Information paper - ADIs: Transitioning to the Financial Accountability Regime

Executive summary

• expands the regime to authorised NOHCs of ADIs;     
  

• expands the regime to include superannuation and insurance entities and their licensed NOHCs;     
  

• expands the regime to include a conduct focus;      
  

• requires accountable entities to identify their significant related entities (SREs); and     
  

• introduces the concept of ‘enhanced notification obligations’, where only enhanced entities must prepare and submit accountability statements and maps to the Regulators. As currently proposed under the draft Financial Accountability Regime Minister Rules 2022, ADIs subject to enhanced notification obligations include those with an asset size greater than $10 billion.

Key activities for a large, complex (enhanced) ADI include:

• determining its entity profile;
  

• identifying which of its subsidiaries will become SREs;
  

• allocating additional prescribed responsibilities to existing or new accountable persons;
  

• allocating all applicable key functions to the relevant accountable persons; 
  

• updating/preparing the accountability statements of existing or new accountable persons; and
  

• updating its accountability map.

Key activities for a small, simple (core) ADI with no subsidiaries include:

• determining its entity profile;
  

• allocating additional prescribed responsibilities to existing or new accountable persons;
  

• allocating all applicable key functions to the relevant accountable persons; and
  

• updating its internal accountability documentation.

• host ADI and industry briefings from October 2023; and      
  

• expect ADIs to participate in pre-commencement activities from October 2023 to make the transition as smooth as possible.

1    Overview

1.1    Purpose of this information paper

• the Financial Accountability Regime Act 2023 (FAR Act) and the Financial Accountability Regime (Consequential Amendments) Act 2023 (FCA Act);     
  

• the Joint Administration Agreement (JAA), which is an agreement between the Regulators that sets out the arrangements for joint administration of the FAR;
  Note: The JAA was established under s37(1) of the FAR Act. 

• ​the explanatory memorandum that accompanied the Financial Accountability Regime Bill 2023 and Financial Accountability Regime (Consequential Amendments) Bill 2023 (Explanatory Memorandum);      
  

• the draft Financial Accountability Regime Minister Rules 2022 (Minister rules);
  Note: As at the issue of this information paper, the Minister rules are yet to be finalised. The details set out in this information paper in relation to enhanced obligation thresholds, prescribed responsibilities and positions, and references to the Minister rules are based on the exposure draft released by the Commonwealth Treasury on 12 September 2022.

• the draft Financial Accountability Regime Act (Information for register) Regulator Rules 2023 (Regulator rules), which prescribe specific data items for inclusion in the FAR register (established under s40 of the FAR Act); and 
  Note: Regulator rules are legislative instruments and when made appear on the Federal Register of Legislation.

• the draft Financial Accountability Regime (Consequential Amendments) Transitional Rules 2023, which prescribe specific data items to be provided by ADIs for their existing BEAR accountable persons during transition to the FAR.

1.2    Summary of what ADIs need to do to transition

• determine whether they are an ‘enhanced’ or ‘core’ entity—see section 1.3;
  Note: The thresholds for determining whether an ADI is an enhanced or core entity are set out in Part 3 of the Minister rules.

• provide additional information for the FAR register and for those accountable persons transitioning from the BEAR to the FAR—see section 3.1;     
  

• apply for registration for any new accountable persons (including for their SREs)—see section 3.2;      
  

• for enhanced entities, update their accountability map and statements to reflect the expanded scope of the FAR—see Chapter 4;     
  

• put in place processes and procedures to ensure they comply with their notification obligations—see Chapter 5;     
  

• for entities that are part of a corporate group, determine the impact of the FAR on other entities within its group (including any SREs)—see Chapter 6; and      
  

• maintain compliance with BEAR deferred remuneration obligations for six months after the commencement of the FAR, as well as comply with other transitional arrangements—see Chapter 7.

1.3    Overview of the FAR

1.4    Key dates for ADIs and FAR commencement

2    Joint administration and pre-commencement

• the Regulators’ approach to joint administration of the FAR (see section 2.1); and     
  

• the pre-commencement arrangements for ADIs (see section 2.2).

2.1    The Regulators’ approach to joint administration

• ADIs that hold an Australian financial services licence or Australian credit licence;      
  

• the SREs of such ADIs; and      
  

• accountable persons of such ADIs and their SREs. 

