Purpose of the Bill

This Bills Digest relates to two Bills comprising:

• Financial Accountability Regime Bill 2021 (the FAR Bill)
• Financial Sector Reform (Hayne Royal Commission Response No. 3) Bill 2021.

The purpose of the FAR Bill is to replace the existing Banking Executive Accountability Regime (BEAR) and establish the Financial Accountability Regime (FAR) that expands on, and strengthens BEAR-like accountability requirements across the financial services sector for

• certain entities in the banking, insurance and superannuation industries and
• their directors and most senior and influential executives.[1]

To this end, the FAR 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.[2]

The Financial Sector Reform (Hayne Royal Commission Response No. 3) Bill 2021 makes consequential amendments to various Commonwealth laws and provides for transitional arrangements relating to the repeal of the Banking Executive Accountability Regime under the Banking Act 1959.[3]

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.[4]

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.[5]

Scott Morrison, then Treasurer, said:

Given the critical roles banks play within the community, bank directors and executives need to be held to an especially high standard of accountability…

The BEAR ensures that where these community expectations are not met, appropriate consequences will follow. It makes clear individual accountabilities so that it is clear where the buck stops in decision making and responsibility.[6]

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’).[7]

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.[8]

Many stakeholders, including the Senate Standing Committees on Economics, have argued 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.[9] This aligns with the recommendations of the Banking Royal Commission.

Recommendations of the Banking Royal Commission

In December 2017, the Australian Government established the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Banking Royal Commission or Hayne Royal Commission) to inquire into and report on misconduct in the financial services industry. The Banking Royal Commission’s interim report and final report were tabled in Parliament on 15 October 2018 and 12 February 2019 respectively.[10]

The Banking Royal Commission found evidence of conduct by many financial institutions that caused substantial loss to many customers.[11] The conduct of these financial institutions often broke the law or fell short of community expectations.[12]

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). 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.[13]

The Banking Royal Commission’s recommendations include:

• Recommendation 3.9 – over time, provisions modelled on the BEAR should be extended to all RSE (registrable superannuation entities) licensees[14]
• Recommendation 4.12 – over time, provisions modelled on the BEAR should be extended to all APRA-regulated insurers[15]
• Recommendation 6.6 – the Australian Securities and Investments Commission (ASIC) and APRA should jointly administer the BEAR
• Recommendation 6.7 – accountability obligations should make clear that ADIs and accountable persons (for example, a senior executive of a bank) must deal with APRA and ASIC in an open, constructive and cooperative way
• Recommendation 6.8 – over time, provisions modelled on the BEAR should be extended to all APRA-regulated financial services institutions and APRA and ASIC should jointly administer those new provisions.[16]

The Government’s response to the Banking Royal Commission

On 4 February 2019, the Government released its response to the Banking Royal Commission Final Report, which committed, amongst other things, to taking action on the recommendations listed above.[17]

In his second reading speech for the FAR Bill, Alan Tudge (Minister for Education and Youth) said:

The Bill underscores the Government's commitment to take action in response to the Royal Commission, which uncovered too many instances of misconduct across the financial sector, and highlighted that industry practices were too often not meeting community expectations.

The new Financial Accountability Regime extends the existing banking sector responsibility and accountability framework to the insurance and superannuation sectors.[18] (emphasis added)

The FAR Bill (along with Bills that establish the Compensation Scheme of Last Resort)[19] represents the final tranche of legislation to implement the recommendations made by the Banking Royal Commission.[20] Table 1 below shows the legislation that has been enacted in response to the Banking Royal Commission’s recommendations.[21]

Table 1: legislation addressing the recommendations of the Banking Royal Commission

Has the BEAR gone too FAR?

If passed, the FAR Bill will establish the Financial Accountability Regime (FAR). The FAR will replace the BEAR and extend similar accountability obligations to all APRA-regulated entities.

The entities to which the FAR applies are referred to as accountable entities. These entities include ADIs, insurance companies and superannuation funds.[22]

The directors and senior executives who are regulated under the FAR are referred to as accountable persons. The definition of an accountable person is discussed below in the ‘Key issues and provisions’ section.

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 raised several concerns regarding the FAR Bill. At the time of writing, the Government has not responded to the issues raised by the Committee.

Significant matters in delegated legislation

The Committee raised concern that there are significant matters pertaining to the FAR Bill that will be specified in delegated legislation rather than the primary legislation.[23]

Clause 15 of the FAR Bill requires accountable entities to comply with the obligations set out in the Bill (details of the obligations are discussed further below). However, the Minister may exempt an accountable entity or classes of entities from compliance (clause 16).

The Committee noted that:

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. [24]

Consequently, the Committee requested the Treasurer’s advice as to:

• why it is considered necessary and appropriate to provide the Minister with a broad power to provide exemptions to the Financial Accountability Regime under clause 16 and
• whether the Bill can be amended to include guidance on the exercise of the power on the face of the primary legislation, noting the potential for a broad, unconstrained exemption power to undermine the Financial Accountability Regime.[25]

Furthermore, clause 37 of the FAR Bill provides that APRA and ASIC must enter into an arrangement outlining their general approach to administering and enforcing the FAR within 6 months of the commencement of the Bill.[26] If the regulators fail to reach an agreement, the Minister may determine an arrangement for this purpose.

