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With the Financial Accountability Regime (FAR) in Australia going live on 15 March 2024 for the banking industry, firms need to have in place robust frameworks to ensure seamless adoption and continually demonstrate compliance with the new regulation.
In our recent “FAR Decoded: Key Insights & Strategies for Success” webinar, Andy Atkinson, Director of Product Management at StarCompliance, and Silvana Wood, Partner at Gilbert & Tobin, examined how FAR will drive increased accountability in the industry and the strategies firms can use to effectively meet the FAR regulation.
Here are (3) key takeaways:
1. THE MAIN DRIVERS OF FAR AND WHAT'S EXPECTED
FAR has been brought in to tackle serious misconduct in the financial sector and the prevalent issue of individuals not being held accountable for their actions. The new regime replaces and extends the scope of Australia’s Banking Executive Accountability Regime (BEAR), which was only previously applicable to Authorized Deposit-Taking Institutions (ADIs). Instead, FAR now encompasses all firms regulated by the Australian Prudential Regulation Authority (APRA)– however, it will only apply to insurance entities, their licensed NOHCs, and superannuation trustees from March 15, 2025.
It has a key objective of improving culture and transparency throughout the industry by introducing several conduct-focused prescribed responsibilities, which outline the expected behaviours of individuals in their respective roles. The regulatory framework is jointly administered by APRA and the Australian Securities and Investments Commission (ASIC), and there has also been an evolution in the concept of the approved person.
Under FAR, firms will need to be able to:
- Map accountability within their organization, including the ability to show reporting lines and the lines of responsibility
- Detail accountability obligations, including reasonable steps taken by employees when carrying out their responsibilities
- Meet notification obligations, including informing each regulator when a person breaches their accountability obligations
- Comply with deferred remuneration of accountable person obligations
While ADIs have needed to prepare for the March 15 deadline, certain aspects of the Ministerial Rules regarding accountable persons and their prescribed responsibilities can be deferred until June 30, 2024. This includes accountability statements which list areas that must be attributed to a certain person’s roles and responsibilities.
Although there has been a lack of enforcement for BEAR, ASIC has a history of being much more scrutinous when it comes to firms meeting their regulatory obligations. However, the absence of enforcement should not be misconstrued as ineffective regulation; rather, it underscores the necessity for firms to implement robust policies and procedures to ensure accountability among their employees.
2. MANAGING THE TRANSITION FROM BEAR TO FAR
The initial phase of FAR focuses on ADIs, who were previously subject to BEAR, and so have already established processes and procedures that detail how they are holding their employees to account. During our webinar, it was observed that for the upcoming transition, 88% of participants were actively preparing and on track for the implementation date, while 6% were finalizing preparations and another 6% were in the earlier stages. However, FAR presents an opportunity to enhance these existing frameworks and establish more robust procedures for accountability and mapping.
A key difference between the two regimes is in administration. FAR introduces stringent conduct regulations, including internal and external dispute resolution mechanisms and reporting of prescribed responsibilities for accountable individuals. As discussed above, firms must be able to effectively map individuals within an entity. There is also a conduct focus on key functions within ADIs, which must be included on the regulators' register for accountable persons.
Another key challenge is regulatory fatigue. A new regime just adds another layer of administrative burden to compliance professionals, who already contend with a lot of existing regulatory obligations. However, when firms adopt FAR, they can experience significant organizational benefits. Senior stakeholder engagement is vital for implementing the right frameworks and streamlining reporting processes, as it may encourage proactive behaviour among employees in their roles.
When it comes to breach reporting, there is a growing emphasis on robust processes and regulators are demanding entities to demonstrate reasonable grounds to prevent enforcement action and investigation into potential breaches. Therefore, it’s highly recommended that organizations carry out scenario testing of key stakeholders and accountable persons within their organization to evaluate how good they are at governance and risk management for their prescribed responsibilities.
3. CREATING AN EFFECTIVE FAR PROGRAM
Although non-ADI firms don’t need to comply with FAR until March 2025, a large majority (64%) of our webinar participants had already started their preparations, with 29% already well-advanced and only 7% yet to begin. Since these firms haven't been obliged to adhere to BEAR's accountability rules, it's crucial they establish the fundamentals to comply with FAR.
For effective implementation, there must be accompanying administrative processes, including engaging key stakeholders to identify feasible policies and procedures for meeting prescribed responsibilities under the new regime. Those who have not started should start preparing soon. Efficient mapping of accountability can take two to three months with ongoing consultations across the organization.
An effective FAR program requires three lines of defence, which involve:
- Implementing a single point of accountability for specific areas within the entity
- Developing a reasonable steps framework demonstrating actions taken by accountable persons
- Mapping how these actions will be discharged throughout the organization to uncover and address gaps
In other regimes such as the UK FCA’s Senior Manager & Certification Regime (SMCR), firms have added headcount to meet compliance obligations, with these temporary measures sometimes becoming permanent due to the substantial workload involved. While organizations tend to recognize the benefit of having a specific office to meet accountability regimes, the best implementation is when it flows through the veins of an organization. However, determining the necessary level of detail for compliance can be challenging, with more detail potentially leading to gaps. Therefore, businesses must collaborate with subject matter experts to guide the processes and procedures they implement.
Technology does play a role in how firms can adapt to FAR. It can facilitate mapping and provide dashboards of roles and responsibilities in the organization, with insights into how well each person is carrying out their obligations. Despite this, half of our webinar participants (50%), were planning to rely on manual processes to comply with FAR, with 27% unsure of whether they will use bespoke technology to meet FAR.
While manual processes could work in the short term, firms face challenges associated with knowledge retention and onboarding during staff turnover. Existing HR systems may offer some solutions that can be adapted to demonstrate reasonable steps of personnel. However, the scope of these systems is often limited. A specialized vendor can help build a solution from the ground up, enabling businesses to establish a proven track record of all the actions carried out by an organization––helping to protect the company’s reputation in the future by fulfilling its accountability obligations.
StarCompliance recently launched a strategic market research study across Australia with senior compliance professionals in financial services to gain a deeper insight into the most pressing compliance challenges confronting enterprises in the region. To see how firms in Australia are transitioning to the Financial Accountability Regime download your copy of the FAR Report ebook here.