2.1.1    Single point of contact

2.1.2    Single portal

2.2    Pre-commencement arrangements for ADIs

2.2.1    ADI submission of draft FAR information

• entity profile information, including whether the ADI is classified as an enhanced or core entity, whether it is sole or dual-regulated, and its nominated SREs;     
  

• draft additional information for existing accountable persons under the BEAR to be included in the FAR register;     
  

• draft registration information for any new accountable persons; and     
  

• for enhanced entities, their updated draft accountability statements and map.

2.2.2    Pre-commencement support arrangements for ADIs

3    Registration of accountable persons

• the transition for accountable persons who are already registered under the BEAR and will be accountable persons under the FAR (see section 3.1);     
  

• the process for new accountable person registrations (see section 3.2);     
  

• the requirements for filling temporary and unforeseen vacancies (see section 3.3); and     
  

• how to assign key functions to accountable persons (see section 3.4). 

3.1    Transitioning accountable persons from the BEAR to the FAR

• prescribed responsibilities—both new and existing (as prescribed under the Minister rules)—to reflect that obligations under the FAR cover both prudential matters and conduct-related matters;      
  

• the new scope of entities in an ADI group that are subject to the FAR obligations—other entities in an ADI group may be accountable entities (including an authorised NOHC of an ADI) or SREs of the ADI; and     
  

• additional information that ADIs must include in the FAR register, which was not required under the BEAR. 

3.2    Application for registration of a new accountable person

Table 2: Parallel process for registration of new accountable persons

3.3    Filling temporary and unforeseen vacancies

3.4    Concept and application of key functions

3.4.1    The concept of key functions

• key functions are prescribed in the Regulator rules;     
  

• each key function that is applicable to the ADI must be assigned to at least one accountable person and recorded in the FAR register; and     
  

• changes to the allocation of key functions are considered material changes and must be reported under the FAR notification obligations (see section 5.1.1).

Table 3: Key differences between prescribed responsibilities and positions and key functions

3.4.2    Application of key functions

• the chief executive officer is accountable for ensuring that the ADI as a whole operates within the board-approved credit risk appetite;
  

• the chief risk officer is accountable for the overall risk controls and overall risk management arrangements, and participates in material credit decisions;
  

• the head of retail banking is responsible for managing the credit risk generated by the retail banking division; and 
  

• the head of business banking is responsible for managing the credit risk generated by the business banking division.

4    Enhanced ADIs: Accountability statements and maps

• accountability statements, for each accountable person, which contain a comprehensive statement of that person’s responsibilities; and
  Note: Individuals that are accountable persons for multiple entities within a group, or are accountable for multiple responsibilities, need only submit one accountability statement.

• an accountability map, which outlines all accountable persons in the relevant group, their responsibilities, and the lines of reporting and responsibility between them.

4.1    Content of accountability statements and maps

• the application of the FAR to its SREs and any authorised NOHC of the ADI;     
  

• new prescribed responsibilities that may either result in new accountable persons being registered or existing accountability statements being updated to reflect changes in the accountable person’s responsibilities;     
  

• the FAR requirement for accountability statements to include a declaration by the accountable person that the statement is accurate and they understand their accountability obligations; and     
  

• new accountability obligations of accountable persons to cover dealing with the Regulators and taking reasonable steps to prevent matters from arising that would likely result in the ADI materially contravening specified financial sector laws (see s21 of the FAR Act). 

4.2    Process for submitting and updating statements and maps

5    Notification obligations

• the accountable entity has reasonable grounds to believe that it has breached its key personnel obligations (see section 5.1); and     
  

• a material change occurs to information about an accountable person on the FAR register (see section 5.2).

5.1    Core notification obligations

• ceases to be an accountable person;     
  

• is dismissed or suspended because the person has failed to comply with their accountability obligations (see s21 of the FAR Act); or     
  

• has their variable remuneration reduced because the person has failed to comply with their accountability obligations.

• it has reasonable grounds to believe that:     
  

• it has failed to comply with its accountability obligations (see s20 of the FAR Act) or its key personnel obligations (see s23 of the FAR Act); or     
  

• an accountable person of the ADI, or of an SRE of the ADI, has failed to comply with their accountability obligations (see s21 of the FAR Act); and     
  

• a material change occurs to information that relates to an accountable person of the ADI, or of an SRE of the ADI, and is contained in the FAR register (see s32 of the FAR Act). 