However, the Bill contains no requirement that an arrangement entered into under clause 37 be tabled in the Parliament. The Committee noted:

tabling documents in Parliament is important to parliamentary scrutiny, as it alerts parliamentarians to the existence of documents and provides opportunities for debate that are not available where documents are not made public or are only published online. Tabling reports on the operation of regulatory schemes promotes transparency and accountability. [27]

As such, the Committee requested the Treasurer's advice as to:

• whether the Bill can be amended to provide that an arrangement entered into under clause 37 of the Bill is required to be tabled in each House of the Parliament and
• why it is considered necessary and appropriate to leave details relating to provisions that must be included within a clause 37 arrangement to delegated legislation. [28]

No-invalidity clauses

The Committee noted that the FAR Bill contains no-invalidity clauses that require further scrutiny.

Clause 36 of the FAR Bill provides that the Financial Accountability Regime will be administered by both APRA and ASIC. As discussed above, clause 37 provides that APRA and ASIC must enter into an arrangement outlining their general approach to administering and enforcing the FAR within 6 months of the commencement of the Bill. Clause 38 provides that in general, neither APRA nor ASIC may perform a function, or exercise a power, under the Bill without the agreement of the other.[33]

The Committee noted that the following three clauses are no-invalidity clauses:

Subclause 36(2) provides that ASIC is only to perform functions and powers in relation to accountable entities that hold a financial services licence, significant related entities, or accountable persons. However, a failure to do so does not invalidate the performance or exercise of the function or power by ASIC. Similarly, subclause 37(5) provides that a failure to comply with requirements relating to entering into an administrative agreement does not invalidate the performance or exercise of a function or power by either APRA or ASIC. Finally, subclause 38(4) provides that a failure by either APRA or ASIC to receive agreement prior to performing or exercising a function or power does not invalidate the performance or exercise of the function or power. [34]

Put simply, subclauses 36(2), 37(5) and 38(4) are no-invalidity clauses because they specify that actions taken by ASIC or APRA are not invalid even if they are not in accordance with the statutory requirements outlined in clauses 36, 37 and 38. The Committee was concerned that these clauses ‘may limit the practical efficacy of judicial review to provide a remedy for legal errors’:

For example, as the conclusion that a decision is not invalid means that the decision-maker had the power (i.e. jurisdiction) to make it, review of the decision on the grounds of jurisdictional error is unlikely to be available. The result is that some of judicial review’s standard remedies will not be available.[35]

The Committee requested the Treasurer’s advice as to why the Government considered it necessary and appropriate to include no-invalidity clauses in the Bill.[36]

Reversal of evidential burden of proof

The Committee noted that the FAR Bill seeks to establish several defences which reverse the evidential burden of proof.[37]

The Committee noted that clause 68 of the FAR Bill makes it an offence for an accountable entity, significant related entity or accountable person to disclose information covered by the secrecy provision at clause 67. However, subclause 68(3) provides an exception (also known as defence) to this offence whereby the offence does not apply if the disclosure was authorised by clauses 69–75 of the Bill or was required by the order or direction of a court or tribunal.[40]

Similarly, subsection 56(2) of the Australian Prudential Regulation Authority Act 1998 provides that it is an offence if a person discloses protected information. However, subclause 72(2) of the FAR Bill provides an exception to this offence if the disclosure of protected information was authorised by clauses 69-75 of the Bill.[41]

The defendant bears an evidential burden of proof in relation to both exceptions or defences listed above. In other words, the defendant who wishes to rely on the exception or defence will bear the burden of adducing or pointing to evidence that suggests a reasonable possibility that they are authorised by clauses 69-75 of the Bill to disclose protected information. If a defendant discharges his or her evidential burden, the prosecution must then discharge its legal burden to disprove the relevant matters beyond reasonable doubt.[42]

The Committee said:

There is no explanation within the explanatory materials for reversing the evidential burden of proof in relation to the exception set out in subclause 68(3), with the explanatory memorandum merely re-stating the operation of the provision.[43]

Given the explanatory materials do not address this issue, the Committee requested the Treasurer’s advice as to why it is proposed to use offence-specific defences in this instance.[44]

The Committee also found that the Financial Sector Reform (Hayne Royal Commission Response No. 3) Bill 2021 seeks to establish several defences which reverse the evidential burden of proof and again sought the Treasurer’s advice on the appropriateness of this approach.[45]

Immunity from liability

Clauses 101 and 102 of the FAR Bill provide that a person is generally not liable for the performance of powers, functions or duties under the FAR Bill, if done in good faith and without negligence.[46]

The Committee noted that the immunities provided for under clauses 101 and 102 would remove any common law right to bring an action to enforce legal rights (for example, a claim of defamation), unless it can be demonstrated that lack of good faith is shown.[47] Given that ‘the courts have taken the position that bad faith can only be shown in very limited circumstances’, the Committee stated that it expects that provisions that attempt to establish immunity from civil and criminal liability to be ‘soundly justified’.[48]

As such, the Committee requested the Treasurer’s advice as to why it is considered necessary and appropriate to confer immunity from civil and criminal liability on persons under clauses 101 and 102 of the Bill.[49]

Incorporation of external materials existing from time to time

Certain accountable entities are required to comply with enhanced notification obligations set out in the FAR Bill. The threshold to determine which accountable entities will need to comply with the enhanced notification obligations will be specified in rules to be made by the Minister. For example, the Minister may determine that entities that have asset values above a certain threshold are required to comply with enhanced notification obligations.

