FAR – Deferred Remuneration – What Goes Up, Must Come Down!

In May 2024, our article ‘FAR is here and now’ provided a summary of the key changes for accountable entities under the Financial Accountability Regime (FAR).  In this article, we take a closer look at the remuneration obligations imposed on Approved Deposit-Taking Institutions (ADIs).

Accountability is nothing new within the Australian financial system. There are rafts of regulatory obligations imposed by financial and market regulators. Like its predecessor, BEAR[1], FAR has further extended and created a stronger nexus between a senior person’s remuneration and the impact their performance can have on poor risk outcomes.

Management Conduct and Regulatory Response

A strong correlation exists between a weakness in management conduct and regulatory response as depicted within the below diagram. As the former increases, so does the later:

Similarly, regulatory response requires adequate and sufficient resources to actively monitor and act upon poor risk management, alleged or actual misconduct. This issue recently addressed within the eleven (11) recommendations made by the Senate Economics Committee in July 2024[2]. That said, legislative compliance and reporting requirements can also impose self-reporting and management as is the case with the FAR deferred remuneration obligations. Put simply, poor risk management performance by accountable persons of an accountable entity likely leads to a reduction and/or deferment in that accountable person’s variable remuneration.

Underpinned by a transparent governance framework, an accountable person’s failure to achieve their accountability obligations i.e., their risk management objectives, will directly and proportional lead to a reduction (even potentially to zero) or a deferment in their variable remuneration.

FAR and APRA Standard CPS 511[3]

During the BEAR era, remuneration implications only applied to ADIs overseen by APRA under its Remuneration standard of CPS 511. But FAR takes a more comprehensive approach to intermediaries with financial influence within the economy and extended the remuneration implications to all accountable entities including the insurance sector (general, life and health) and RSE licensee (superannuation entities).

All accountable entities should take note of the FAR changes and the changes to CPS 511 and ensure appropriate change management has been implemented within their risk management framework and control systems.

In some instances, the CPS 511 standards are much higher and more prescriptive than FAR, so some accountable entities may not need to make any changes as they would already be complying with the FAR standards. Conversely, some entities may need to make substantial changes to their risk managements obligations.

A summary of the similarities between CPS 511 and FAR is included at Appendix A below.

Next steps

Madison Marcus has subject matter expertise in FAR and can customise and deliver FAR training for your accountable business.  Alternatively, by registering your details using the following link, please register for our next training program for ‘Accountable Persons: Implications for Directors and Officers‘, which will be held in person at our Sydney office.

We look forward to seeing you.

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

The following table is extracted from RG279 ‘Financial Accountability Regime: Information for accountable entities’.

[1] Banking Executive Accountability Regime as per its amendments to Part IIAA the Banking Act 1959, commenced on 1 July 2018 for large ADIs and 1 July 2019 for medium and small ADIs.

[2] Report by The Senate Economics Committee – Australian Securities and Investments Commission – Investigation and Enforcement – Australian Securities and Investments Commission investigation and enforcement – Parliament of Australia (aph.gov.au)

[3] APRA Prudential Practice Guide, CPG 511, 18 October 2021, page 10.