5.1.1    Material changes to information contained in the FAR register

5.2    Enhanced notification obligations

5.2.1    Material changes to accountability statements and maps

• the substance of an accountability or operations, such that an ADI is doing something additional, or not doing something it did previously;     
  

• prescribed responsibilities or positions of an accountable person;      
  

• general responsibilities or underlying accountabilities of an accountable person, such as where accountability is altered from ‘ensure’ to ‘oversight’; or     
  

• who the accountable person reports to (see s31(2)(b) and (d) of the FAR Act).

• incorporating their authorised NOHCs and SREs;     
  

• adding mandatory declarations within statements for existing accountable persons in accordance with the requirement for accountability statements under the FAR;      
  

• assigning key functions to accountable persons; or     
  

• reflecting a new prescribed responsibility and/or position, particularly the new conduct responsibilities, which causes a person to be an accountable person under the FAR.

• the title of a person who reports to an accountable person, where there is no substantive change to the reporting line or the line of responsibility of that accountable person;     
  

• the name of a business unit within the ADI where the underlying accountabilities or operations of and responsibility for the unit remain the same; or     
  

• references to relevant legislation or Regulator rules that do not alter the accountabilities or responsibilities of an accountable person.

6    Corporate groups

• how to identify SREs of an ADI (see section 6.1);      
  

• the classification of accountable entities within corporate groups (see section 6.3); and     
  

• how to prepare accountability statements and maps for individuals who are accountable persons for multiple entities within the same corporate group (see section 6.4).

• the scope of a relevant group; and     
  

• the classification of an ADI within a corporate group with multiple accountable entities, including across other relevant industries, for the purpose of determining its notification obligations.

6.1    Identifying SREs of an ADI

• it is a subsidiary of the ADI;     
  

• it is not an accountable entity itself; and     
  

• its business or activities have or are likely to have a material and substantial effect on the ADI. 
  Note: See s12 of the FAR Act for definition of ‘significant related entity’ and s12(2) for certain exceptions.

• the nature and scale of the subsidiary’s business or activities;     
  

• the nature and extent of any interdependency between the subsidiary and the ADI; and     
  

• any organisational, financial or administrative arrangements between the subsidiary and the ADI (see s12(4) of the FAR Act).

6.2    Foreign accountable entities

6.3    Classification of accountable entities within groups

6.3.1    Corporate groups with accountable entities from other relevant industries

Figure 1: Example structure

• the ADI will be reclassified from core to enhanced. This is because the general insurer meets the relevant enhanced notification threshold and, therefore, all accountable entities within the same corporate group will also be classified as enhanced for this purpose; and
  

• the RSE licensee will cease to be an SRE when it becomes an accountable entity. This will likely trigger a number of obligations under the FAR. For example, the ADI will likely need to make material changes to its accountability statement(s) and map. In addition, the ADI may need to notify the Regulators of the cessation of an accountable person of an SRE of the ADI, as that person will instead become an accountable person of the RSE licensee in its capacity as an accountable entity. The RSE licensee will also be classified as an enhanced entity because it is within a corporate group that includes an enhanced entity. 

6.4    Accountability statements and maps

7    Deferred remuneration obligations and other transitional matters

• the deferred remuneration obligations (see section 7.1);     
  

• the notification obligations (see section 7.2); and      
  

• other obligations that continue under the BEAR after FAR commencement (see section 7.3).

7.1    Deferred remuneration obligations

7.1.1    Transition to the deferred remuneration obligations under the FAR

7.2    Notification obligations

7.2.1    Notification events

7.2.2    Changes to accountability statements and maps under the BEAR

7.3    Other obligations that continue under the BEAR after FAR commencement

• following directions, either to reallocate responsibilities or for non-compliance; and      
  

• enforceable undertakings and injunctions. 

7.4    Regulatory actions under the BEAR after FAR commencement

Glossary

Appendix A: Key differences between the BEAR and the FAR requirements

Appendix B: Alignment between FAR and CPS 511 deferred remuneration obligations

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