Subclause 31(5) of the FAR Bill specifies that despite subsection 14(2) of the Legislation Act 2003,[50] the Minister’s rules that prescribe the circumstances in which an accountable entity meets the enhanced notification threshold may incorporate, by reference, any matter published on a website maintained by ASIC or APRA as in force or existing from time to time.[51]

The Committee advised that it has scrutiny concerns where provisions in a Bill allow the incorporation of legislative provisions by reference to other documents outside the Bill.[52] This is because the Committee believes, as a matter of general principle, any member of the public should be able to freely and readily access the terms of the law.

The Committee said:

While in this case incorporated material must be published on a website maintained by the Regulator there is nothing on the face of the bill to require that this material is freely and readily available.[53]

Put simply, the Committee is concerned that not everyone interested in the law will be able to access the documents published on the ASIC or APRA websites. For examples, the documents published by the regulators may be difficult to locate on their websites, or the documents may be in a particular format that requires software which is not readily available.

Additionally, the Committee expressed particular concern that an incorporated document could operate to change the circumstances when an accountable entity meets the enhanced notification threshold without any involvement from the Parliament.[54]

Consequently, the Committee requested the Treasurer’s further advice as to why it is considered necessary and appropriate to incorporate external materials as in force or existing from time to time.[55]

At the time of writing this Digest, the Committee has not received a response from the Treasurer.[56]

Senate Economics Legislation Committee

The Bills have been referred to the Senate Economics Legislation Committee for inquiry and report by 15 February 2022. Details of the inquiry are at the inquiry webpage.

Policy position of non-government parties/independents

Official position

At the time of writing, non-government parties and independents have not made official comments on the Bills.

Media speculation

The Australian Financial Review published an article on 9 November 2021 which reported that Liberal Senator Gerard Rennick, One Nation Senator Malcolm Roberts, United Australia Party leader Craig Kelly and parliamentarians from the Australian Greens have expressed an intention to amend the FAR Bill to reinstate civil penalties (of up to $1.05 million) for senior executives who breach their accountability obligations under the FAR.[57]

The Australian Financial Review also reported that:

While Labor is still determining its position on the legislation, the Party’s financial services spokesman, Stephen Jones, told the Financial Review he supported putting financial penalties in the Bill.[58]

The FAR Bill does not impose civil penalties on accountable persons for breaches of their accountability obligations. This is a departure from the policy position taken by the Treasury in an earlier proposal paper.[59] However, individuals will be liable for a civil penalty if they aid or abet an accountable entity to contravene its obligations under the FAR.[60]

Earlier reports from the Australian Financial Review speculated the removal of civil penalties was due to intense industry lobbying.[61] Lawyers from Clayton Utz (a law firm) also speculated that ‘early indications suggest that there may be some pressure applied to re-introduce individual penalties.’[62]

Position of major interest groups

Various stakeholders made their submissions to the Senate Economics Legislation Committee (SELC) to comment on the FAR Bill.

Consumer advocacy groups

Seven consumer advocacy groups made a joint submission, which criticised the FAR Bill.[63] They argued:

the FAR bill is deficient in many important areas. As drafted, this law will be unlikely to hold finance executives to account for their actions, nor will it significantly improve corporate culture in Australia. Without amendment, members of the community remain vulnerable to decision-making that trades off consumer welfare for excessive profits, and we are likely to see a repeat of the same harmful corporate practices that resulted in the Banking Royal Commission.[64] [emphasis added]

Specifically, the consumer advocacy groups recommended that the FAR Bill should be amended to:

• expand accountability obligations to include all executives and senior managers of financial institutions (typically only senior executives are considered to be within the scope of the FAR)
• reinstate the civil penalties under the FAR for people who break the law (see ‘Media speculation’, above)
• bolster the proposed deferred remuneration obligations
• legislatively require executives and senior managers to treat customers fairly.[65]

The consumer advocacy groups argued that ‘without these changes, the Bill fails in its primary objective of establishing an “accountability regime”’.[66]

Australian Banking Association

The Australian Banking Association (ABA), an industry association that comprises of 21 banks from across Australia,[71] said it supports the passage of the FAR Bill and ‘welcomes the key provisions of the bill to strengthen accountability and transparency in the financial system.’[72]

In contrast to the policy position taken by the consumer advocacy groups, the ABA believes that potential amendment to reinstate civil penalties for individual accountable persons is unnecessary. The ABA said:

The ABA has consistently taken the view that the FAR should build on the key strengths of the existing BEAR regime rather than replace it. In line with this, we welcome the decision not to proceed with a civil penalty for individual accountable persons under the regime, given the clear and substantial consequences for individuals provided for in the existing BEAR regime.

The ABA considers the potential for disqualification as an Accountable Person impacting future employment in the banking industry, together with the potential for those individuals to lose significant variable remuneration under the current BEAR creates significant and effective incentives to improve conduct and ensure adequate sanctions for not meeting requisite standards. There is no evidence to suggest that the current BEAR enforcement options are ineffective. As acknowledged in APRA’s Enforcement Strategy Review, disqualification is a very significant sanction and further penalties are unnecessary.[73]  [emphasis added]

Superannuation industry

The Association of Superannuation Funds of Australia (ASFA) and the Australian Institute of Superannuation Trustees made separate submissions to comment on the FAR Bill.[74] They expressed concerns over several aspects of the FAR Bill.

According to an article in the Australian Financial Review, the CEO of ASFA, Dr Martin Fahy, said the Government’s plan to extend the scope of the BEAR to include the superannuation sector is ‘overkill and risked unintended consequences’, especially given that the ‘sector doesn’t have a history of misconduct and the changes will weigh on investor returns.’[75]

Reportedly Dr Fahy said:

We need to be careful that it [the FAR] doesn’t drive out innovation, discourage funds from taking appropriate risks and prevent us from attracting the best people.[76]

Both superannuation organisations also criticised specific clauses of the FAR Bill. These criticisms are discussed below in the ‘Key issues and provisions’ section of this Digest.

