With all the regulatory change passing across RMs desks over the past 3 months, it’s probably not surprising that little attention has been paid to the Financial Accountability Regime (FAR). After all, the details have yet to be finalised.
There’s no legislation, no regulations, not even a confirmed start date! However, savvy RMs are preparing the foundations now, to ensure their organisations are ready for the inevitable.
Here’s what you need to know about the not-so-far-away FAR.
In 2018, ADIs began operating under the Banking Executive Accountability Regime (or BEAR), which was designed to raise the bar on conduct by imposing explicit accountability obligations on banking entities and individuals. FAR is effectively the expansion of BEAR to cover all APRA-regulated entities.
There have been a number of positive signs that the BEAR has delivered on its objectives, so it should come as no surprise that much of the regime will be left unchanged as it expands to take in a wider range of financial entities.
Below we have outlined the key elements of the accountability framework, as well as some of the key changes from BEAR to FAR that were flagged during the consultation period.
Both BEAR and FAR operate around the concept of ‘accountable persons’. These are senior executives with key responsibilities within their organisation. Under BEAR, institutions must register the names of these accountable persons with the relevant authority and notify them when they leave their position of employment.
While we don’t yet know exactly how far the scope of accountable persons will be expanded under FAR, the original consultation paper issued by Treasury gives a fairly strong indication as to the areas of responsibility that will be captured under the framework. These include board directors, CEOs, CFOs, as well as senior compliance, product, service and complaints executives.
This means that licensees and RMs should be giving some thought as to the best approach for briefing senior executives who are likely to become accountable persons, as they will need to be well versed in their obligations under an accountability regime before they assume that role.
A process to notify the regulatory authority about a change in leadership should also be mapped out.
Accountability statements and maps
Under BEAR, an ‘accountability statement’ must be prepared for each accountable person, explaining all the areas for which that person is responsible. This is then signed by the accountable person and submitted to APRA. A separate ‘accountability map’, used to show the lines of reporting and responsibility across the entire organisation, must also be prepared and submitted to the regulator.
Effectively, this means that entities must demonstrate that there is a specific leader to whom responsibility for each of its products and processes is assigned.
It is likely that not all entities covered by FAR will have to submit accountability statements and maps, however it is advisable that all entities use these tools to identify and register accountable persons. This is a great exercise in ensuring everyone in the organisation is clear about where the buck stops and can help to instil a culture of responsibility.
Deferred remuneration obligations
In an effort to ensure individuals are held accountable for their actions, BEAR and FAR require that entities must withhold a minimum amount of an accountable person’s variable remuneration for at least 4 years if they breach their accountability obligations.
Variable remuneration is generally taken to mean bonuses or performance-related remuneration, paid on condition of achieving pre-determined objectives.
As this is a key requirement of the accountability regime, it is critical that a process exists within the organisation to execute the remuneration deferment if triggered. Payroll and performance management systems and processes can take time to update, so it is highly advantageous to start work on this element of the regime sooner rather than later.
Unlike BEAR, accountable persons under FAR will be subject to civil penalties for wrongdoing. FAR also significantly increases the maximum penalty that may be imposed on an entity for breaching its obligations.
These are particularly big ‘sticks’ for regulators to use to ensure organisations behave themselves. In preparing for FAR, it may be worth considering the implications for your organisation, and the long-term reputational impacts, if these penalties were pursued.
- Are the right people currently employed in leadership positions?
- Do your executives understand the risk to their own financial position invoked by their level of responsibility?
These are not questions to be left until the last minute.
FAR is not something to be feared. With the right oversight, your organisation can transition to a new era of accountability and responsible conduct. All it takes is some pre-planning.
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