RSM Australia

FSEAR - Accountability For (Almost) All

Accountability
In the Financial Services Royal Commission Final Report, Commissioner Hayne made 76 recommendations for reform. Of these, 54 recommendations were directed to the Government, 12 to regulators and 10 to industry. The Government agreed to act on all 76 recommendations and made 18 additional commitments.

These additions include empowering the Australian Securities and Investments Commission (ASIC) to administer an extension of the Banking Executive Accountability Regime (BEAR), designed to establish accountability obligations for authorised deposit-taking institutions (ADIs) and their senior executives and directors, to include:Compliance

  • Superannuation funds,
  • Insurers,
  • The Australian Securities Exchange,
  • AMP, and
  • Potentially private health insurers and other companies deemed to be heavily involved in the financial system.

"We believe that this extension of this accountability regime, so that leaders of financial institutions, particularly large ones—but as many financial institutions as possible—have a requirement under law to be responsible and accountable for the good conduct of their financial institutions, is absolutely key." - Mr James Shipton, Chair of ASIC, October 2019

Current requirements are for the ADI’s to create and register “accountability maps”, naming the manager responsible for each function and enabling the regulator to target them should any wrongdoing be discovered.

The objective of the proposed Financial Services Executive Accountability Regime (FSEAR) is to improve the conduct of financial services executives by:

  • Defining responsibilities,
  • Protecting customers, and
  • Creating subjective standards for institutions to act honestly and with integrity, due skill, care and diligence, and to deal with regulators in an "open, constructive and co-operative" way.​

​A consultation paper and draft legislation are being developed by Treasury and ASIC to which the financial services sector is widely expected to lobby for exemption. The main concern is that ASIC will use the law to pursue its "why not litigate" enforcement approach adopted in October 2018 and recently re-invigorated to include [1]:

  • The establishment of an Office of Enforcement within ASIC,
  • Accelerating enforcement outcomes, and
  • A strengthening of available penalties.

BEAR, which came into effect for large banks in July 2018 and for small and medium-sized banks on 1 July 2019, was modelled on a similar law in Britain known as the Senior Managers and Certification Regime (SM&CR).

Risk AdvisoryThe SM&CR was extended to include the insurance sector in November 2018, and effective December 2019 was further extended to include all Financial Conduct Authority (FCA) solo-regulated firms authorised under the Financial Services and Markets Act 2000, which include asset managers and investment firms carrying out certain activities.

The extension of the regime was reportedly to remove opportunities for regulatory arbitrage created by inconsistencies in the regulatory framework, support competition and establish an efficient regulatory system for all types of financial services firms.

On 5 August 2019, the FCA published the findings of a review into the embedding of the SM&CR in the banking sector. Those considered relevant to the application of FSEAR include:

  • The FCA states that it found that firms have implemented processes to oversee the certification population. They have taken steps to ensure their frameworks are robust with several checks and balances in place to support the competence assessment and provision of training. However, the regulator also found that most firms could not demonstrate the effectiveness of their assessment approach, use of subjective judgement or how they ensure consistency across the population;
  • Overall the FCA found that firms were positive about the concept of regulatory references in order to prevent individuals with poor conduct records transferring to new employers. However, the industry as a whole needs to be more consistent with the quality, timeliness and reliance on these references;
  • Firms have told the FCA that the SM&CR is having an impact on the mindset of senior managers. However, the SM&CR is primarily enabling firms to improve their controls environment, which they expect to lead to improved behaviours. It is not clear to what extent the regime has been linked to culture; and
  • The FCA notes that some firms seem to have been less successful in embedding the regime below the senior manager level. There is some room for further progress at the certification level and potentially more significant weaknesses in the implementation of the conduct rules for other staff.

Accordingly, it is recommended that all Australian financial services providers (not just ADIs and banks) start considering and preparing for the, now very likely, expansion of such accountability regime to include them.
 

For further information:

Do you have any queries, or alternatively require assistance from our highly experienced Financial Services Risk Consultants? If this is the case, get in touch with your local office or Jeremy Elman


[1] ASIC Commissioner Sean Hughes, Banking in the Spotlight, 30 August 2019