Financial Accountability Regime – Rules finalised and further regulatory guidance released

The Financial Accountability Regime (FAR) will commence on 15 March 2024. The FAR, which replaces the Banking Executive Accountability Regime (BEAR), will initially apply to certain entities, including authorised deposit taking institutions (ADIs) and ADI Non-Operating Holding Companies (NOHCs) (all Accountable Entities). The FAR imposes a strengthened responsibility and accountability framework for Accountable Entities and certain of their directors and senior executives (Accountable Persons).

The FAR will apply to the superannuation and insurance industries from 15 March 2025.

Last week, in preparation for the commencement of FAR, the following rules were finalised and published:

1. Financial Accountability Regime (Minister) Rules 2024 (Minister Rules) (which, amongst other things, prescribe certain responsibilities and positions by which directors and senior executives become Accountable Persons, and set the “enhanced notification threshold” that triggers the requirement for an Accountable Entity to comply with certain additional notification obligations);
2. Financial Accountability Regime Act (Information for register) Regulator Rules 2024 (Regulator Rules) (which prescribe information, including key functions, required for inclusion in the FAR register of Accountable Persons);
3. Financial Accountability Regime (Consequential Amendments) Transitional Rules 2024 (Transitional Rules) (which prescribe information, including key functions, to be provided by ADIs in relation to their existing Accountable Persons under the BEAR for the transition to FAR).

Exposure drafts of these rules were previously released for consultation.

There are a number of key differences between the exposure drafts and the final published rules, which are set out below.

Minister Rules

Enhanced notification requirements

Under the FAR, Accountable Entities that meet the “enhanced notification threshold” are required, among other things, to maintain an Accountability Map and Accountability Statements for their Accountable Persons. Part 3 of the Minister Rules sets out the enhanced notification threshold for different types of Accountable Entities based on total asset size. In all cases, the final Minister Rules prescribe a higher threshold than in the exposure draft. Set out below are the new thresholds, compared with the exposure draft thresholds:

Prescribed responsibility for Accountable Persons of significant related entities

As set out above, the Minister Rules prescribe certain responsibilities and positions by which a director or senior executive becomes an Accountable Person of an Accountable Entity. Unlike the exposure draft, the final published Minister Rules no longer include a separate prescribed responsibility for “senior executive responsibility for management or control of the business activities of a significant related entity of the accountable entity” and instead includes a prescribed responsibility for “senior executive responsibility for management or control of the business activities of the accountable entity and its significant related entities (if any)”.

In our view, this significantly limits the persons who may have this prescribed responsibility. In particular, whereas a number of persons may have senior executive responsibility for management or control of the business activities of a significant related entity, it is likely there will be significantly fewer persons (probably only the Group CEO) who will have senior executive responsibility for management or control of the business activities of the accountable entity and its significant related entities.

Regulator Rules

ADI Key Functions

The Regulator Rules identify certain ‘ADI Key Functions’. ADIs must assess and identify the Accountable Persons (if any) responsible for those functions, the details of which must then be reported to APRA and ASIC. The ADI Key Functions include capital management, collections and enforcement, risk management (including credit, operational, and market risk), data management, financial and regulatory reporting, liquidity and funding management.

A number of ADI Key Functions in the draft Regulator Rules have been excluded from the final published legislation.  In APRA and ASIC’s response to submissions on the draft, the regulators noted they have “reduced the list of ADI Key Functions from 20 to 17…The ADI Key Functions ‘financial services regulatory engagement’ and ‘risk culture’ have been removed, given submissions noted that these ADI Key Functions, if retained, would need to be allocated to most, if not all, accountable persons.  The ADI Key Functions on ‘monitoring representatives and staff’ and ‘training of relevant staff and representatives’ have been merged into one.”     

Additionally, unlike in the draft Regulator Rules, ADI Key Functions will only need to be allocated if additional ‘ADI Key Function Requirements’ are met.  These ‘ADI Key Functions Requirements’ require the ADI Key Function to be:

• undertaken by an ADI or NOHC of an ADI; and
• for an Accountable Person to have actual or effective senior executive responsibility for management or control of the whole of, or a significant or substantial part or aspect of, the key function.

This is a significant change, which means that not all ADI Key Functions need to be allocated. An ADI Key Function only needs to be allocated to an Accountable Person if the ADI Key Function Requirements are also met. While we expect that most Accountable Entities will allocate all ADI Key Functions to Accountable Persons, if no Accountable Person has actual or effective senior executive responsibility for management or control of the whole of, or a significant or substantial part or aspect of, the key function, there is no obligation to allocate that ADI Key Function to an Accountable Person.

This is recognised by the regulators’ response to consultation submissions in which the regulators specifically state that “The Regulator rules and Transitional rules do not require a relevant accountable entity to undertake each ADI Key Function specified in the list of ADI Key Functions or to ensure that an accountable person is assigned to each ADI Key Function.  That is, if the accountable entity does not undertake an ADI Key Function, or an accountable person as determined under the FAR Act does not have the requisite level of responsibility for an ADI Key Function, it does not need to be allocated.”  

This means “that information regarding an ADI Key Function needs only be provided and will only be included in the FAR register if the ADI Key Function is undertaken by a relevant accountable entity and an accountable person…has the relevant senior executive responsibility for that ADI Key Function.”

Transitional Rules

The final Transitional Rules also include the ADI Key Function updates described above, and remove a number of personal identification details which were required to be provided to the regulators for transitioning Accountable Persons under BEAR under the exposure draft.  In their response to consultation submissions, the regulators acknowledged privacy concerns and noted that they agreed to remove the requirement to provide details of the place of birth, country of birth, state of birth, former given names, former middles names and former family names.

Where to from here?

The final published rules and additional regulator responses provide welcome guidance for the banking industry ahead of the FAR commencement date. 

Accountable Entities should review these materials in detail, noting the guidance package also contains information on how FAR information can be submitted to APRA Connect from 14 March 2024, including submitting entity profile information, registering Accountable Persons and updating a transitioning Accountable Person’s information. 

The guidance package also sets out the dates in late March and early April during which the regulators will hold APRA Connect FAR form drop-in sessions to assist individuals responsible for submitting FAR forms via APRA Connect by providing a walkthrough of the FAR forms, followed by an opportunity to ask questions.  

Please do not hesitate to contact a member of the King & Wood Mallesons team if you would like further information regarding the operation of the supplementary legislation or on compliance with the FAR regime generally.