The Financial Accountability Regime Bill 2021 (FAR Bill) will not pass into legislation this year; instead, it has been referred to the Senate Economics Legislation Committee, with a report due by 15 February 2022.
The Senate Committee will consider six topics largely related to the administration of the regime, including:
- whether the Minister should have a broad power to provide exemptions to the Financial Accountability Regime (and if it is, whether guidance can be provided on the exercise of that power, noting the potential for a broad, unconstrained exemptions power to undermine the regime);
- if the arrangement entered into between APRA and ASIC to jointly administer the regime should be tabled in each of the Houses of Parliament, and the details of that arrangement be left to delegated legislation;
- the inclusion of no-invalidity clauses in subclauses 36(2), 37(5), and 38(4). A "no-invalidity" clause says an act done or decision made in breach of a particular statutory requirement or other administrative law norm is not invalid. For example, under subclause 36(2) ASIC is only to perform functions and powers in relation to accountable entities that hold a financial services license, significant related entities or accountable persons. However, ASIC's failure to do so does not invalidate the performance or exercise of the function or power by ASIC. Subclauses 37(5) and 38(4) are similar. The referral paper notes that there are significant scrutiny concerns with no-invalidity clauses, as these clauses may limit the practical efficacy of judicial review to provide a remedy for legal errors.
What happens next will depend heavily upon the Committee's report. If the report makes no recommendations for amendments, the path is clear for the Federal Parliament to pass the Bill in the Autumn sittings, which, given the upcoming Federal election, will last until early April at the latest. Any amendments proposed and not accepted by the Government and the Bill could be further held up, or even not be passed in the short timeframe.
The deferral of the passage of the FAR Bill to 2022 results in uncertainty as to when the new obligations will come into force. Under the current proposed legislation:
- For authorised deposit holding institutions, the obligations will come into force on either 1 July 2022 or 6 months after the Bill is passed, whichever comes later.
- For registerable superannuation entities and insurers, the obligations will come into force on either 1 July 2023 or 18 months after the Bill is passed, whichever comes later.
In the current circumstances, it appears that commencement will likely occur sometime after July 2022 for ADIs, six months after the legislation is passed. For both RSE licensees and insurers, commencement will be sometime after July 2023, 18 months after the FAR Bill is passed.
What should banks, insurers and superannuation providers be thinking about while we wait for the next iteration of the legislation and the publication of regulatory guidance?
- Who will be your accountable persons and what are their responsibilities? In part this question cannot be answered until a Ministerial Direction confirms the prescribed person positions. In the meantime, entities can refer to the Financial Accountability Regime – List of prescribed responsibilities and positions Policy Proposal Paper, 16 July 2021 for an indication of the kinds of roles that are likely to be captured.
- How will you identify your Significant Related Entities? Given the test under the proposed legislation requires the entity to have a "material and substantial" effect on the accountable entity and that term is not defined, it is likely that guidance from the Regulators will be required to assist with the classification process. In the meantime accountable entities can be canvassing the other entities in their Group and considering a set of principles that could be developed to categorise them consistently. If the timing of regulatory guidance is consistent with the roll out of the Banking Executive Accountability Regime, we would expect the Regulators to publish their guidance around the same time as the FAR Bill were passed.
- Should you make any changes to your compliance systems for monitoring for and reporting of possible breaches to the Regulators? Given the time that such compliance system changes can take to pass through development and testing stages, we would expect organisations to require a reasonable lead time prior to implementation.
- For foreign entities, are you operating a branch in Australia and if so, have you identified your accountable persons? Are there any Significant Related Entities to consider related to your Australian branch? Under the proposed legislation, the obligations of the FAR apply to a foreign accountable entity (in the banking or insurance industries), but only to the operations of the entity’s branch in Australia. The obligations apply to the same extent to an accountable person of such an entity or any of its significant related entities.
We will continue to monitor the progress of the legislation through the Houses of Parliament and will provide updates with any major developments. If you would like to understand how FAR will affect you, or need help to manage the transition, please contact us.