FAR Out – The reintroduction of civil penalties

23 November 2021
Liam Hennessy, Partner, Brisbane

Background

On 16 July 2021, the Government released the draft Financial Accountability Regime Bill 2021 (Consultation Draft Bill) for consultation.

The Revised Bill alters the Financial Accountability Regime, which constitutes the Government’s implementation of recommendations from the Financial Services Royal Commission, namely recommendations 3.9, 4.12, 6.6, 6.7 and 6.8.

FAR will apply to all prudentially-regulated institutions e.g., banks, super and insurance, and will operate to place institutional and personal liability on key executives for regulatory failures, based on new principles-based obligations. It is a fundamental regulatory shift in Australia’s financial services landscape.

Gadens, with the benefit of its clients’ input, submitted a consultation paper to Treasury advising on the Bill and proposing amendments that would have a practical benefit to the industry. The paper is available at: Gadens Submission to Treasury – FAR 2021.

Changes to the revised Financial Accountability Regime Bill 2021 after consultation

On 28 October 2021, the Financial Accountability Regime Bill 2021 (Revised Bill) was introduced and read for the first time.

The FAR Bill incorporates key changes, some of which are highly consequential such as the extension of liability to parties who are ‘indirectly or directly’ involved in contravention of civil penalties. In our view this is a concerning development, and will reinforce the need for structured implementation and ‘reasonable steps’ reviews of accountable persons’ function areas to provide comfort.

A summary of key changes between the Consultation Draft Bill and the Revised Bill are set out in the table below. Otherwise, if you really want to get into the detail, please refer to this link for a detailed comparison between the Consultation Draft Bill and the Revised Bill.

KEY CHANGES FROM THE CONSULTATION DRAFT BILL TO REVISED BILL
Expanded powers
Theme Comments
Civil penalties for accountable persons & ancillary persons – extension of civil penalty provision to capture ancillary persons (non-executives)The Revised Bill includes a provision that extends the civil penalty provision to any persons, who directly or indirectly, contravene a civil penalty of the FAR regime.

If an accountable entity breaches Chapter 2 of the Revised Bill (all obligations are civil penalty provisions), the accountable entity is liable to a civil penalty per section 80(1). Under section 81(1), if a person is knowingly concerned in, directly or indirectly, a contravention of a civil penalty provision, then that person is liable to a civil penalty.

As such, practically, section 81(1) would extend civil penalties to include accountable persons, employees of accountable entities, and ancillary persons.

Section 81(1) states that a person must not:
  1. attempt to contravene a civil penalty provision of this Act; or
  2. aid, abet, counsel or procure a contravention of a civil penalty provision of this Act; or
  3. induce (by threats, promises or otherwise) a contravention of a civil penalty provision of this Act; or
  4. be in any way, directly or indirectly, knowingly concerned in, or party to, a contravention of a civil penalty provision of this Act; or
  5. conspire with others to effect a contravention of a civil penalty provision of this Act.'

A financial penalty can be imposed on an accountable person, or other persons, who in any way, directly or indirectly, contravene FAR (e.g., aiding an accountable entity to contravene FAR).

In addition, section 83(3) of the Bill provides that a breach of s81 by a 'person other than a body corporate' (which according to the explanatory memorandum includes an accountable person), would mean that the person could incur a civil penalty of the greater of either:
  • 5,000 penalty units; or

  • if the court can determine the benefit derived and detriment avoided because of the contravention — that amount multiplied by 3.

A list of the civil penalty provisions under the Revised Bill is set out in Chapter 2 FAR Bill. This includes:
  • accountability obligations under Part 3 – this includes the requirement for accountable entities to act with honesty and integrity, and with due skill, care and diligence;
  • key personnel obligations under Part 4;

  • deferred remuneration obligations under Part 5;

  • notification obligations under Part 6.
Disclosure of the Accountable Persons' registerThe register of accountable persons will now detail the responsibilities that cause a person to be an accountable person.

This includes the potential for the Regulators to disclose details of accountable persons' responsibilities, any previous disqualifications from being an accountable person, and any other appropriate information.
Legal obligations imposed on auditors and actuaries to assist APRA with investigationsThe FAR Bill will also extend certain existing obligations on auditors and actuaries to assist with investigations under existing financial services legislation.
Extension to significant related entitiesInstead of ASIC only having power with respect to AFSL/ACL holders, their power is extended to the licensee's significant related entitles and accountable persons in limited circumstances.
Prescribed roles and responsibilities (end-to-end product role)Final lists of prescribed responsibilities and positions are yet to be released.

The requirement for responsibility for end-to-end product development and distribution remains unchanged.
Remuneration for deferral for ancillary workFor variable remuneration, the deferral requirements under the FAR Bill do not apply to variable remuneration which relates to work outside of the scope of their role as an accountable person.
Reduced scope
Accountable persons filing for temporary or unforeseen vacancy – deferred remuneration does not applyThe deferred remunerations do not apply if a person is not prohibited from being an accountable person because they have filed a temporary or unforeseen vacancy and have not been an accountable person for 90 days or other prescribed period.
Reduced information sharing for RegulatorsThe deferred remunerations do not apply if a person is not prohibited from being an accountable person because they have filed a temporary or unforeseen vacancy and have not been an accountable person for 90 days or other prescribed period.
Copies of determinations on variable remuneration Copies of determinations on variable remuneration will have to be provided under the FAR Bill.
Reviewable decision on time period of prohibition for an accountable personReviewable decisions now include decisions as to shortening the period that a person will be considered prohibited from being an accountable person.

Further reading

Gadens has previously completed an in-depth analysis of the FAR regime based on the consultation paper released in 2020, a key facts article on the FAR Bill in 2021, and a comparative analysis of the UK experience in applying these broad principles-based regulations to individual accountabilities.

The articles are below:

Please reach out to Liam or Cameron if you wish to know more about the FAR, including some of the practical challenges we have come across in implementing its forerunners in the banking sector (with the BEAR) and in the UK (with the SMCR).

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.


Authored by:

Liam Hennessy, Partner
Cameron Simpson, Solicitor

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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