Financial Accountability Regime (FAR) Draft Legislation - How Far Has It Come?
After a long wait following Treasury's initial proposal paper issued in January 2020, the Financial Accountability Regime (FAR) draft legislation has arrived, and there are a few key items that require consideration by superannuation trustees.
How did we get here?
There is no reason in principle why the directors and the senior executives of at least the large superannuation funds should not be subject to statutory obligations of a kind generally similar to those imposed on members of the board and banking executives by the BEAR … if BEAR is seen as a necessary step in the proper supervision and regulation of (at least some of the) banks, proper supervision and regulation of superannuation funds needs no less.
Commissioner Hayne recommended that the Banking Executive Accountability Regime (BEAR) be extended to APRA-regulated institutions.
After consulting on a Proposal Paper that outlined the Government's proposed model for the FAR in early 2020 and a delay caused by the COVID-19 pandemic, Treasury has now released:
Exposure draft legislation
Exposure draft explanatory materials
Information paper – Joint administration of the Financial Accountability Regime between APRA and ASIC
Policy Proposal Paper – List of prescribed responsibilities and positions
Exposure Draft Legislation Q&A
What should superannuation trustees consider?
Timeline for implementation
The Bill is being prepared for introduction in the 2021 Spring sittings. Commencement is intended for RSE licensees from the later of 1 July 2023 or 18 months after commencement of the regime, however, this timeframe is not prescribed in the draft legislation and is dependent on the Minister making a declaration to apply the FAR to RSE licensees.
Individual Penalties
The exposure of individual accountable persons to civil penalties for breaches of their accountability obligations initially proposed has been removed from the FAR. Regulators will, however, be able to disqualify a person from being an accountable person for a period and to direct an accountable entity to reallocate responsibilities of its accountable persons.
Significant Related Entity
Extending the initial proposal to allocate responsibilities to accountable entities for their subsidiaries where the activities of the subsidiary are significant, the draft legislation introduces the concept of a "significant related entity". For RSE licensees, this includes a wider variety of entities than subsidiaries, including connected entities that have a material or substantial effect (or are likely to have an effect) on the accountable entity, or its business or activities of the accountable entity. The draft legislation provides a list of matters that may be taken into account to determine if a connected entity has a material and substantial effect on an accountable entity.
While the significant related entities will not be subject to direct legal obligations under the regime, accountable entities must take reasonable steps to ensure significant related entities comply with the accountability obligations as if the significant related entity were an accountable entity. In practice, this may result in trustees reviewing current contractual arrangements, if any, with these entities, to ensure that the accountability obligations are documented along with other reporting and oversight mechanisms that would provide the trustee with the appropriate transparency to meet its obligations.
Trustees that are part of a larger group need to consider the extent to which the expanded significant related entity applies to them and whether accountable persons of the significant related entity will need to be designated. The explanatory memorandum suggests that "[a]n accountable person may also be employed by a body other than the accountable entity or one of its significant related entities."
Indemnity Prohibition
While also generally included in Treasury's initial Proposal Paper, the draft legislation introduces a prohibition on indemnity that prohibits a related body corporate of an accountable entity from indemnifying the entity for penalties incurred as a result of breaches of the FAR, and from paying insurance premiums insuring the entity for such breaches. It does not prevent entities from obtaining insurance themselves and also does not apply more generally to legal costs.
Taken together with the prohibition on indemnity from trust assets that comes into effect in January 2020 pursuant to the Financial Sector Reform (Hayne Royal Commission Response) Act 2020, this may present further complexities for trustees that may be considering indemnity arrangements that would provide for insurance or an indemnity from a related body corporate, as such arrangements may not be effective in relation to the FAR.
Accountable Persons
Commissioner Hayne's view was that the regulatory burden of complying with what is now FAR should not be significant, and the obligations would not entail any "reporting or recording beyond what prudent administration would require anyway."
The Explanatory Memorandum notes that "[i]n practice, accountable persons will generally only include the directors and senior executives of an entity, such as the Chief Executive Officer and officers reporting directly to the Chief Executive Officer."
The Proposal Paper, however, lists prescribed responsibilities and positions that for many trustee offices may be broader than simply directors, and CEO's and their direct reports. For example, the heads of internal audit, compliance, AML/CTF and risk are listed separately and responsibilities and positions such as senior executives for management of dispute resolution, member remediation programs, breach reporting, member administration, financial advice, and insurance offerings are also listed.
Trustees that do not have separate executives for each of these functions may need to consider whether they need to appoint one accountable person (perhaps a current executive) that will hold the multiple prescribed responsibilities, or whether it is more appropriate to have separate accountable persons for each prescribed responsibility.
The Government will formally consult on the list of prescribed responsibilities and positions prior to the Minister making the final rules.
End-to-End Product Executive Responsibility
Commissioner Hayne in his final report recognised that more must be done to prevent processing and administrative errors, which arose from a combination of factors, including number and complexity of products, and the absence of end-to-end accountability. The final report refers to the testimony of the ANZ CEO, who discussed the "disaggregation of the management of the value chain with no-one 'accountable from the design of the product through to its implementation and if something goes wrong, remediating it and, importantly, keeping it fit for purpose'." The Commissioner's statements were focused on banks, rather than RSE licensees.
FAR seeks to address this by requiring that a senior executive, or multiple senior executives, are jointly accountable for end-to-end product management, which includes all steps in the design, delivery and maintenance of all products and services offered to members, remediation, linkages to IT systems and data quality, outsourcing and incentive arrangements for frontline staff. Treasury does attempt to make clear that "it is not necessary for an individual holding the end-to-end product responsibility to have technical expertise on every stage of the product value chain."
This will present some difficulty for trustees that do not have a designated product management function, but rather where this responsibility is spread across multiple areas. Trustees may wish to consider their implementation of the Design and Distribution Regime, which also targets a holistic approach to product management, in determining the appropriate accountable person(s).
Remuneration Deferral
The explanatory memorandum states that the "deferral period is intended to be consistent with provisions of APRA's proposed prudential standard to regulate remuneration in APRA-regulated industries (Prudential Standard CPS 511 Remuneration) that would also require deferral of variable remuneration for an overlapping class of persons in those industries. This will enable persons regulated by both regimes to comply with the requirements under each framework."
While the variable remuneration deferral requirements in the most recent version of CPS 511 differ from those contained in the draft legislation, the intention seems to be that the FAR requirements are intended to only be a baseline. For example, CPS 511 requires that significant financial institutions defer at least 60 per cent of the CEO's total variable remuneration over a minimum period of 6 years, whereas the FAR generally requires deferral of 40 per cent of an accountable person's variable remuneration over a minimum period of 4 years. While the case may be that in complying with CPS 511, a trustee also complies with the FAR, trustees should consider stepping through the provisions and calculation methodologies required under each to ensure that the result of compliance with CPS 511 is also compliance with FAR.
Both the FAR and CPS 511 provide that the deferral rules do not apply if the variable remuneration is less than $50,000. FAR also exempts accountable persons that are filling a temporary or unforeseen vacancy, who are not registered or required to be registered under the FAR because they only hold the position for 90 days or less.
If your trustee office needs further clarification or assistance with FAR please contact QMV Legal at sayhi@qmvsolutions.com or 03 9620 0707.
Gabriele Pirana - Senior Associate
QMV Legal
ABOUT QMV
QMV provides independent advisory, consulting, legal services and technology to superannuation, wealth management, banking and insurance organisations.
Like what you see? Please subscribe to receive original QMV content!
You may also benefit from our free monthly pensions and superannuation regulatory updates.