FAR: your questions, answered.

Australia's financial services industry is encountering a surge of new regulations and heightened oversight from regulators. The Financial Accountability Regime (FAR) is one such new regulation.

The Financial Accountability Regime or FAR replaces the Banking Executive Accountability Regime (BEAR), which was introduced in 2018. It’s designed to improve the risk and governance practices of Australia’s banking, insurance, and superannuation industries by raising the responsibility and accountability for Australia’s financial institutions and their executives and directors. 

In terms of regulation, the FAR is unusual in that it is being jointly administered by ASIC and APRA. It raises the bar in terms of individual accountability, and we expect there to be plenty of regulator activity in this space in the very near future.

Here some answers to the questions we receive most from our clients around the FAR.

Which entities are captured under the FAR and what is meant by significant related entities (SREs)?

The FAR applies to a broad range of financial institutions in Australia including Authorised Deposit taking Institutions (ADIs) and their Non-Operating Holding Companies (NOHCs), as well as insurers and superannuation entities.

Accountable entities (AEs) must also identify their significant related entities (SREs) and ensure they are compliant with the obligations under the FAR. 

An organisation would be considered a SRE in the following circumstances:

• it is a subsidiary of the accountable entity or, if the accountable entity is an RSE licensee, a connected entity;
• it is a constitutionally covered body;
• it is not an accountable entity itself; and
• its business or activities have or are likely to have a material and substantial effect on the entity.

Who will be identified as accountable persons (APs) under the FAR, and what obligations will they be subject to?

AEs will be required to identify and register their APs for each relevant key function of their business. Registration of an AP must include: a registration form, declaration from the entity that the individual is suitable for their responsibilities, and the accountability statement for APs of enhanced entities. 

The AP will be expected to:

• Act with integrity, honesty, and due diligence
• Collaborate with the regulator
• Take reasonable steps to prevent any matters that would adversely affect the entity 

What obligations does the FAR impose on AEs?  

The core obligations of the FAR are designed to enhance transparency, accountability, and ethical behaviour within accountable entities in the financial services sector, contributing to overall market integrity and investor confidence.

These include:

• Accountability statements: AEs are required to provide annual accountability statements. These statements outline the specific responsibilities of senior executives and directors within the organisation.
• Responsibility maps: Entities must create and maintain responsibility maps that clearly define the lines of responsibility and accountability within the organisation. These maps help identify who is responsible for key functions and decisions.
• Notification requirements: There are specific requirements for notifying regulatory authorities about changes in senior personnel or other key roles within the organisation. This ensures transparency and accountability in leadership transitions.
• Remuneration policies: Entities must defer 40% of variable remuneration of accountable persons for at least four years. Remuneration policies should be designed to align with the entity's long-term performance and sustainability goals.

Which regulator will administer the FAR, and what can be expected in terms of enforcement investigations compared to BEAR?

The FAR is being jointly regulated by both the Australian Securities & Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA), indicating increased regulatory oversight. APRA will continue its role in the Australian market, focusing on prudential regulation and financial stability, ensuring that institutions are managed soundly. ASIC will focus on conduct regulation and consumer protection, ensuring that institutions operate with integrity and fairness.   

ASIC and APRA will collaborate on several areas for increased risk and governance oversight and practices. These include but are not limited to:

• Registration: Registration and assessment of APs, ensuring a comprehensive evaluation of individuals from a prudential and a conduct perspective.
• Information sharing: Collaboration on investigations and enforcement actions to ensure a coordinated and holistic approach to regulating financial institutions.
• Guidance and standards: APRA and ASIC continue to jointly develop and issue guidance and standards to help financial institutions understand and comply with their obligations under the FAR.
• Investigations and enforcement: Both regulators will work together on coordinating investigations and any enforcement actions. 

How does the FAR expand on the BEAR, and do its provisions extend beyond those included in the BEAR?

There are a few key differences between the BEAR and the FAR including:

1. Scope of Entities

BEAR: Applies specifically to ADIs, which include banks, credit unions, and building societies. It primarily focuses on senior executives and directors within these institutions.

FAR: Extends the accountability regime beyond ADIs to a broader range of financial sector entities, including insurers, superannuation funds, and non-ADI lenders. It covers a wider spectrum of financial services providers.

2. Accountability

BEAR: Focuses on ensuring that senior executives and directors of ADIs are accountable for their actions and decisions that impact the institution's prudential standing and reputation.

FAR: Introduces a more comprehensive accountability framework that includes obligations related to conduct, culture, risk management, and compliance. It aims to foster a culture of accountability across all levels of management within regulated financial entities.

3. Enforcement

BEAR: Imposes significant penalties on individuals and institutions for breaches of BEAR obligations, including financial penalties and disqualification from holding senior positions.

FAR: Introduces similar penalties for breaches, emphasising the importance of individual accountability and the consequences for failing to meet regulatory standards.

What are the deferred remuneration obligations under the FAR ?

Under the FAR, AEs and their SREs must comply with certain remuneration and deferral obligations, ensuring that APs are incentivised to promote risk management in long term decision making. These include: 

Variable Remuneration Deferral – A minimum of 40% of the AP’s variable remuneration must be delayed for a period of a least four years. 

Remuneration policy – The entity’s remuneration policy must state a reduction in the AP’s variable remuneration if they do not comply with their obligations. The entity must implement measure to ensure this reduction is not paid to the AP. 

AEs that are also SFIs will also need to ensure they meet the relevant remuneration requirements under CPS511.

What are the timelines for implementation?

The FAR came into place for ADIs on 15 March 2024. For superannuation and insurance organisations, the FAR will apply from 15 March 2025. 

What actions can super funds and insurance companies take to start to prepare?

Read our article on Navigating the FAR: Five priority actions.

Got more questions and need answers fast?

Getting your head around regulation isn’t always easy but our team of experts are on hand to help.  

We don’t believe in one-size-fits-all solutions. We act as an extension to your team embedding resilience at the core of your organisation to protect your biggest assets. And when we leave our capabilities stay because we upskill your people to build sustainable solutions faster, keeping you ready for the next wave of risk and regulation.

Get in touch to find out more.