Australian Institute of Company Directors

The Australian Institute of Company Directors (AICD) supports the passage of the FAR Bill in its current form.[77] However, the AICD also said:

the [FAR] Bill represents a material divergence from the BEAR and what was contemplated under the Royal Commission recommendations. The FAR is in effect a new accountability regime with expanded obligations on entities and accountable persons…

Expansion of the BEAR, rather than extension, is contrary to the recommendations of Commissioner Hayne…

The AICD urges that the [Senate Economics Legislation] Committee approach with caution any consideration of further departure from the recommendations of the Royal Commission.[78]

Specifically, the AICD said it would not support potential changes to the FAR Bill to introduce civil penalties on accountable persons for breaches of accountability obligations.[79]

Law Council of Australia

The Law Council of Australia said the optimal way to achieve the recommendations of the Banking Royal Commission is to extend the BEAR in its existing form to all APRA-regulated entities, rather than replacing the BEAR completely with the broader FAR.[80] This is because:

The challenges for Australia, as with other countries, as we seek to maintain strong economies in the face of ongoing impacts of the pandemic, are substantial. As the Government has acknowledged in its deregulatory agenda, it is important to ensure that new regulation does not impose as disproportionate impost on business which may divert from those efforts…

If the BEAR is seen as having any shortcomings, it would be open, and more efficient, to make incremental changes to that regime rather than replace it with the completely new FAR.[81] [emphasis added]

The Law Council of Australia also expressed concerns regarding specific provisions of the FAR Bill. These concerns are discussed in the ‘Key issues and provisions’ section of this Digest, below.

Australian Financial Markets Association

The Australian Financial Markets Association (AFMA), an industry association that represents members in the wholesale banking and financial markets, is generally supportive of the FAR Bill in its current form.[82]

In particular, the AFMA said it supports the removal of civil penalties for individuals who breach their accountability obligations. The AFMA said:

AFMA supported the removal of the originally drafted civil penalties for Accountable Person (AP) employee breaches of the accountability obligations from the FAR legislation.

AFMA understands from media reports that there is interest in some quarters in reintroducing the penalties for breaches without a requirement for intent by AP employees that were considered earlier in the consultation process.

Our view is that this is not necessary or appropriate as the Bill as introduced retains a substantial penalty regime.[83]

Business Council of Australia

The Business Council of Australia (BCA), an industry association that represents some of Australia’s largest employers, expressed support for the overall intent of the FAR Bill.[84]

However, the BCA also expressed concerns that ‘the Bill as introduced contains several anomalies that are not necessary to achieve its objectives, and which will have adverse consequences for business.’[85]

The BCA’s two major concerns regarding the FAR Bill are:

• unintended overreach of the FAR to impose obligations on significant related entities of accountable entities (the definitions of ‘accountable entities’ and their ‘significant related entities’ are discussed in the ‘Key issues and provisions’ section, below) and
• no-fault penalty regime.

Unintended overreach of the FAR

The BCA said while the accountability obligations introduced by the FAR are appropriate for financial entities in the banking, insurance and superannuation industries:

the FAR Bill goes further than necessary by also extending these obligations to “significant related entities” of Accountable Entities and to the Accountable Persons of these entities.

For Registered Superannuation Entities (RSE licensees), “significant related entities” is defined broadly and in a manner that will inadvertently apply the FAR regime to a range of non-financial entities that do not fall within the intended scope of the new regime…

The Bill as currently drafted will extend the FAR regime to businesses in a wider range of industries beyond the financial services sector, simply by virtue of them having their own corporate superannuation fund. This was never the intent of the FAR reforms.[86]

No-fault penalty regime

While the FAR Bill does not impose civil penalty for contraventions of accountability obligations by accountable persons; under clause 81 of the FAR Bill, individuals will be subject to an ancillary liability regime which will deem them liable if they aid or abet an accountable entity to contravene its obligations under the FAR.[87]

The BCA believes this ancillary liability should not be imposed without establishing the accountable person’s intent. In other words, this ancillary liability should only apply after proving the individual’s intention, knowledge or recklessness in aiding or abetting an accountable entity to contravene its obligations.[88]

As such, the BCA recommended that:

The Explanatory Memorandum should also clarify that ancillary liability requires evidence of intention, knowledge or recklessness.

Civil penalties under the Bill should not be imposed without intent and this should be put beyond doubt in the explanatory materials.[89] [emphasis added]

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.[90]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights had no comment on the Bills.[91]

Structure of the Bill

The FAR Bill is divided into three chapters:

• Chapter 1 is titled Introduction and provides definitions of key terms used throughout the Bill
• Chapter 2 is titled Obligations under the Financial Accountability Regime and imposes accountability obligations on accountable persons and entities and
• Chapter 3 sets out the Administration provisions, which include prescribing that APRA and ASIC will have the regulatory powers to jointly administer the FAR (although there will be some division of responsibilities).[92]

Key issues and provisions

FAR Bill

Chapter 1 – Introduction

Clause 3 states that the object of the Bill is to provide for a strengthened accountability framework for APRA-regulated financial entities.

Clause 7 specifies that this Bill, once enacted, will extend to conduct outside Australia.

Clauses 8 to 13 provide definitions of key terms used throughout the Bill.

