Key points
- The Bills propose to establish a Financial Accountability Regime (FAR) to increase transparency and accountability across the financial services industry.
- The FAR will replace the existing Banking Executive Accountability Regime (BEAR) and impose four core sets of obligations on authorised deposit-taking institutions, insurance companies, and superannuation funds.
- The Bills arose from the Government’s commitment to implement the recommendations of the Banking Royal Commission.
- Opinions about the proposed FAR are divided. While some stakeholders believe the FAR will place an unnecessary burden on the financial services industry, others argue the regime is deficient in important areas that will render it ineffective. In particular, attitudes regarding whether to impose civil penalties on senior executives vary widely.
- Both the Morrison Government and the Albanese Government made previous attempts to establish the FAR. The Bill introduced by the Morrison Government lapsed at dissolution of the 46th Parliament and the previous Bill introduced by the Albanese Government in September 2022 has been withdrawn and replaced with the current Bills.
Introductory Info
Date introduced: 8 March 2023
House: House of Representatives
Portfolio: Treasury
Commencement: As set out in the body of this Bills Digest.
History of
the Bill
There have been three legislative attempts to create a
Financial Accountability Regime (FAR).
On 28 October 2021, the Morrison Government introduced the
Financial
Accountability Regime Bill 2021 (the lapsed 2021 Bill) and the Financial
Sector Reform (Hayne Royal Commission Response No. 3) Bill 2021 for the
purpose of establishing the FAR. The Bills were not debated and lapsed at the
dissolution of the 46th Parliament on 11 April 2022.[1]
On 8 September 2022 the Albanese Government introduced the
Financial
Accountability Regime Bill 2022 (the discharged 2022 Bill) and the Financial
Sector Reform Bill 2022 to establish the FAR. The 2022 Bill passed the
House of Representatives. However, on 9 March 2023 the Senate moved a motion to
have the 2022 Bill discharged from the Notice Paper of legislation under
consideration.[2]
On 8 March 2023, the Albanese Government introduced the Financial
Accountability Regime Bill 2023 (the Bill or the 2023 Bill) and the Financial
Accountability Regime (Consequential Amendments) Bill 2023 in another
attempt to establish the FAR.
In the second reading speech for the 2023 Bill, Stephen
Jones (Assistant Treasurer and Minister for Financial Services) said the
Government has reintroduced the FAR Bill to include changes proposed by Senator
David Pocock that ‘articulate more clearly the scope of the Minister’s
exemption power’.[3]
The Assistant Treasurer believes reintroducing the Bill is ‘the neatest, lawful
path to the agreed objective’.[4]
The 2023 Bill would establish the FAR with substantially
the same design specifications as originally proposed by the 2021 and 2022
Bills.[5]
Changes between the Bills are explained in the ‘Key provisions’ section of this
Digest.
Bills Digests were prepared for the 2021 and 2022 Bills.[6]
Some content in this Digest is sourced from the earlier ones.
Purpose of the Bill
The purpose of the Financial
Accountability Regime Bill 2023 is to replace the existing Banking
Executive Accountability Regime (BEAR) and establish a FAR that expands on, and
strengthens BEAR-like accountability requirements across the financial services
sector.
