The Banking Executive Accountability Regime (BEAR) introduced new accountability obligations for Authorised Deposit Taking Institutions (ADIs). A key recommendation from the Financial Services Royal Commission was to extend the BEAR to all APRA-regulated financial services institutions, and for the regime to be jointly administered by APRA and ASIC.
On 22 January 2020, Treasury set out how it proposes to extend this accountability framework through the Financial Accountability Regime (FAR). This will affect all general and life insurers, private health insurers, RSE licensees and licensed non-operating holding companies, as well as ADIs already subject to the BEAR.
Like the BEAR, the FAR will impose accountability obligations on firms and individuals, accountability maps and accountability statements, notification obligations and deferred remuneration rules.
However, the proposals also include new, significant civil penalties that will apply to individuals who breach their accountability obligations. These penalties could be up to $1.05 million, or the benefit derived or avoided because of the contravention multiplied by three (whichever is more). There will also be more people captured as ‘accountable persons’, and APRA will have a non-objections power to review the appointment and re-appointment of accountable persons.
New civil penalties
While the AICD supports individual liability for misconduct in appropriate circumstances, any reform in this area must be clear, balanced and fair. We are concerned that the Government has not adequately considered how these new penalties interact with existing obligations and enforcement regimes. Australia's directors are already exposed to a unique civil penalty regime for directors' duties contraventions, and Australian courts may impose civil fines that rival criminal fines in other jurisdictions (see AICD-commissioned research on this here).
It is also important that the FAR appropriately recognises the role of non-executive directors, who have a monitoring, oversight and strategic role, distinct from management. As Commissioner Hayne commented in the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, “the task of the board is overall superintendence of the company, not its day-to-day management.” It is important that the accountability obligations imposed on directors are consistent with this oversight role, as well as their role in collective decision-making.
In light of these concerns, we have suggested that the Government (and where appropriate, APRA and ASIC):
Provide guidance and explanatory materials to clearly set out the expected standard of conduct for the individual accountability obligations;
- Provide clarity around how and when the civil penalty will be used; and
- Clarify how the civil penalty provisions under FAR interact with existing laws and enforcement regimes, and in particular its interaction with directors’ duties.
This type of guidance will enhance the operation of the FAR by giving institutions and individuals a clear understanding of the behaviour expected of them, supporting the FAR’s objective of increasing accountability and improving governance across financial services.
More accountable persons
Treasury’s proposals contemplate that the number of people who will be accountable persons will be significantly expanded, with APRA and ASIC able to specify who will be caught by the regime. However, there is no detail on how this will be decided by the regulators.
We consider that the FAR should focus on the most senior decision makers in a firm who have the greatest potential to impact on market integrity, consumer outcomes or financial system stability. As stated in the Government’s original consultation on BEAR, ‘the net should not be cast so wide that responsibility can be deflected and accountability avoided. The risk is that if everybody is responsible, nobody will be accountable.’
APRA non-objections power
The AICD remains concerned that the proposed 'no objections' power could create a potential moral hazard, with a risk that APRA might be considered responsible for the quality of the board and management of regulated entities. These are accountabilities that should remain with individual entities, their boards and shareholders or members (as appropriate). We remain of the view that the existing prudential framework, in addition to the regulators' disqualification powers, is sufficient.
If the Government proceeds with the non-objections power, it is critical that the legislation clearly defines the limited circumstances in which APRA can exercise this power.
The Government will develop draft legislation over the next few months and release a further consultation on FAR. After the FAR has been implemented for APRA-regulated firms, the Government will consult on how it will apply to solely ASIC regulated entities.
You can read our full submission here.