Regulator means either APRA or ASIC. If the context requires the reference to be particularly to one of those bodies, then Regulator means that body (clause 8).

Definition of accountable entities

Clause 9 defines accountable entities as APRA-regulated entities authorised by the Regulator to carry on a banking, insurance or superannuation business. If passed, the FAR will impose accountability obligations on senior executives of accountable entities. Accountable entities must be constitutionally covered bodies, that is:

• a constitutional corporation[96]
• a body that carries on a business of banking, insurance or superannuation or
• a body whose conduct affects, or could affect, a constitutional corporation or a body that carries on a business of banking, insurance or superannuation.[97]

Accountable entities include:

• ADIs and their authorised non-operating holding companies (NOHCs)
• general insurers and their authorised NOHCs
• life insurers and their registered NOHCs
• private health insurers
• registrable superannuation entity licensees.

Financial institutions may be a part of a larger conglomerate. For example, the Macquarie Group Limited is the non-operating holding company of Macquarie Bank Limited (an ADI).[98] However, only the Macquarie Bank Limited is allowed by the Regulators to take deposits and conduct certain banking businesses. The accountability obligations imposed by the FAR will apply to both the NOHC and the ADI.

These obligations would also apply to foreign accountable entities (in the banking or insurance sectors) but only to the operations of their Australian branch (paragraph 15(2)(b) of the FAR Bill). Additionally, the obligations apply to the same extent to an accountable person of such an entity or any of its significant related entities (paragraph 15(2)(b) and subclause 18(3)).

Definition of accountable persons

Clauses 10 and 11 sets out the definition of accountable person. Accountable persons in accountable entities will be subject to the accountability obligations under the FAR and to potential sanctions for non-compliance with those obligations.

The general principle is that an accountable person is someone who has actual or effective senior executive responsibility for the management or control of accountable entities or of a significant or substantial part of the entities (paragraph 10(1)(b)).

In addition to the general principle test, an accountable person is someone who holds a prescribed responsibility and position in an accountable entity that is of a kind prescribed in the rules by the Minister (subclauses 10(2) – (4)).

According to the Policy Proposal Paper[99] released by the Treasury, the prescribed positions will include:

• all Board members of the accountable entity
• Chief Executive Officer or a similar position
• Chief Financial Officer or similar
• Chief Risk Officer or similar
• Chief Operations Officer or similar
• Chief Information/Technology Officer or similar
• Head of Internal Audit or similar
• Head of Compliance or similar
• Head of Human Resources or similar
• senior executive responsible for anti-money laundering.[100]

The full list of proposed prescribed responsibilities and positions is in Attachment A of the Policy Proposal Paper.[101] For foreign entities, an accountable person’s responsibilities relate only to the entity’s operating Australian branches (subclause 10(5)).

The Policy Proposal Paper clarifies that in respect to the proposed prescribed positions:

The extended list [of prescribed functions] is not intended to capture middle or lower management who may only have day-to-day responsibility for certain parts or aspects of the accountable entity or its significant related entities.[102] [emphasis added]

Furthermore, the Explanatory Memorandum explains:

accountable person may also be employed by a body other than the accountable entity or one of its significant related entities.[103]

The FAR Bill requires that all accountable persons be registered with the Regulators (discussed further below).

Definition of significant related entities

The FAR requires accountable entities to take reasonable steps to ensure their ‘significant related entities’ comply with certain accountability obligations. For banks and insurance companies, their significant related entities are typically their subsidiary companies. However, the definition of ‘significant related entities’ could capture entities that are not subsidiaries of an RSE (registrable superannuation entity).[104]

Chapter 2—Obligations under the Financial Accountability Regime

The Bill proposes to impose obligations on accountable entities and accountable persons within an accountable entity.

Compliance with obligations by accountable entities

Clause 15 requires accountable entities to comply with the obligations set out in the Bill (details of the obligations are discussed further below). However, the Minister may exempt an accountable entity or classes of entities from compliance (clause 16).

Furthermore, APRA and ASIC may also exempt an accountable entity from all or part of an obligation to the extent that it is inconsistent with a foreign law that applies to the entity (clause 17).

Compliance with obligations by accountable persons

Subclause 18(1) requires an accountable person of an accountable entity to comply with the obligations set out in Part 3 of Chapter 2 of the Bill. For foreign entities, an accountable person’s obligations relate only to the entity’s operating Australian branches (subclause 18(3)).

An accountable person is not required to comply with the accountability obligations if the Minister has exempted the accountable entity in which the person holds a position from compliance under clause 16 (subclause 18(2)). APRA and ASIC may also exempt an accountable person from all or part of an obligation to the extent that it is inconsistent with a foreign law that applies to the entity (clause 19).

Accountability obligations of an accountable entity

Clause 20 outlines the accountability obligations of an accountable entity. The accountable entity must take reasonable steps to:

• conduct its business with honesty and integrity, and with due skill, care and diligence (paragraph 20(a))
• deal with APRA and ASIC in an open, constructive and cooperative way (paragraph 20(b))
• prevent matters arising that would affect the accountable entity’s prudential standing or reputation and (paragraph 20(c))
• ensure that each accountable person and significant related entity meets their accountability obligations (paragraphs 20(d) and (e)).