To this end, the Bill imposes four fundamental sets of
obligations:
- accountability
obligations: requiring accountable entities and accountable persons to
conduct their business in a certain manner
- key
personnel obligations: requiring accountable entities to nominate
accountable persons to be responsible for all areas of their business
operations and providing that nominated accountable persons will be subject to
an additional accountability obligation (in other words, not included in
existing BEAR obligations) in relation to preventing matters from arising that
may result in the entity’s material contravention of specified financial
services laws
- deferred
remuneration obligations: all accountable entities will be subject to the
same deferred remuneration obligations, regardless of size or seniority of the
accountable person’s role
- notification
obligations: accountable entities are required to provide the Regulator
with particular ‘core’ information about their business and accountable
persons, generally within 30 days of an event occurring. Specified larger
entities will have enhanced notification requirements and are required to
prepare and submit accountability statements and accountability maps.[7]
The purpose of the Financial
Accountability Regime (Consequential Amendments) Bill 2023 is to set out
transitional arrangements to support the implementation of the proposed FAR.[8]
The
Consequential Amendments Bill amends the following legislation
to enable transition from the BEAR to the FAR:
Background
Accountability regime in the financial services industry
There has been a growing perception, particularly since
the 2008 Global Financial Crisis, that senior executives of financial
institutions have not been held accountable for the numerous financial scandals
that have harmed the community.[10]
As a result, the Australian Government has enacted
legislation designed to increase transparency and accountability across the
financial services industry. For example, in October 2017 the Australian
Government introduced the Bill for the Treasury Laws
Amendment (Banking Executive Accountability and Related Measures) Act 2018
to establish the Banking
Executive Accountability Regime (BEAR) to strengthen the accountability framework of the
banking sector.[11]
The BEAR puts in place a strengthened accountability
framework for the senior executives of authorised deposit-taking institutions
(ADIs). ADIs include banks, credit unions and building societies (for
simplicity ADIs are hereafter referred to as ‘the banking sector’).[12]
The BEAR does not apply to financial institutions
outside the banking sector. For example, the accountability obligations set out
in the BEAR do not apply to senior executives of insurance companies or
superannuation funds.[13]
Many stakeholders argue that while the heightened
accountability regime of the BEAR is a welcome start, the scope of the BEAR
should be extended to non-ADI firms in the financial sector.[14]
This aligns with the recommendations of the Royal Commission into
Misconduct in the Banking, Superannuation and Financial Services Industry
(commonly known as the Banking Royal Commission or the Hayne Royal Commission).
Recommendations of the Banking Royal Commission
The Banking Royal Commission made several recommendations
to extend the scope of the BEAR to all entities regulated by the Australian
Prudential Regulation Authority (APRA).[15]
The APRA regulates entities in the banking sector, the general insurance
sector, the life insurance sector, the private health insurance sector, and the
superannuation sector.[16]
On 4 February 2019, the Morrison Government released its response to the
Banking Royal Commission Final Report, which committed, amongst other
things, to taking action on the recommendations regarding the BEAR.[17]
The Albanese Government has also committed to implementing
the recommendations of the Banking Royal Commission. In his second reading
speech for the Bill, Assistant Treasurer Stephen Jones said:
The bill underscores the [Albanese] government’s commitment
to finalise the action necessary to fully address the banking royal commission
and implement measures that compel the financial services industry to act in
the public’s interest.[18]
There are divided opinions about the FAR. While some
industry stakeholders welcome the FAR and believe it will increase transparency
and accountability across the financial services industry, others argue there
are major deficiencies in the FAR that will render it ineffective, or that the
FAR overreaches and imposes unduly onerous obligations (discussed below).
Committee consideration
Senate
Standing Committee for the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills
has not yet considered the 2023 Bill.[19]
The Committee conducted inquiries into the lapsed 2021 and
discharged 2022 Bills.[20]
In its Scrutiny Digest no. 5 of 2022, the Committee raised several concerns
about specific clauses of the discharged 2022 Bill. The concerns related to:
- the
Minister’s broad discretionary powers
- tabling
of documents in Parliament
- reversal
of evidential burden of proof
- incorporation
of documents as in force from time to time.[21]
Assistant Treasurer Stephen Jones provided a response to
the Committee in October 2022 to address its concerns.[22]
In response to the Assistant Treasurer’s advice, the Scrutiny of Bills
Committee drew its scrutiny concerns to the attention of senators and left to
the Senate as a whole the appropriateness of the provisions with which it had
expressed concern.[23]
Although the comments of the Scrutiny of Bills Committee and the response from
the Assistant Treasurer relate to the discharged 2022 Bill, they are still
valid considerations for the equivalent clauses in the 2023 Bill.
For further details about the Committee’s concerns, please
refer to the Committee’s report and the earlier Bills Digests.
Senate Economics Legislation Committee
At this stage it is not clear whether the 2023 Bill will
be referred to the Senate Economics Legislation Committee for inquiry and
report.
The Committee conducted inquiries into the lapsed 2021 and
discharged 2022 Bills. On 28 March 2022, the Committee (chaired by Liberal
Senator Paul Scarr) tabled its report on the lapsed 2021 Bill and recommended
the Bill be passed.[24]
On 24 October 2022, the Committee (chaired by Labor
Senator Jess Walsh) tabled its report on the discharged 2022 Bill and
recommended the Bill be passed.[25]
Additional comments from Coalition Senators also expressed their support for
the passage of the 2022 Bill.[26]
Australian Greens Senator Nick McKim made additional
comments that criticised the absence of individual civil penalty provisions in the
discharged 2022 Bill.[27]
Further details are discussed below in the ‘Policy position’ section of this Digest.
