Financial Accountability Regime – the BEAR is not FAR away
10/02/2020
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The Treasury released a proposal paper on 23 January 2020 proposing to extend the Banking Executive Accountability Regime (BEAR) framework to all financially regulated entities.

The key points are summarised below.

Entities subject to FAR

The Financial Accountability Regime (FAR) will extend BEAR-like requirements to:

  • General and life insurance licensees;
  • Private health insurance licensees;
  • all RSE licensees; and
  • licensed non-operating holdings companies.

Treasury also indicated that FAR will extend beyond these entities at a later date to others regulated solely by ASIC.

The extension will be a regulatory power that is the sole preserve of the Minister.

The FAR will be jointly administered by APRA and ASIC.

APRA-regulated entities will be classified in the core compliance or enhanced compliance category, depending on size and complexity of the entity.

The former will be subject to all FAR obligations with exemption of submitting accountability maps and statements to APRA and ASIC. The latter will be subject to all FAR obligations.

One big difference is that whereas BEAR remuneration deferral is multi-factored taking into account company size, role (CEO or accountable person) and then a calculation of the lesser of a proportion of total remuneration versus variable remuneration, the FAR is a blanket 40% deferral of variable remuneration for four years (subject to the minimum $50k threshold as applies to BEAR).

Enhanced compliance entities are determined by total assets, used as the proxy of complexity and size:

  • General insurers with total assets that exceed $2 billion;
  • Life insurers with total assets that exceed $4 billion;
  • Private health insurers with total assets that exceed $2 billion; and
  • RSE licensees with total assets that exceed $10 billion.

These are low thresholds that would capture entities not systemically critical. The regulatory burden may be another reason to consider industry consolidation into large oligopolies, competing against more nimble and less burdened small players.

Accountable Person Definition

Similar to the BEAR (see HERE), FAR defines an accountable person that has substantial control or management of the entity, or substantial control or management of the operations of the entity and its significant and substantial subsidiaries. Where the subsidiary activities of a FAR entity are significant, an accountable person should have responsibilities for the operations of that subsidiary.

APRA and ASIC will also prescribe a list of particular responsibilities. The end-to-end product responsibility to be held under an accountable person proposed under BEAR will be subsumed into FAR as well.

A list of functions and responsibilities to have people defined as Accountable Persons is appended to the Treasury paper. It includes what some would consider middle management, and includes the executive accountable for setting incentives.

Deferred Remuneration

In contrast to BEAR, where minimum deferred remuneration is calculated as the lesser percentage of both variable remuneration and total remuneration, FAR drops the reference to total remuneration. FAR entities will just be required to defer 40 percent of variable remuneration (remuneration conditional on achievement of pre-determined objectives and not guaranteed) for a minimum of four years for all accountable people, contingent on the deferred amount greater than $50,000 AUD.

Implications

1 . Larger APRA-regulated entities under BEAR had to have 60% of CEO remuneration deferred. This distinction disappears, and all Accountable Persons have 40% of variable remuneration deferred.

2 . The FAR requires deferral only on variable remuneration. A viable method of regulatory avoidance is to alter the remuneration mix by increasing the proportion of fixed remuneration. APRA likes variable remuneration as a method to punish poor risk management and investors like pay to be variable with performance. The proposed regime discourages the application of variable pay. APRA may vary from FAR in setting a regulatory standard that recaptures a total remuneration deferral requirement.

3 . A further implication of the above, is that it will be an uneven playing field as privately and/or foreign-owned entities can respond more quickly to reduce or eliminate variable pay in favour of fixed pay more readily than listed competitors.

4 . The proposed 40% deferral over four years is a flat figure applicable to all industries and all accountable positions. There is no differentiation for positions with varied weight of accountability.

5 . Like BEAR, the FAR does not make a distinction whether an accountable person’s short-term incentive or long-term variable remuneration is to be deferred, or a combination of both. If entities apply the deferral requirement to long-term incentives only, they by-pass the issue of short-termism that a framework may seek to mitigate.

6 . As with BEAR, and the draft CPS 511 for APRA-regulated entities, non-regulated entities will have a competitive advantage in recruiting individuals with pay packages that do not have to comply with deferral requirements.

Accountability Maps

Enhanced compliance entities must submit accountability maps visualising lines of reporting and responsibility within an entity to APRA and ASIC. Entities must also submit accountability statements detailing areas of responsibility for accountable people. These are required to be updated when any change occurs.

Smaller entities will be exempted from accountability mapping, even though it should be relatively simple for these entities.

Penalties

The maximum penalty of the entity will be the greater of:

  • $10.5 million; or
  • Three times the benefit or detriment avoided by the body corporate due to contravention (if it can be determined); or
  • Ten percent of annual turnover up to maximum value of $525 million.

The proposed regime has taken a step further and accountable people will also be penalised for FAR obligation breaches. APRA and ASIC will also be given the power to disqualify the accountable person. The maximum penalty will be the greater of:

  • $1.05 million; or
  • Three times the benefit or detriment avoided by the body corporate due to contravention (if it can be determined).

When?

The Government has not yet determined an implementation timeframe for the FAR and intends to consult on timeframes as part of the consultation on the exposure draft legislation.

Find details regarding Treasury’s proposals HERE .

© Guerdon Associates 2020
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