Accountability obligations of an accountable person

Clause 21 outlines the accountability obligations of an accountable person of an accountable entity. The accountable person must:

• act with honesty and integrity, and with due skill, care and diligence (paragraph 21(1)(a))
• deal with APRA and ASIC in an open, constructive and cooperative way (paragraph 21(1)(b))
• take reasonable steps to prevent matters from arising that would (or would be likely to) adversely affect the prudential standing or reputation of the accountable entity (paragraph 21(1)(c))
• take reasonable steps in conducting responsibilities to prevent matters from arising that would (or would be likely to) result in a material contravention by the accountable entity of specified Commonwealth laws (paragraph 21(1)(d)).

Clause 22 provides guidance by way of a non-exhaustive list of what constitutes ‘the taking of reasonable steps’, including having appropriate governance, control and risk management strategies, and safeguards and procedures for identifying and remediating problems that arise or may arise.

Key personnel obligations

Clause 23 sets out the key personnel responsibilities for accountable entities. An accountable entity is required to ensure all accountable persons in the entity have been registered and have not been disqualified (discussed further below in clauses 40 and 42).

Deferred remuneration obligations

Clauses 25 and 26 introduce a requirement that a proportion of an accountable person’s variable remuneration be deferred so that it can be reduced (‘clawed back’) in the event that the individual fails to satisfy their accountability obligations.

Specifically, subclause 25(1) sets out the remuneration obligations of an accountable entity, which are:

• requiring at least 40% of an accountable person’s variable remuneration be deferred for a minimum period of four years (except in limited circumstances) (paragraph 25(1)(a), subclause 27(1) and clause 28). The Explanatory Memorandum states that four year deferral is intended to align with provisions of APRA’s prudential standard to regulate remuneration in regulated industries (Final Prudential Standard CPS 511 Remuneration).[109] In addition to the same period of  deferral, APRA's prudential standard CPS 511 Remuneration also requires a deferral of at least 40% of variable remuneration for senior managers and executive directors of significant financial institutions, and requires a higher deferral of at least 60% of the total variable remuneration for CEOs.[110] APRA has indicated (CPG 511 Remuneration) that entities are expected to comply with both FAR and CPS 511[111]
• to have a remuneration policy in force which provides that if an accountable person fails to comply with their accountability obligations, then the person’s variable remuneration is reduced by an amount that is proportionate to the failure (paragraph 25(1)(b))
• to ensure that if an accountable person’s variable remuneration is required to be reduced under the remuneration policy, then the amount of the reduction is not paid to the person (paragraph 25(1)(c))
• to take reasonable steps to ensure that if the variable remuneration is payable to an accountable person of a subsidiary of the accountable entity, that the subsidiary also complies with the obligations (paragraph 25(1)(d)).

Paragraph 25(2)(a) provides that a reduction in an accountable person’s variable remuneration can occur in any period, not only the period in which the person failed to meet their accountability obligations. Paragraph 25(2)(b) provides that variable remuneration may be reduced to zero.

Paragraph 26(1)(a) defines ‘variable remuneration’ as an accountable person’s remuneration that is conditional on achievement of objectives (for example, bonuses and incentive payments) and that is not remuneration of a kind prescribed in the rules. Subclause 26(3) allows the regulators (APRA and ASIC), by written notice to an accountable entity, to determine whether a particular type of remuneration is, or is not, variable remuneration.

Subclause 27(1) prescribes that all accountable entities and their significant related entities are required to defer at least 40% of the variable remuneration for each of their accountable persons.

Clause 28 sets out the minimum deferral period in relation to variable remuneration of an accountable person. The minimum deferral period is four years or a shorter period in certain circumstances or when approved by the regulators.

If a person ceases to be an accountable person because they have died or are suffering serious incapacity, serious disability or serious illness, the period of deferral of their variable remuneration ceases on the day that they cease to be an accountable person if the accountable entity is satisfied on reasonable grounds that the person has complied with their accountability obligations. If the accountable entity is not so satisfied on that day, the deferral period ends on the day that the entity is satisfied that the accountability obligations have been complied with, or if the accountable entity is never so satisfied, on the conclusion of the default period of four years (subclause 28(4), Table item 2).[113]

A shorter deferral period will apply in circumstances determined by the Regulator. A determination that applies to a particular entity will be given by written notice (subclause 28(4), Table item 2 and subclause 28(5)). A determination that applies to a class of entity will be set out in the Regulator rules (subclause 28(4), Table item 3).[114]

Subclause 29(1) provides that the deferral requirements do not apply to variable remuneration amounts less than $50,000, or an amount determined by the Minister.

Notification obligations

Core notification obligations

The Bill proposes to apply core notification obligations on all accountable entities under clause 31. In other words, all accountable entities have obligations to notify the regulators (APRA or ASIC) of any of the following events under clause 32:

• a person ceasing to be an accountable person
• the dismissal or suspension of an accountable person due to failure to comply with their accountability obligations under clause 21
• the reduction of the variable remuneration of an accountable person of the entity (or of a significant related entity) because the person failed to comply with one or more of their accountability obligations under clause 21
• the accountable entity becoming aware or having reasonable grounds to believe that the entity breached its accountability obligations under clauses 20 or 23
• the accountable entity becoming aware or having reasonable grounds to believe that an accountable person of the entity or of significant related entity, has breached their accountability obligations under clause 21
• a material change occurs to information included on the register of accountable persons about an accountable person.

Generally, the notification must be provided to the regulators within 30 days of the event occurring (subclause 31(6)). However, the regulators can prescribe a different timeframe in the rules.[116]

Furthermore, accountable entities must take reasonable steps to ensure their significant related entities comply with the core notification obligations (paragraph 31(1)(b)).

