Snapshot
This year the Financial Accountability Regime Act 2023 replaces the Banking Executive Accountability Regime (BEAR). It seeks to improve culture, governance and accountability within financial services firms.
The Banking Industry is well equipped to transition to FAR based on the compliance with BEAR. However, while many of the changes align with what is in place already, some of the key differences include:
- a move to individual accountability – with personal liability attaching to accountable persons where reasonable steps have not been taken to prevent regulatory breaches;
- accountability mapping (although this is already in place for ADIs under BEAR);
- remuneration deferral obligations applying to all entities, including non SFIs;
- APRA and ASIC acting as dual regulators; and
- increased penalties.
The move to individual accountability in FAR’s UK counterpart has led to difficulties in attracting senior executives. To support accountable persons, entities will need to consider establishing frameworks setting out the bank’s expectations; providing adequate guidance material and having formal governance protocols, in order to ensure that senior managers are able to demonstrate that they have taken reasonable steps to prevent regulatory breaches.
When will FAR commence?
The following key dates apply.
- 15 March 2024: ADI’s and their authorised NOHC’s
- 6 March 2025: Insurance and superannuation industries
How will it work?
Entities will be classified into 2 categories replacing the BEAR small, medium, and large ADI’s. These categories are:
- Core Notification Entities: subject to all obligations under FAR, except the requirement to submit accountability statements and maps to the Regulators; and
- Enhanced Notification Entities: subject to all the obligations under FAR.
An ADI will be classified as ‘Enhanced Notification Entity’ if its total assets exceed $10 billion.
FAR v BEAR – How different are they?
The question that most ADI’s are asking is, how much further than BEAR does FAR reach?
| Area | BEAR Requirements | FAR Requirements |
|---|---|---|
| Responsible Regulator | APRA | APRA & ASIC |
| Senior Appointments | APRA currently has no power to veto senior executive and director appointments | • APRA & ASIC to be notified before senior appointments. • APRA will have power to veto senior appointments. • All 'Accountable Persons', including senior executives and all Board Members, must be registered with either APRA or ASIC. |
| Personal Liability for Accountable Persons | None | • Accountable Persons will be liable for civil penalties. • The maximum penalties will be the greater of: • 5,000 penalty units (currently $1.05m); or (a) 3x the benefit derived, or detriment avoided because of the contravention. |
| Accountability Mapping | All ADI's are required under the BEAR Regime to provide an accountability map and accountability statements to APRA. | • Only enhanced entities will be required to provide accountability maps and accountability statements to APRA and ASIC. • Core compliance entities are still expected to undertake a process to identify and register their accountable persons to cover all aspects of their business. |
| Remuneration Policy and Deferral | All ADI's are required under the BEAR Regime to provide an accountability map and accountability statements to APRA. | • Only enhanced entities will be required to provide accountability maps and accountability statements to APRA and ASIC. • Core compliance entities are still expected to undertake a process to identify and register their accountable persons to cover all aspects of their business. |
| Remuneration Policy and Deferral | • Deferral requirements under CPS 511 apply to all ADIs and SFI's. • Non-SFI ADIs do not have specific deferral requirements. • ADIs are required to defer a minimum of 40-60% of bank executives' variable pay or 10-40% of total pay to be deferred for a minimum of 4 years. • ADIs must also allow for a reduction in variable remuneration in proportion to any failure. | • The FAR variable remuneration deferral obligations will apply to all entities. • Variable remuneration definitions consistent with CPS 511 (but with clarity on "objectives"). • Start of deferral period aligned. • will apply to remuneration decisions that occur in the first financial year that begins six months after FAR commences (6 September 2024) • Higher deferral threshold for chief executive officers under CPS 511. • Deferred remuneration will continue to be subject to the BEAR obligations until the period of deferral finishes. |
| Penalties | Penalties are tiered based on the size of the ADIs. The maximum penalty for a) large ADI’s is 1 million penalty units. b) medium ADI’s is 250,000 penalty units. c) small ADI’s is 50,000 penalty units. APRA has a disqualification power to remove an individual from their role and in extreme cases, prevent them from taking any similar role in the industry in the future | The maximum penalties for an entity under the FAR will be the greater of the following: • 50,000 penalty units (currently $10.5m). • 3x the benefit derived, or detriment avoided by the body corporate because of contravention. • 10% of annual turnover of the body corporate, to a maximum of 2.5m penalty units (current $525m) Similar to BEAR, APRA holds a disqualification power. |
How can you prepare for FAR?
Get ahead
Consider how FAR will impact your organisation and what documents, processes and information is needed or must be updated to comply with FAR.
Identify
Identify Accountable Persons and whether additional AP’s will be required given the new particular responsibilities mandated by FAR.
Updates statements and maps
Existing statements and maps must be extended to include the new particular responsibilities.
Deferred remuneration obligations
The remuneration requirements under BEAR are no longer sufficient, remuneration packages which were compliant with that regime must be updated to reflect the changes made by FAR.
Assess Reasonable Steps Framework
Consider whether your current Reasonable Steps Framework is appropriate given the new obligations under FAR.
Assess the impact of BEAR
Determine how your organisation was compliant with BEAR and identify any gaps, grey areas, or overlaps which can be fixed now in order to effectively implement FAR.