Securing the Digital World

Financial Accountability Regime Holds Executives' Feet to the Fire

Aug 27, 2020 | by Dereck Hooker |
Man stands with laptop in hand in front of backyard featuring various financial graphs

It’s the kind of financial regulation U.S. Senators Elizabeth Warren and Bernie Sanders dream of: I’m talking about Australia’s proposed Financial Accountability Regime (FAR), which will hold executives and board members at banks, insurance companies and other financial services institutions accountable for a wide range of misconduct at their organizations, from reckless and unfair lending practices to bribery and money laundering. 

As expected, FAR has the attention of top executives within Australia’s financial services market. In large part, their attention is focused on the proposed penalties: Executives who fail to comply with FAR’s accountability obligations may face a $1.05 million AUD (approx. $750,000 USD) fine and the prospect of being permanently barred from working in the financial services industry. There are penalties for the financial services institutions, too, ranging from $10.5 million (approx. $7.5M USD) to $525 million AUD (approx. $375M USD).

The regulation materialized after a year-long investigation of Australian financial services’  business practices, known as the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The investigation was prompted by a wave of banking scandals that began eroding public trust in these institutions. Thus, the Royal Commission’s goal was twofold: to report on misconduct at these institutions that either broke the law or fell short of public expectations, and to recommend steps the industry should take to prevent future misconduct and malfeasance. FAR is the consummation of the Royal Commission’s work.

The Australian government originally planned to implement the proposed regulation by the end of this year, but those plans were sidelined. Nevertheless, the local financial services industry expects regulators will resume work on FAR after September 30, 2020, based on guidance given by the Australian Prudential Regulation Authority (APRA).  

Obligations Under the Financial Accountability Regime

FAR extends an existing regulation, the Banking Executive Accountability Regime (BEAR), to a broader set of financial services companies that are APRA regulated. BEAR requires banks to defer a portion of senior executives’ compensation, in the event of violations. FAR continues BEAR’s deferred compensation and claw back provisions, and also proposes fines for “accountable persons” in addition to the fines BEAR levies on organizations found to have violated its codes of conduct.

By making senior leaders personally accountable for misconduct at their organizations through fines and compensation claw backs, FAR seeks to change the culture of the industry from one that rewards reckless and unscrupulous behavior to one that acts with integrity and transparency. To that end, the obligations under FAR include the following (for full details, see the government’s proposal paper):

  • Accountability obligations: Entities and accountable leaders will be required to take reasonable steps to conduct their businesses with honesty, integrity and due skill, care and diligence. They also agree to deal with regulators in an open, constructive and cooperative manner; prevent matters from arising that would undermine the entity’s prudential standing or reputation; and ensure that each of its accountable persons meets its accountability obligations. 
  • Key personnel obligations: Entities will be required to ensure that the responsibilities of accountable persons cover all aspects of the operations of the entity and its significant subsidiaries. Accountable persons must be registered with regulators, and must comply with directions from regulators to reallocate responsibilities.
  • Deferred remuneration obligations: Entities will be required to defer 40% of accountable executives’ variable (i.e., bonus) compensation for a minimum of four years provided the amount that would be deferred is greater than $50,000 AUD (approx. $35,000 USD).
  • Accountability maps and statements:  Entities must submit accountability maps and statements to regulators. Accountability maps are intended to show lines of reporting and responsibility within the entity, while accountability statements for each accountable person must detail their areas of responsibility and management control.
  • Notifications: Entities will be required to notify regulators of several events, including changes in accountable persons (e.g., an executive leaving a company and/or a new executive coming in); violations of accountability or key personnel obligations; and the firing of an accountable person or the reduction in his or her  bonus compensation for failing to comply with accountability obligations.

Compliance with the Financial Accountability Regime requires stakeholders across the board of directors, the senior management team and risk, compliance and legal teams to work together. At a minimum, they’ll need to identify accountable individuals and their responsibilities and set up processes for creating accountability maps and statements and for notifying regulators of changes and violations.

Accountability: A Global Trend?

The efforts of Australian regulators to improve corporate governance and accountability may be part of a broader, global trend. BEAR and FAR were influenced by a similar regulation in England, the Senior Managers and Certification Regime (SMCR). Separately, the Monetary Authority of Singapore has proposed guidelines on individual accountability and conduct in financial services.

It remains to be seen whether the U.S. and other countries will follow suit. In the meantime, the Australian financial services industry has an opportunity to be a worldwide model for greater accountability.