FAR Bill receives endorsement to proceed

The Senate Economics Legislation Committee has endorsed the Financial Accountability Regime (FAR) Bill 2021 in a report issued 15 February 2022. Here are some highlights from the report, which included welcome guidance from the Regulators' submissions on some of the less certain aspects of the proposed regime.

• Treasury has confirmed that, despite this new legislation "replacing" the Banking Executive Accountability Regime (BEAR), consistency with BEAR is a key principle adopted in designing FAR. Any changes are necessary to reflect a change in policy, but unnecessary changes have been deliberately avoided. This confirms for banks who have applied BEAR, the steps to apply FAR should not require a complete overhaul of current systems but rather adjustments to encompass specific policy changes.
• The scope of the regime is deliberately set at the level of the most senior executives and there is no present intention to expand it to senior managers to align with the UK Senior Managers Regime.
• Treasury is cognisant of the current breadth of the definition of "significant related entity", which is framed to ensure its application across a range of different structures (RSE Licensees, insurers and banks). Submissions to the Committee highlighted potentially unintended consequences of this breadth, such as a telecommunications company falling in scope of FAR by virtue of their employee superannuation regime. We anticipate the definition will therefore remain broad in the bill but there may be further clarification of the scope of "significant related entity" in Regulatory Guidance.
• ASIC clarified its expectations for accountable persons to comply with their obligation to take reasonable steps to ensure the entity complies with a long list of legislation (cl 19(1)(d) of the Exposure Draft Legislation). Accountable persons will not be expected to be looking over the shoulder of everyone in the area of activity they're responsible for. They must take reasonable steps to manage a process, from their particular vantage point.
• Given the breadth of the regime, one-size-fits-all guidance on what is required to take reasonable steps is not possible and the Regulators do not plan to issue detailed guidance. Individual entities must determine what they consider reasonable steps will be, given their ultimate responsibility for the issues in their organisation. The specific steps will necessarily vary industry to industry, entity by entity -size, complexity, and so on.
• Where there are some minimal overlapping obligations, ie. between the FAR accountability obligations and other financial services laws, APRA confirmed it will take steps to avoid penalising an individual for breach of the same conduct more than once. APRA does not appear to perceive significant overlap between existing laws and the new regime. Existing conduct laws are about the specific conduct involved, whereas the focus of FAR is on accountability so people know who is responsible. Where "traditional misconduct" arises, it doesn't necessarily mean there will have been a breach of FAR, but it means the persons accountable will be readily identifiable.
• For the deferred remuneration obligations, APRA clarified that overall, the FAR and APRA's CPS 511 are consistent. However, for significant financial institutions CPS 511 requires longer deferrals than the minimum requirements under FAR.

The Committee recommended the FAR Bill be passed, satisfied that it will deliver on its intent to strengthen accountability and transparency in the financial services sector.

In the same report, the Committee also endorsed bills to introduce the Compensation Scheme of Last Resort (CSLR), however the Labor members of the Committee advocated for an expansion of the CSLR to encompass Managed Investment Schemes.  It is unclear whether this demand will hold up passage of the CSLR bills.