Enhanced notification obligations

All accountable entities are required to comply with the core notification obligations listed above. Additionally, a subset of accountable entities is required to comply with enhanced notification obligations.

Enhanced notification obligations include:

• providing the regulators with an accountability statement for each of its accountable persons (paragraph 31(2)(a))

  –  an accountability statement is a comprehensive statement of the responsibilities of an accountable person[117]

• providing the regulators with an accountability map (paragraph 31(2)(c))

–  an accountability map must contain: the names of all accountable persons in an accountable entity and its significant related entities, the responsibilities of each accountable person and the lines of reporting and responsibility between those accountable persons, and any other matters determined in the Regulator rules.[118]

Furthermore, accountable entities must take reasonable steps to ensure their significant related entities comply with the requirement to provide and update an accountability statement (paragraph 31(2)(e)).

The threshold to determine which accountable entities will need to comply with the enhanced notification requirements will be specified in rules to be set out by the Minister. Subclause 31(5) specifies that despite subsection 14(2) of the Legislation Act 2003, [119] the Minister’s rules that prescribe the circumstances in which an accountable entity meets the enhanced notification threshold may incorporate, by reference, any matter published on a website maintained by ASIC or APRA as in force or existing from time to time.[120]

Table 2 below shows the metrics currently proposed to be used to determine the entities that must comply with enhanced notification obligations. Put simply, it is proposed that entities with asset values above the threshold must comply with enhanced notification obligations.

Table 2: proposed metrics used to determine enhanced notification threshold [121]

Chapter 3 – Administration

General administration

As recommended by the Banking Royal Commission’s final report,[123] the FAR will be jointly administered by ASIC and APRA (subclause 36(1)).

Subclause 36(2) prescribes that ASIC will only be able to perform functions and exercise powers under the provisions listed in a table in that subclause in relation to accountable entities that hold an Australian financial services licence or an Australian credit licence, their significant related entities, and accountable persons of these entities. However, ASIC will:

be able to maintain the register of accountable persons, share information, and make legislative instruments (Regulator rules) with APRA in relation to all accountable entities and persons.[124]

APRA will administer and enforce the FAR in relation to other entities, their significant related entities and the accountable persons of those entities.

Clause 37 provides that APRA and ASIC must enter into an arrangement outlining their general approach to administering and enforcing the FAR within 6 months of the commencement of the Bill.[125] If the regulators fail to reach an agreement, the Minister may determine an arrangement for this purpose.

Clause 38 specifies that the regulators must agree before making certain decisions or exercising certain enforcement powers. For example, the regulators must agree prior to making a decision to disqualify an accountable person. However, according to the Explanatory Memorandum:

… a failure by the Regulators to reach an agreement, or by ASIC to adhere to the scope of its enforcement powers towards certain entities, does not invalidate the performance or exercise of the relevant function or power. [126]

Information sharing between ASIC and APRA

Subclause 39(1) provides that APRA and ASIC may share information that is obtained, produced, or disclosed for the purposes of FAR.

The Explanatory Memorandum explains:

APRA and ASIC are also required to share certain information necessary to enable the joint administration and enforcement of the regime. These arrangements are in addition to information‑sharing frameworks available to APRA and ASIC under other legislation.[127]

Register of accountable persons

Subclause 40(1) prescribes that the regulators must establish and keep a register of accountable persons. This register must include details of the responsibilities of accountable persons and details of any accountable person’s disqualification (paragraphs 40(4)(d) and (f)).

Subclause 40(5) provides that the regulators may make any of the information contained in the register available for public inspection on the internet. The Explanatory Memorandum explains:

Information from the register may be made public at the discretion of APRA and ASIC. This allows the regulators to balance the need for confidentiality of sensitive information about financial services businesses with the need for public accountability and transparency.[128]

According to the Treasury’s Information Paper on the FAR, APRA and ASIC will support the implementation of the FAR by:

• establishing a single portal to receive applications for registration of accountable people
• establishing a single point of contact for accountable entities to raise any queries or requests they may have
• determining the appropriate form for registration.[129]

Registration of a person as an accountable person

Subclause 41(1) provides that an accountable entity may apply to APRA or ASIC to register a person as an accountable person.

Subclause 41(2) prescribes that the application must comply with certain requirements. For example, the application must be in the form approved in writing by the regulator and the application must contain the information that the form requires.

Subclause 41(4) clarifies that APRA and ASIC must register a person as an accountable person if the application meets the requirements.

Disqualification of an accountable person

Subclause 42(1) provides that the regulators may disqualify an individual from being or acting as an accountable person if the regulators are satisfied that:

• the individual has failed to comply with their accountability obligations and
• the non-compliance is sufficiently serious to justify the disqualification.

The regulators may disqualify a person from being or acting as an accountable person for a particular accountable entity, a class of accountable entities or any accountable entity, or any significant related entity of these (subclause 42(2)).

The regulators may vary or revoke a disqualification on its own initiative or following an application by the disqualified person (subclause 43(1)). Decisions made by the regulators to disqualify an accountable person are subject to merits review (discussed below).

Examination powers

The Bill provides APRA and ASIC with examination powers to investigate breaches of the FAR.

Subclause 45(1) prescribes that APRA and ASIC may, in writing, appoint an investigator to investigate an accountable entity or its significant related entity if the regulators have reasonable grounds to believe that the accountable entity or an accountable person of the entity may have contravened their accountability obligations.