Policy
position of non-government parties/independents
The
Coalition
At the time of writing this Bills Digest, the Coalition
has not made official comments on the 2023 Bill.
As noted, in the Senate Economics Legislation Committee’s report
about the discharged 2022 Bill, Coalition committee members expressed their
support for the passage of the Bill.
Australian
Greens
The Australian Greens have:
… criticised the possibility of a deal between Labor and
Liberal to pass the Financial Accountability Regime (FAR) without fines for
law-breaking bankers…
Any deal between the major parties would be yet another sign
that the big banks are still calling the shots in Parliament.[28]
In particular, the Greens criticise the Bill’s lack of
individual civil penalties for breaches of accountability obligations.[29]
Other Independents
As noted, Assistant Treasurer Jones said the Government
has reintroduced the Bill to include an amendment proposed by Senator David Pocock.[42]
The amendment relates to the scope of the Minister’s power to exempt
accountable entities from compliance (clause 16). Details about clause
16 are discussed in the ‘Key issues’ section of this Digest.
At the time of writing, the positions of non-government
parties and independents could not be identified.
Position of
major interest groups
Various stakeholders made submissions
to the Senate Economics Legislation Committee to comment on the discharged 2022
Bill. The Committee noted that the majority of submissions to the
inquiry supported the 2022 Bill and its intent to establish the FAR.[43]
However, some stakeholders were critical of specific clauses of the Bill.[44]
Based on publicly available information, stakeholder
positions regarding the FAR have not changed. For detailed information
regarding the stakeholders’ positions, please refer to the Committee’s
report or the Bills
Digest on the discharged 2022 Bill.
Financial
implications
The Explanatory Memorandum states that the Bill will have
no financial impact.[45]
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the
Bill’s compatibility with the human rights and freedoms recognised or declared
in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible.[46]
Parliamentary
Joint Committee on Human Rights
At the time of writing, the
Parliamentary Joint Committee on Human Rights has
not yet considered the 2023 Bill. The Committee had no comments with
respect to the discharged 2022 Bill.[47]
Key issues
and provisions
The 2023 Bill and the discharged 2022 Bill are drafted in
almost identical terms, except in relation to provisions that provide the
Minister with power to exempt accountable entities from compliance (clause
16). As noted, there are also policy disagreements regarding the exclusion
of individual civil penalty provisions for breaches of accountability
obligations under the FAR (clause 81).
This Bills Digest focuses on clauses 16 and 81.
For other provisions, please refer to the Digest
on the discharged 2022 Bill.
The
Minister’s power to exempt an accountability entity or classes of entities from
compliance
If passed, the Bill will establish the FAR. The entities
to which the FAR applies are referred to as accountable entities.
These entities include ADIs, insurance companies and superannuation funds.[48]
The directors and senior executives who are regulated under the FAR are
referred to as accountable persons.[49]
Clause 15 of the 2023 Bill requires accountable entities to comply with
the FAR obligations set out in Chapter 2 of the Bill.
Subclause 16(1) provides that the Minister may, by notifiable
instrument, exempt an accountable entity from compliance with Chapter 2
obligations. Furthermore, subclause 16(4) provides that the Minister
may, by legislative instrument, exempt a class of accountable entities.
The 2022 Bill did not set out any requirements for the
Minister to exempt an entity or a class of entities. Under the 2023 Bill, the
Minister may only exempt an accountable entity, or a class of accountable
entities, if the Minister is satisfied that it would be unreasonable for the accountable
entity or class of accountable entities to comply with obligations under the
FAR (subclauses 16(2) and (5)). Additionally, any exemption of an
individual entity must include a statement that sets out the Minister’s reasons
for making the exemption (subclause 16(3)).
The Parliament may disallow the Minister’s decision to
exempt a class of accountable entities. When a legislative instrument is tabled in the Parliament, it
is subject to the disallowance regime within 15 sitting days of being tabled, unless otherwise
specified.
Subclause 16(1) of the 2023 Bill is different to its
equivalent clause in the 2022 Bill. Under the discharged 2022 Bill, the
Minister would have been able, by written notice, to exempt an
accountable entity from obligations.
