Legislation for the Financial Accountability Regime (FAR) passed the Senate today, paving the way for the commencement of stronger conduct standards for directors and senior executives.

FAR secured passage in the House of Representatives in March and it is a recommendation from the Hayne royal commission final report in 2019. It expands the previous Banking Executive Accountability Regime (BEAR) to cover all Australian Prudential Regulation Authority-regulated entities including insurers.

Law firm Clyde & Co says FAR is arguably the “most significant” change to Australia’s financial services regulatory landscape in a generation.

FAR requires insurers, banks and superannuation funds to identify directors and senior executives, detail their specific responsibilities in “accountability statements” and conduct their activities in accordance with broader obligations such as integrity with APRA and the Australian Securities and Investments Commission (ASIC).

“The FAR regime will require general and life insurers to put in place comprehensive responsibility and accountability regimes,” Clyde & Co Partner Avryl Lattin said.

“It will impose legal obligations at the institutional, but also at the individual level for directors and key senior executives.”

She says FAR is designed to improve operating culture through more transparent allocation of responsibilities.

“Any individual who is caught by the FAR regime will have to fulfil certain duties and will have an obligation to take reasonable steps to prevent matters arising that would result in material contravention of financial services laws by the insurer,” Ms Lattin said.

Clyde & Co says FAR is very simple in theory, and “devilishly” hard to implement in practice.

At its most basic, for each director/executive, organisations need to create a new artefact setting out the separate requirements which constitute “reasonable steps” under the FAR legislation such as delegations of responsibility.

“The point here is the importance of good corporate governance – employees need to know where responsibility lies and who to report to in any given scenario,” the law firm says.

Executives and directors need to also ensure they have the right information to make decisions and “control” to fix any problems which arise in their area.

“Ignorance or ‘decision by committee’ is no defence under FAR. It is specifically designed to attribute liability to one person, irrespective of whether they are directly responsible for the failure or not,” the law firm says.