The Financial Accountability Regime Bill 2023 (FAR Bill) was passed by the House of Representatives on 22 March 2023 and the Senate on 5 September 2023.
The FAR Bill differs in one material respect from the Financial Accountability Regime Bill 2021, which lapsed when the 2022 federal election was called, and the Financial Accountability Regime Bill 2022, which did not proceed. Namely, it articulates more clearly the scope of the Minister's exemption power and provides for parliamentary oversight of the exercise of that power.
The FAR Bill establishes a new financial accountability regime (FAR) for certain entities in the banking, insurance and superannuation industries.
The FAR will apply to RSE licensees 18 months after commencement of the FAR Bill. As RSE licensees are not subject to the Banking Executive Accountability Regime, they will require extra preparation to comply with the FAR. In our view, a prudent RSE licensee will consider the extent to which existing policies and procedures can aid its compliance.
We have analysed how the obligations under the FAR compare to existing obligations for RSE licensees. In this article, we set out the most interesting observations from our analysis.
FAR obligations for standard employer-sponsors as significant relates entities?
The FAR imposes some obligations on an accountable entity in relation to its significant related entities. In relation to an RSE licensee, a body corporate is a ‘significant related entity’ if:
it is a connected entity of the RSE licensee;
it, or its business or activities, has (or is likely to have) an effect on the RSE licensee, or the business or activities of the RSE licensee, that is material and substantial;
it is a constitutionally covered body; and
it is not an accountable entity itself.
An issue that arises is whether a standard employer-sponsor of a corporate superannuation fund is a significant related entity of the RSE licensee of that fund.
Assuming that the standard employer-sponsor is:
a connected entity of the RSE licensee;
a constitutionally covered body; and
not an accountable entity itself,
whether it is a significant related entity will turn on whether it, or its business or activities, has (or is likely to have) an effect on the RSE licensee, or the business or activities of the RSE licensee, that is material and substantial .
In determining whether a body corporate has (or is likely to have) an effect on an RSE licensee, or the business or activities of an RSE licensee, that is material and substantial, the FAR prescribes certain matters that may be taken into account. Those matters are:
the nature of the body corporate’s business or activities;
the scale of the body corporate’s business or activities;
the nature and extent of any interdependency between the body corporate and the RSE licensee;
any organisational, financial or administrative arrangements between the body corporate and the RSE licensee; and
any other relevant matter.
We observe that a standard employer-sponsor of a corporate superannuation fund could have an effect on the RSE licensee, or its business or activities, if it terminated its contributions to the corporate superannuation fund. Relevant factors to consider in relation to whether the effect is material and substantial include whether the standard employer-sponsor was the principal employer or an associated employer of the fund and whether the fund is a public offer fund.
We use the term ‘principal employer’ to refer to the main employer which contributes to the fund and ‘associated employer’ to refer to other companies in the group that are standard employer-sponsors.
Effect of an associated employer ceasing contributions
If an associated employer only has a relatively small number of employees, the associated employer ceasing to contribute is unlikely to have a material and substantial effect. This situation could arise, for example, where the shares in the associated employer are sold with the result that it leaves the group, but the other group companies continue to contribute to the corporate super plan.
Effect of a principal employer ceasing contributions
By contrast, the principal employer ceasing to contribute might have a material and substantial effect. The trust deed for a fund may even require the RSE licensee to wind up the fund if the principal employer ceases to contribute.
However, the issue appears to be whether the ability for a principal employer to cease making contributions in the future, if it so chooses, means that the principal employer has (or is likely to have) an effect on the RSE licensee, or the business activities of the RSE licensee, that is material and substantial. We suggest that it is unlikely to have that effect until it ceases to contribute. Further, where the principal employer has not done anything to suggest that it will cease, or is considering ceasing, contributions to the fund, we suggest that typically, it does not have (and is unlikely to have) an effect on the RSE licensee, or the business activities of the RSE licensee, that is material and substantial. Of course, the relevant facts will need to be considered in each case.
In our view, whether the corporate superannuation fund is a public offer fund is another matter to consider, but it is unlikely to be determinative.