Table 1:
differences between the 2023 and 2022 Bills regarding the Minister’s power to
exempt accountability entities
|
|
By legislative instrument |
By notifiable instrument |
By written notice |
| 2023 Bill |
Exempt a class of entities |
Exempt an entity |
|
| 2022 Bill |
Exempt a class of entities |
|
Exempt an entity |
Source: Parliament Library, information derived from clause 16
of the 2023 and 2022 Bills.
In the second reading speech for the 2023 Bill, Assistant
Treasurer Jones argued that the changes articulate more clearly the scope of
the Minister’s exemption power and provide for Parliamentary oversight.[50]
A notifiable instrument provides greater transparency than
a written notice. Although a notifiable instrument is not subject to
disallowance, it must be published on the Federal
Register of Legislation.[51]
In contrast, there is no legal requirement for written notices (as proposed under
clause 16 of the 2022 Bill) to be published on the Federal Register of
Legislation.
The Assistant Treasurer has acknowledged that the changes
to the exemption process reflect amendments
to the 2022 Bill proposed by Senator David Pocock.[52]
Should the
Minister have the power to exempt accountable entities from compliance?
The Explanatory Memorandum to the 2023 Bill argues the
Minister should have the power to exempt accountable entities:
The power to exempt an accountable entity or a class of
accountable entities from the Financial Accountability Regime is required to
ensure the regime applies appropriately to the regulated industries and to
avoid any potential unintended consequences from the application of the regime.
This power ensures that the regime can operate flexibly
and be appropriately targeted. For instance, there may be instances where
the Financial Accountability Regime may act as a barrier to entry for some
small new entrants and the ability to exempt entities or classes of entities
from the regime may facilitate competition in the market.
The exemption power is broadly framed to avoid constraining relevant
considerations due to the diversity of industries regulated by the Financial
Accountability Regime, and the complexity and unforeseen nature of the issue
the exemption power is seeking to address.[53]
[emphasis added]
In its Scrutiny Digest no. 5 of 2022, the Senate Standing
Committee for the Scrutiny of Bills, considering the equivalent clause in the 2022
Bill, requested the Treasurer’s advice as to why it is necessary and
appropriate to provide the Minister with a broad power to exempt an accountable
entity or a class of accountable entities from compliance.[54]
The Scrutiny Committee noted:
… insufficiently defined administrative powers, such as those
granted under clause 16, may be exercised arbitrarily or
inconsistently and may impact on the predictability and guidance capacity
of the law, undermining fundamental rule of law principles.[55]
[emphasis added]
The Committee argued that legislative instruments made
under subclause 16(2) of the 2022 Bill should be time-limited to ensure
an appropriate level of parliamentary oversight.[56]
By way of example, if legislative instruments made under subclause 16(2) were
time-limited for a period of six months; when the six months period expires,
the accountable entities that had been exempted from compliance would be
subject to compliance again, unless the Minister makes a new legislative
instrument exempting them.
In October 2022, Assistant Treasurer Stephen Jones
responded to the Committee’s request for further information on these matters.
The Assistant Treasurer advised:
An exemption for classes of accountable entities under
subclause 16(2) is a legislative instrument and is therefore subject to
Parliamentary scrutiny and disallowance… Further, as a legislative instrument,
any exemption will sunset within ten years of making in accordance with section
50 of the Legislation Act 2003. In my view this is an appropriate
period for duration of a class exemption as it provides system stability and
certainty for the entities affected, and it means the sunset review will
consider the operation of the exemption based on a substantive amount of time
and practice. A shorter period would not provide those benefits…
The framing of the exemption power is broad to avoid
constraining the use of the power… I do not intend to amend the bill to provide
time limits for instruments of exemption under clause 16(2), or to limit the
circumstances or conditions attached to exercise of the exemption power.[57]
[emphasis added]
The Committee acknowledged the importance of allowing
flexibility in the context of the FAR, but noted that it was unclear from the Assistant
Treasurer’s explanation as to why the Bill could not provide at least
high-level guidance in relation to the exercise of the exemption power under
clause 16.[58]
The 2023 Bill, adopting Senator David Pocock’s proposed amendments to the 2022
Bill, provides that the Minister may only exercise the exemption power if they
are satisfied that it would be unreasonable for the relevant entity or entities
to be required to comply with obligations under the FAR (subclauses 16(2) and
(5)).
