Glossary
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]
| Explainer: the Bill’s history regarding individual civil penalties for breaches of accountability obligations
In January 2020, the Treasury published a proposal paper that argued that certain individuals should be subject to civil penalties if they breach their accountability obligations under the FAR.[30] These individuals are known as ‘accountable persons’ under the Bill and they include senior executives in the financial industry. The proposal paper envisaged that these senior executives would be liable to civil penalties (up to $1.375 million) if they breach their accountability obligations. Any penalties would be imposed by a court.[31] When the lapsed 2021 Bill was introduced by the Morrison Government in October 2021, it did not contain the individual civil penalties. This was a departure from the policy position taken by the Treasury in the proposal paper. The Australian Financial Review speculated that the absence of individual civil penalties was due to industry lobbying.[32] Stakeholders in the financial industry have argued that individual civil penalties are not necessary because alternative penalties (such as disqualification) already provide effective incentives to improve conduct.[33] On the other hand, the Australian Greens and consumer advocacy groups have expressed concerns that the absence of individual civil penalties meant that senior executives would not be personally liable for engaging in misconduct.[34] After Labor formed Government in May 2022, the Sydney Morning Herald reported that the Greens’ economic justice spokesperson Senator Nick McKim had reached a deal with Assistant Treasurer Stephen Jones to include individual civil penalty provisions for senior executives who breach their obligations under the FAR.[35] However, when the Albanese Government introduced the discharged 2022 Bill to the Parliament, it did not include the individual civil penalty provisions. Reportedly, this was due to industry lobbying and ‘a ferocious response from banks and super funds’.[36] Assistant Treasurer Jones maintained that he did not reach an agreement with Senator McKim regarding the inclusion of civil penalty provisions.[37] In contrast, Senator McKim asserted: There was 100 per cent, categorically a deal. We looked each other in the eye and shook hands… If the minister [Stephen Jones] is saying there was no agreement he is not fit to be a minister. This is a disgraceful move to renege on our agreement.[38] [emphasis added]
On 21 October 2022, Senator McKim proposed to move an amendment on behalf of the Australian Greens that individual civil penalty provisions be added to the discharged 2022 Bill. The amendment was not voted on.[39] At the time of writing, the 2023 Bill does not include individual civil penalty provisions. In the second reading speech for the Bill, Assistant Treasurer Jones said: After careful consideration, the Government has not adopted the Australian Greens’ recommendation to introduce [individual] civil penalties for breaches of accountability obligations... The Government’s Bill already contains effective measures to address executive failures to comply, including disqualification, loss of deferred bonuses, and individual civil penalties for assisting in an entity's contravention of its obligations…
Adding individual civil penalties on top… is not likely to substantially increase the level of deterrence that already exists... while it may impact on firms seeking to attract and retain the best executive talent.[40] [emphasis added]
Explainer: the Bill’s history regarding individual civil penalties for breaches of accountability obligations (continued)On the same day (8 March 2023) that the Assistant Treasurer made his speech, Senator McKim also announced: Labor is trying to create a financial accountability regime that does not hold bankers accountable…
The Greens will be moving amendments in the House and the Senate to include civil penalties of up to $1.1 million for executives who breach their accountability obligations.[41]
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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. [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.