It could be the case that an RSE licensee has outsourced a material business activity to a standard employer-sponsor. However, RSE licensees typically outsource activities such as administration, custody and investment management to specialist providers, rather than standard employer-sponsors. A standard employer-sponsor might provide resources to the RSE licensee (e.g. office space or software licensing). Where this occurs, it is likely that any such arrangements are ‘contractor relationships’ (as defined in APRA Prudential Practice Guide SPG 231 Outsourcing) rather than the outsourcing of a material business activity. However, the classification and the effect on the RSE licensee will depend on the cost and relative ease of switching providers.
Expanded accountability obligations for RSE licensees
RSE licensees will be familiar with the covenant for each director of a corporate trustee of a registrable superannuation entity to exercise a reasonable degree of care and diligence for the purposes of ensuring that the corporate trustee carries out the covenants referred to in section 52 of the SIS Act.
The accountability obligations under the FAR extend much further, as they will apply to more than just directors of the RSE licensee and in respect of a greater range of legal obligations.
Under the FAR, an accountable person of an RSE licensee or of a significant related entity is required to take reasonable steps in conducting the responsibilities of their position to prevent matters from arising that would (or would be likely to):
adversely affect the prudential standing or prudential reputation of the RSE licensee; or
result in a material contravention by the RSE licensee of specified laws, including the SIS Act, the SIS Regulations and the prudential standards.
Further, accountability is two-way between accountable persons and RSE licensees under the FAR. An RSE licensee is required to take reasonable steps to ensure that each of its accountable persons meet their accountability obligations. Consequently, an RSE licensee must take reasonable steps to ensure that each of its accountable persons are taking reasonable steps to prevent the RSE licensee from contravening the SIS Act, the SIS Regulations and prudential standards.
APRA will regain the power to disqualify individuals
Under the FAR, a person is prohibited from being an accountable person of an RSE licensee or a significant related entity if the person is disqualified. The Regulator will have the power to disqualify a person from being or acting as an accountable person, if the Regulator is satisfied that:
the person has failed to comply with one or more of their accountability obligations; and
the disqualification is justified, having regard to the seriousness of the failure to comply.
In relation to RSE licensees, the Regulator is principally APRA but may include ASIC where the RSE licensee holds an Australian financial services (AFS) licence.
APRA previously had a power to disqualify individuals under the SIS Act. However, that power was replaced with a court-ordered disqualification process in 2008 following the AAT’s decision in Re VBN and Ors and Australian Prudential Regulation Authority to set aside disqualification orders made by APRA against seven directors.
With APRA regaining the power to disqualify accountable persons of RSE licensees and significant related entities, it will be more important than ever for RSE licensees to carefully manage their relationships with APRA.
New financial accountability regime, but RSE licensees are not starting from zero
The FAR will impose overarching obligations that will be relevant to all aspects of an RSE licensee’s business. For example, it will require an RSE licensee (as an accountable entity) to take reasonable steps to conduct its business with honesty and integrity, and with due skill, care and diligence.
However, it is worthwhile noting that RSE licensees are already subject to overarching obligations. For example, under section 52 of the SIS Act, the trustee of a registrable superannuation entity covenants:
to act honestly in all matters concerning the entity; and
to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as a prudent superannuation trustee would exercise in relation to an entity of which it is trustee and on behalf of the beneficiaries of which it makes investments.
Another example is the obligation in section 912A(1)(a) of the Corporations Act for an RSE licensee (as an AFS licensee) to do all things necessary to ensure that the financial services covered by its licence are provided efficiently, honestly and fairly. Relevantly, a person provides a financial service if they provide a superannuation trustee service. Due to the broad definition of ‘superannuation trustee service’, the efficiently, honestly and fairly obligation extends to practically everything that an RSE licensee does as trustee in operating a registrable superannuation entity.
While it will be necessary for an RSE licensee to revisit existing governance, risk and compliance arrangements to prepare for the implementation of the FAR, its existing policies and procedures will provide a very useful starting point. We recommend reviewing and improving those policies and procedures, rather than starting over.
G+T has the knowledge and expertise required to assist with updating governance, risk and compliance arrangements and employment contracts and to assist regarding any aspect of FAR implementation. Please contact us if you would like further information or assistance.