FAR Consultation: What superannuation trustees need to know

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Australia Publication August 2021

This article was co-authored with Merren Taylor and Caterina Presutti.

 

On 16 July 2021, the Government released for consultation the draft Financial Accountability Regime Bill 2020 (Cth) (FAR), the Policy Proposal Paper in relation to the list of prescribed responsibilities and positions in FAR, an Information Paper on the joint administration of FAR by ASIC and APRA (Regulators), and a Q&A in relation to FAR and the consultation process. FAR is intended to replace the existing Banking Executive Accountability Regime (BEAR) in line with the recommendations from the Financial Services Royal Commission, and extends its application to all APRA regulated insurers and registrable superannuation entity licensees.

FAR will take effect for the banking sector from the later of 1 July 2022 or six months after commencement, and for APRA regulated insurers and superannuation entities from the later of 1 July 2023 or 18 months after commencement.

FAR imposes four core sets of obligations on entities:

  1. accountability obligations – entities must take reasonable steps to conduct their business with honesty and integrity, with due skill, care and diligence and in a manner that prevents adverse impact on their prudential standing;
  2. key personnel obligations – entities must ensure that all areas of their operations and those of their groups are attributed to directors, and most senior and influential executives (Accountable Persons) are regulated by FAR;
  3. deferred remuneration obligations – entities must defer at least 40% of the variable remuneration of their Accountable Persons for a minimum of four years, and their variable remuneration must to be reduced where accountability obligations are breached; and
  4. notification obligations – entities must meet core notification requirements to provide the Regulators with certain information, and entities above a certain threshold (set in the Bill) must prepare and submit accountability statements and accountability maps.

The metrics for enhanced compliance thresholds are proposed to be total assets over $10b for authorised deposit-taking institutions and superannuation entities (this refers to the combined total assets for all superannuation entities under the trusteeship of a given licensee).

FAR grants the Regulators considerable powers to oversee the conduct of Accountable Persons, including but not limited to:

  1. direct variable remuneration of Accountable Persons to be withheld or clawed back where certain obligations have been breached;
  2. to disqualify someone from being an Accountable Person of an authorised deposit-taking institution, an insurer, a registrable superannuation entity licensee or a licensed non-operating holding company; and
  3. direct an entity to reallocate responsibilities of an Accountable Person to address prudential risks or systemic risks of non-compliance.

FAR is designed to improve the risk and governance cultures and operating culture of entities in the banking, insurance and superannuation sectors by imposing a strengthened responsibility and accountability framework for those institutions, directors and most senior and influential executives of those institutions.

Consultation on the Bill is open until 13 August 2021. For more information please follow this link. Consultation on the transitional provisions is expected to commence in August/September 2021.

How is this different from BEAR?

  • Entities must deal in an open, constructive and cooperative way with both APRA and ASIC.
  • FAR introduces a new obligation to require Accountable Persons to take reasonable steps, in conducting their responsibilities, to ensure the accountable entity complies with certain laws relating to the financial sector.
  • There are two new notification obligations, to notify the Regulator when:
  • the entity reasonably believes that it has breached its key personnel obligations; and
  • a material change occurs to information about an Accountable Person.
  • BEAR required all authorised deposit-taking institutions to provide accountability maps and statements to APRA, and to notify APRA of all changes to accountability maps and statements; under FAR, only accountable entities with total assets greater than $10b are required to prepare and submit accountability maps and statements to APRA and ASIC.
  • Significant civil penalties will apply to a breach of obligations under FAR.
  • The Regulator’s power to give directions to reallocate responsibilities of Accountable Persons under FAR will be expanded to include serious non-compliance risks.

Significantly, the detailed obligations that are outlined in the BEAR legislation are not included in the current draft FAR; instead they will be incorporated as rules determined by the Minister. These have only been outlined at this stage in the Policy Proposal Paper released by Treasury. It is proposed that the prescribed responsibilities and positions will be differentiated according to banks, superannuation entities and insurers. The Federal Government will formally consult on the list of prescribed responsibilities and positions prior to the list being finalised.

What should superannuation entities do?

In our experience, the implementation of BEAR in the banking sector required banks to invest significant resources and time, and required the involvement of senior people.

The new obligations under FAR significantly exceed current prudential requirements and will expand obligations on banks currently subject to BEAR. Superannuation entities, which are new to this regime, will need to consider the following actions to ensure they will be ready and compliant with FAR as presented under the proposals:

  • identify all Accountable Persons within their organisation;
  • identify reporting structures for all of their entities within their group;
  • draft accountability statements and accountability maps;
  • review and consider their remuneration arrangements with Accountable Persons;
  • amend the remuneration policy to reflect the deferred remuneration obligations;
  • amend relevant governance policies to reflect the roles and responsibilities of Accountable Persons; and
  • train staff on FAR requirements.


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