversely affect prudential standing or reputation:
Both the BEAR and the FAR Proposal Paper included obligations for entities to prevent matters from arising that would adversely affect prudential standing or prudential reputation. The ED maintains this obligation, but extends ‘would’ to ‘would (or would be likely to)’ adversely affect prudential standing or prudential reputation.
While on the face of it, this appears to extend the existing obligation, it may not have significant implications in practice. The nature of the existing obligation, through reference to ‘would’, already contemplates the hypothetical, forward-looking view that inclusion of ‘would be likely to’ attempts to address. It remains to be seen whether this wording change is flagging an intention on the part of the regulators to take action where an AP has failed to act with the relevant foresight, even where no adverse impact has actually materialised.
Additional guidance on taking reasonable steps
The ED also provides additional detail on what amounts to taking reasonable steps to support proactive compliance by accountable entities and persons. In addition to existing provisions (covering governance, control, risk management, delegations and procedures for identifying and remediating problems), Treasury has also sought to include:
This is aligned to the approach that many organisations are already taking and is unlikely to prompt significant change.
How have penalties and indemnification changed?
As anticipated, significant civil penalties will apply to entities in breach of their obligations under FAR. The maximum penalty amount for a contravention is the greater of:
However, there are some important departures from the FAR Proposal Paper:
How will joint administration operate in practice?
As expected, FAR will be jointly administered by APRA and ASIC, except for entities not licensed under the financial services laws or credit legislation (these will be regulated solely by APRA). Key points to note about the joint administration approach include:
Respond to the consultation (quickly!)
Interested parties are invited to comment on the ED by 13 August 2021.
We recommend assessing the more material departures from the FAR Proposal Paper, including what is involved in understanding the newly framed accountability obligation for APs, the operation of the end-to-end product management responsibility and the overlap between proposed PRs.
Consider the impact on other regulatory change items
Several of the PRs consider areas that are currently undergoing significant regulatory change. It will be important to consider whether the appointment of APs into these roles should be contemplated by existing implementation programs. By way of example:
Get your implementation programs started
For ADIs and their NOHCs, there is now less than 12 months to transition over to the new and changed requirements under FAR, or extend to entities not previously captured. We recommend starting now in order to be appropriately prepared for 1 July 2022, and to overcome some of the nuances that weren’t contemplated under BEAR.
For all other APRA-regulated entities, experience tells us that the sooner you get started – the better. Ideally the organisation is operating in a FAR-ready state in advance of 1 July 2023.
If you have any questions or comments in the meantime, please feel free to reach out.
Rosalyn is a partner in Deloitte's Melbourne office in the Governance, Regulation and Conduct practice. She specialises in supporting firms to design and assess frameworks to treat customers fairly, including the development of conduct, product governance, sales practices and complaints handling frameworks.
Caroline is a Partner in Deloitte’s Sydney office in the Governance, Regulation and Conduct practice. She has over 15 years’ experience as a governance specialist and lawyer in financial services, having worked with major banks, superannuation trustees and responsibility entities. Caroline’s key areas of practice are corporate governance, regulatory compliance and corporate conduct.
Erin is a Senior Manager in Deloitte’s Melbourne office in the Governance, Regulation and Conduct practice. She specialises in supporting clients across the financial services sector in designing, implementing and reviewing frameworks, policies and procedures focused on preventative conduct and promoting good customer outcomes. Erin’s key areas of practice are accountability regimes and regulatory change.
Georgia is a Senior Manager in the Governance, Regulation and Conduct practice based in Brisbane. She specialises in supporting clients across the financial services sector in designing, implementing and reviewing frameworks, policies and procedures focused on preventative conduct and promoting good customer outcomes.