The Committee also expressed concerns that ‘it would be
possible for broad-ranging exemptions to be made by the minister which would
undermine the Financial Accountability Regime enshrined in primary legislation
passed by the Parliament.’[59]
As such, the Committee drew its scrutiny concerns to the
attention of senators and left to the Senate as a whole the appropriateness of
providing the Minister with a broad power to provide exemptions under clause
16.[60]
Civil
penalty provisions for accountable entities and persons that breach their accountability
obligations
While an accountable entity that breaches its
accountability obligations under the FAR may be subject to civil penalties (clause
80), there are no individual civil penalties for accountable persons who
breach their accountability obligations.
However, the Bill does prescribe civil penalties for ancillary
involvement by a person (including an accountable person) in an accountable
entity’s contravention of an obligation. Specifically, subclause 81(1)
prescribes that a person (including an accountable person) must not:
- attempt
to contravene a civil penalty provision of the Bill
- aid,
abet, counsel or procure a contravention of a civil penalty provision of the
Bill
- induce
(by threats, promises or otherwise) a contravention of a civil penalty
provision of the Bill
- be
in any way, directly or indirectly, knowingly concerned in, or party to, a
contravention of a civil penalty provision of the Bill
- conspire
with others to effect a contravention of a civil penalty provision of the Bill.
The Explanatory Memorandum explains:
A person can face a civil penalty if they assist another
person to contravene a civil penalty provision under the Financial
Accountability Regime. An example of such an ancillary contravention is an
accountable person aiding an accountable entity to contravene its
accountability obligations.[61]
In other words, individuals will be subject to an
ancillary liability regime which will deem them liable if they aid or abet an
accountable entity to breach its obligations under the FAR.
In addition to potential civil penalties for ancillary
involvement, an accountable person who breaches their FAR obligations also
faces other deterrents such as disqualification or loss of bonus payments.[62]
In regard to the specific amount of civil penalties that is
applicable, subclause 83(2) provides that if a body corporate (for
example, an accountable entity) breaches a civil penalty provision (that is, subclause
80(1) or 81(1)), then the maximum penalty that may be imposed on the body
corporate is the greatest of:
- 50,000
penalty
units (equivalent to $13.75 million) [63]
or
- three
times the value of the benefit derived/detriment avoided because of the
contravention or
- 10%
of the annual turnover of the body corporate for the 12-month period preceding
the contravention, up to 2.5 million penalty units ($687.5 million).
Subclause 83(3) provides that if a person other
than a body corporate breaches a civil penalty provision, then the person would
incur a maximum civil penalty of the greater of either:
- 5,000
penalty units (equivalent to $1.375 million) or
- three
times the value of the benefit derived/detriment avoided because of the
contravention.
As discussed, the Australian Greens recommend that the
Bill should include individual civil penalties for accountable persons who breach
their accountability obligations. The Government has made it clear that it does
not support the Greens’ recommendation.
Commencement
date
The Bill commences the day after Royal Assent. Subclauses
9(2) and (4) of the Bill specify that the FAR will apply to the banking
industry six months after Royal Assent and to any new entrants beyond that,
from the time they become an ADI or a non-operating holding company. The regime
will apply to the insurance and superannuation industries 18 months after Royal
Assent, and to any new entrants beyond that, from the time they become
licensed.[64]
Lawyers from MinterEllison note that September 2023 is the
earliest possible date from which the FAR would apply for the banking sector
and September 2024 for the insurance and superannuation sectors.[65]
Concluding comments
The Bill proposes to give effect to the Government’s
commitment to implement the recommendations of the Banking Royal Commission by
extending the scope of the BEAR to all APRA-regulated entities.
There are divided opinions about the effectiveness of the
proposed FAR, and stakeholders have voiced criticisms regarding specific
clauses of the Bill.[66]
The Bill’s potential points of contention include:
- the
scrutiny concerns raised by the Senate Standing Committee for the Scrutiny of
Bills in relation to the discharged 2022 Bill which is in similar terms to this
Bill
- the
effectiveness of the obligations imposed by the FAR to improve conduct across
the financial services industry
- whether
there are adequate penalties for contraventions of obligations by accountable
persons.