At a glance
- Full regime was expected to be in force, but “accountable persons” registration element delayed until July
- New regime is a result of Australia’s Royal Commission into banking misconduct
- Previous regime was branded “a failure” by leading consumer advocacy group
Australian banks and other financial institutions are now subject to a new Financial Accountability Regime, which came into effect on March 15 after passing into law in September 2023.
The FAR rules, also knowns as Minister Rules, foresee significant sanctions for both institutions and individuals. Individual executives potentially face fines of A$1.565mn ($1mn) and may be disqualified from senior manager roles in institutions regulated by Australia’s prudential supervisor Apra in the case of a breach.
In addition, the new regime requires at least 40 per cent of the variable remuneration of “accountable persons” to be deferred for a minimum of four years. In cases of failure, variable remuneration must be reduced by an amount that is proportionate.
However, due to a ministerial delay, the requirement to register “accountable persons” to the regulators, a key component of the new regime, will not come into effect until July 1.
“The two most significant changes are the introduction of the Australian Securities and Investments Commission, as a co-regulator; and the introduction of a new obligation for ‘accountable persons’ to take reasonable steps to prevent matters that would result in a material contravention of the legislation,” said Miriam Kleiner, a legal governance advisory partner at law firm Ashurst.
The FAR aims to impose stronger accountability not only on banks, as was the case in the previous regime, but also insurance and superannuation companies.
Under the new regime, all directors and most senior executives must register as “accountable persons” with the regulators. “This will require additional consideration to ensure all accountable persons are aware of their obligations and have in place systems, processes and controls to ensure and demonstrate compliance with them. This is a very significant change,” said Kleiner.
However, in early February in a letter to all banks, Apra and Asic said: “Given that the Minister Rules are in the process of being finalised, Apra and Asic recognise that industry may require additional time, beyond the commencement date, to finalise compliance with the new FAR requirements in relation to submitting applications for registration of new accountable persons.”
Kleiner stressed that under the previous regime “individuals were always personally accountable in a similar manner to the Senior Manager and Certification Regime in the UK”. What has changed is the appointment, formal registration, remuneration deferral and added preventative obligations.
The new regime is the Australian government’s response to the recommendations made by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in its 2019 report after a series of misconduct scandals involving Australia’s major banks — the Commonwealth Bank of Australia, National Australia Bank, Westpac and ANZ.
The public inquiry revealed industry-wide wrongdoing “in pursuit of profit at the expense of basic standards of honesty”. Examples of misconduct included widespread bribes paid to win mortgage business and fees charged to the accounts of dead people.
In 2018, the CBA was fined A$700mn — the largest fine in Australia’s corporate history for failures in its anti-money laundering provisions, while in 2020 the NAB was handed a A$57.5mn fine and forced to repay A$117mn in fees to superannuation fund members for services it never provided.
Liz Hristoforidis, director in risk advisory at Ashurst, is confident that with the addition of a co-regulator, the new regime will ensure rules enforcement.
“It is early days yet. However, with ASIC now a co-regulator, we expect it will want to be seen to be actively enforcing the regime. We are already seeing joint action by the conduct and prudential regulator, so we can expect to see regulatory investigations and enforcement action reasonably soon,” said Hristoforidis.
The previous regime — the Banking Executive Accountability Regime, or BEAR — was branded “a failure” by CHOICE, a consumer group. Patrick Veyret, head of policy and government relations at CHOICE, had said in its submission to the Treasury in 2021: “If the BEAR’s impact is measured in financial terms — by the amount of executive remuneration clawed back or the amount of fines issued — then its impact has been precisely zero.”
Veyret had urged the Australian government to ensure its replacement did “what the legislation intended and holds the sector to account”.
