Parliament on Tuesday passed legislation to implement the so-called Financial Accountability Regime, a key recommendation of the Hayne royal commission.
The new rules, which (assuming they receive royal asset) is expected to apply to the superannuation and insurance sectors from March 2025, extend the accountability measures imposed on senior bankers after the damning royal commission.
Under the FAR regime, executives deemed “accountable persons” will be obliged by law to act with honesty and integrity and apply “due skill, care and diligence” to their work, as well as co-operate fully with regulators ASIC and APRA and take reasonable steps to ensure their organisation complies with their licensing obligations.
Funds with assets under management exceeding $10 billion will be required to submit “accountability maps” to regulators, which show clear chains of commands and reporting lines. A raft of new regulatory reporting obligations have also been shepherded in by the regime.
More controversially, relevant organisations captured by the FAR will be forced to defer 40 per cent of variable remuneration for accountable persons for a minimum of four years, where the relevant bonus is part of the executive’s pay package and exceeds $50,000.
It is expected that many senior portfolio managers and investment team members would be affected by the move, which was arguably designed by the royal commission to neuter perverse incentives mostly in the banking sector.
Partners at law firm MinterEllison – Siobhan Doherty, Gordon Williams, Donna Worthington and Paul Schoff – clarified that “deferred remuneration obligations under the proposed FAR will apply to remuneration that was determined after the start of the first financial year after the FAR applies to the insurance and superannuation industries”.
An amendment proposed by the Greens to beef up the individual penalties that executives would face for breaching the new obligations was rejected. But Minister for Financial Services Stephen Jones made clear that accountable persons still faced significant deterrents, including potential civil penalties for aiding and abetting their employer’s FAR breaches.
“Financial services executives make decisions that impact upon the lives of all Australians,” Jones said in a media statement on Tuesday. “They must be held to high standards of accountability and integrity.”
The FAR replaces and extends the Banking Executive Accountability Regime by imposing “tough new accountability obligations” in the banking, insurance and superannuation sector, Jones said.
“The FAR ensures that these institutions clearly identify individuals who will be held accountable for the actions of the organisation,” Jones said.
“An executive who breaches these obligations can be penalised with a loss of income, disqualification from working in the sector, and individual civil penalties for assisting in the organisation’s contravention of its obligations.”
Jones said the passage of the legislation marked completion of the “final major recommendation” made by Royal Commissioner Kenneth Hayne in his seminal final report in February 2019, the bulk of which were implemented by the previous Coalition government.
On social media, the Financial Services Council said it “looks forward to working with stakeholders including APRA, ASIC and other industry bodies to implement the new legislation”.