Background on the Financial Accountability Regime

The Financial Accountability Regime Bill 2022 (New Bill) has been introduced to Parliament. As the New Bill has not changed in substance from the Financial Accountability Regime Bill 2021 (Previous Bill), it will receive bi-partisan support. Consequently, organisations can be confident that it will become law soon and can start getting ready now.

The new financial accountability regime (FAR) will apply for financial entities in the banking, insurance and superannuation industries.  The purpose of this article is to provide a recap on key aspects of the New Bill, as it will apply to RSE licensees.

This article also considers the Exposure Draft Financial Accountability Regime Minister Rules 2022 (Minister rules) as they will apply to RSE licensees.

A quick recap

You may recall that the Previous Bill lapsed when the 2022 federal election was called.

The key aspects of the FAR have remained unchanged under the New Bill.  These include the following:

Persons to whom the financial accountability regime applies

The FAR will apply to “accountable entities”, and also to certain “accountable persons”. These are both defined terms:

• Accountable entities include RSE licensees that are constitutionally covered bodies.
• An accountable person, in relation to an RSE licensee, means (a) a person who holds a position in the accountable entity or in another body corporate of which the accountable entity is a connected entity and (b) because of that position the person has actual or effective senior executive responsibility for management or control of the accountable entity, or for management or control of a significant or substantial part or aspect of the operations of the accountable entity or the accountable entity’s relevant group.
• The New Bill defines “relevant group” to mean the accountable entity and its significant related entities.  Whether an entity is a “significant related entity” often involves looking at whether the entity is an “associated entity” under the Corporations Act and whether it has or is likely to have a “material and substantial” effect on an accountable entity or its business or activities.
• We note that the concept of an associated entity is broader than a member of the same corporate group, and in certain cases may capture, for instance, a promoter of a superannuation fund.
• An individual is also an accountable person of an RSE licensee if: (a) the person holds a position in, or relating to the, the accountable entity; and (b) because of that position has a responsibility prescribed in the Minister rules.   

Core obligations

The FAR will broadly impose the following four core sets of obligations in relation to financial entities operating in the banking, insurance and superannuation industries, and their senior executive management.  Each set comprises a detailed “shopping list” of obligations.  We provide the following high-level overview of them.

1. The Accountability Obligations are intended to encourage acting with honesty, integrity, and due care, skill and diligence, as well as dealing with ASIC and APRA (together, the Regulator) in an open, constructive and cooperative way.  They complement and support other legislative obligations, such as the general obligations of a financial services licensee under section 912A of the Corporations Act and the covenants set out in section 52 of the SIS Act.  Having well-documented and appropriate governance, control and risk management procedures and protocols will be crucial to complying with these obligations.
2. The Key Personnel Obligations are intended to ensure that responsibilities covering all aspects of the operations of the accountable entity and its significant related entities are appropriately allocated to accountable persons.  Importantly, accountable persons must be registered with the Regulator and not disqualified.
3. The Deferred Remuneration Obligations require that at least 40% of an accountable person’s variable remuneration is deferred for at least the “minimum deferral period” (generally, a period of 4 years) with some narrow exceptions.  Remuneration policies will also need to comply with the deferred remuneration obligations.
4. The Notification Obligations consist of “core” and “enhanced” notification obligations.
   • Core notification obligations will apply to all accountable entities. Broadly, they require accountable entities to notify the Regulator within 30 days if certain events occur (e.g. a person ceases to be an accountable person; an accountable person is dismissed or suspended due to failure to comply with accountability obligations; an accountable person’s variable remuneration is reduced because of a failure to comply with accountability obligations).
   • Enhanced notification obligations, in contrast, only apply to accountable entities which meet a threshold prescribed by the Minister rules.  Enhanced notification obligations require an accountable entity to give the Regulator an accountability statement and an accountability map and inform the Regulator of any changes to these documents.  In broad terms, an accountability statement is a comprehensive statement of the relevant accountable person’s responsibilities, and an accountability map identifies each accountable person and their reporting lines and lines of responsibility.

Consequences of non-compliance

An accountable entity is liable to a civil penalty for non-compliance with an obligation under the FAR.  Further, there will be civil penalties for ancillary contraventions (e.g. attempting, aiding or abetting a contravention).

Administration

The FAR will be administered by APRA and ASIC jointly.

What’s new?

The only difference between the Previous Bill and New Bill relates to when an entity commences to be an accountable entity.  In the case of an RSE licensee which is a constitutionally covered body, it will be an accountable entity from the day that is 18 months after the commencement of the Act.

When will the Financial Accountability Regime Bill commence?

The FAR will commence on the day after the Act receives the Royal Assent.  However, the FAR will have a staggered application.  As noted above, an existing RSE licensee which is a constitutionally covered body will be an accountable entity from the day that is 18 months after the commencement of the Act.

Minister rules

The draft Minister rules were released on 12 September 2022.

The purpose of the Minister rules is to prescribe certain matters for the purposes of the Act.  The following prescribed matters affect RSE licensees:

• prescribed responsibilities or positions that cause a person to be an accountable person.  The Minister rules prescribe being a director of the RSE licensee.  The Minister rules also prescribe a range of senior executive responsibilities, including for management of the RSE licensee’s business activities, financial resources, operations, risk controls, internal audit function, compliance function, human resource function, anti-money laundering function or dispute resolution function.  Further, the Minister rules prescribe senior executive responsibility for management of the RSE licensee’s member administration operations, investment function, financial advice service or insurance offerings.
• prescribed enhanced notification threshold for the purpose of the Notification Obligations.  Under the Minister rules, the threshold at which the enhanced notification obligations apply is if, at the start of the financial year, the RSE licensee’s total asset size equals or exceeds $10 billion.  The Minister rules also prescribe the meaning of total asset size.

What do RSE licensees need to do to comply with the Financial Accountability Regime Bill?

RSE licensees will need to undertake some initial work with a view to being compliant under the FAR.  Below, we set out a non-exhaustive checklist of steps which we view as important:

G+T has the knowledge and expertise required to assist with updating policies, procedures, employment contracts and other documentation, and to advise regarding compliance with the financial accountability regime.  To find out more information, contact our experts.