Subclause 47(1) compels an individual to cooperate with an investigator by producing books, accounts or documents relevant to the investigation if the investigator reasonably believes the person has custody or control of the books, accounts or documents. A maximum penalty of 30 penalty units ($6,660) applies if the person refuses to provide a book, account or document on request (subclause 47(3)), and a maximum penalty of up to 2 years imprisonment applies if the person conceals or destroys a document relevant to an investigation, intending to delay or obstruct the investigation (clause 48).[132]

If an examination or investigation is conducted, the person being examined may be required to take an oath or make an affirmation and to answer questions (subclause 50(1)). Failure to comply with these requirements is an offence punishable by a maximum penalty of 30 penalty units ($6,660) (clause 53).

A written record of the examination must be prepared and provided to the examinee. The investigator may place conditions on the use of the record, which the examinee must comply with. A penalty of up to six months imprisonment applies if the person fails to comply with these conditions (subclause 52(4)).

The regulators’ power to issue directions for non-compliance

Subclause 64(1) allows APRA and ASIC to give an accountable entity a direction if they have reasonable grounds to believe that a contravention of a provision of the Bill has or is likely to occur.

Subclause 64(2) specifies the kinds of direction that the regulators may issue.

Clause 65 prescribes that APRA and ASIC may give a direction to an accountable entity to reallocate responsibilities as between accountable persons if the regulators have reasonable grounds to believe that the current allocation has given rise to, or is likely to give rise to a prudential risk or a risk of significant and systemic non-compliance.

Secrecy provisions

Clause 67 provides that APRA and ASIC may determine if a direction is covered by secrecy provisions. Secrecy provisions are provisions that impose confidentiality obligations on individuals or entities.

Subclause 68(1) prescribes that if a person discloses information covered by the secrecy provisions, a penalty of imprisonment of up to 2 years will apply (save for limited exceptions described in subclause 68(3)).

Civil penalties

Civil penalties apply in relation to contravention of obligations by an accountable entity under the FAR (clause 80).

Furthermore, subclause 81(1) prescribes that a person (a body corporate or a natural 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.

Civil penalties for bodies corporate

Subclause 83(2) provides that if a body corporate (for example, an accountable entity or significant related 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 of $11.1 million) [137] or
• 3 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 ($555 million).

The Explanatory Memorandum states:

In practice, it is intended that a court would determine which method provides the greatest penalty, and then use discretion to impose an appropriate penalty up to that amount.[138]

Civil penalties for accountable persons

Subclause 83(3) provides that if a person other than a body corporate (for example, an accountable person) breaches a civil penalty provision (that is, subclause 80(1) or 81(1)), then the person would incur a maximum civil penalty of the greater of either:

• 5,000 penalty units (equivalent of $1.1 million) or
• 3 times the value of the benefit derived/detriment avoided because of the contravention.

Merits review of decisions made by the regulators

Clause 91 provides for a list of decisions made by the regulators (APRA and ASIC) that can be subject to merits review (known as reviewable decisions). Where a decision is reviewable, the regulators must give all persons affected by the decision the reasons for the decision and information about the person’s review rights (clause 91 and subclause 92(1)).[144]

To seek review, a person affected by a reviewable decision may first apply for the regulator that made the original decision to reconsider the decision. The regulator must reconsider the decision within 60 days and notify the applicant of the outcome by written notice. If the regulator does not notify the applicant in that time, the decision is taken to be affirmed (clauses 93 and 94).[145]

A notice to an affected person of a reviewable decision, or of a reconsideration decision, may contain conditions relating to disclosure of information about the reasons for the decision. A penalty of up to 2 years imprisonment will apply if a person does not comply with a condition in a notice that relates to disclosure of information (subclauses 94(4) and (5)).[146]

As noted above, contravention of five provisions of the Bill (clauses 48, 52, 68, 92 and 94) could potentially incur a penalty of imprisonment.

In the Exposure Draft of the FAR Bill, there was a requirement that ‘the Minister must cause a review of the operation of this Act to be undertaken as soon as possible after the fifth anniversary of the commencement of this Act.’[147] This provision does not appear in the FAR Bill.

Other provisions

The Financial Sector Reform (Hayne Royal Commission Response No. 3) Bill 2021 amends the following legislation to support the FAR and enable transitional arrangements from the BEAR to the FAR:

• Australian Prudential Regulation Authority Act 1998
• Australian Securities and Investments Commission Act 2001
• Banking Act 1959
• Financial Regulator Assessment Authority Act 2021
• Financial Sector (Transfer and Restructure) Act 1999
• Insurance Act 1973
• Life Insurance Act 1995
• Private Health Insurance (Prudential Supervision) Act 2015
• Superannuation Industry (Supervision) Act 1993.[149]

Commencement date

The FAR Bill 2021 commences the day after Royal Assent.[150] The regime will apply to the banking industry on 1 July 2022 or six months after Royal Assent, whichever is later. The regime will apply to the insurance and superannuation industries on 1 July 2023 or 18 months after Royal Assent, whichever is later.[151]

Concluding comments

The FAR 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, while some stakeholders argue that the Bill is ‘overkill’ that places unnecessary burden on the financial services industry,[152] others believe the Bill is deficient in many important areas and ‘will be unlikely to hold finance executives to account for their actions’.[153]

Potential points of contention of the FAR Bill include:

• the scrutiny concerns raised by the Senate Standing Committee for the Scrutiny of Bills
• the effectiveness of the obligations (for examples, deferred remuneration obligations and key personnel obligations) imposed by the FAR
• whether there are adequate penalties (civil and criminal) for contraventions of accountability obligations by accountable persons.