Consumer advocacy group CHOICE is “shocked” that the Government removed civil penalties of up to $1 million for executives that breach the Financial Accountability Regime (FAR) in its proposed bill.
Appearing before the Senate Economics Committee, CHOICE chief executive, Alan Kirkland, said the group welcomed the proposal back in 2020 because it “made sense [as] obligations without consequences… are worthless”.
He said it would bring penalties under the regime in line with the new maximum penalties that the Government introduced under the Corporations Act, the Australian Securities and Investments Commission Act, the Insurance Contracts Act and the National Consumer Credit Protection Act.
“We were therefore shocked when that provision was deleted from the bill that was introduced to Parliament,” he said.
“So, we strongly encourage the committee to recommend that the bill be amended to include penalties in line with the government’s original proposals.”
Senator Paul Scarr, chair of the Senate Economics Committee, asked Kirkland how civil penalties would work when directors were indemnified against a company.
Kirkland replied there would still be a significant deterrent effect.
“Bear in mind this will only occur in the case of significant misconduct and breach of accountability obligations,” Kirkland said.
“Regardless who ends up paying that, it’s still a significant black mark against that executive.”
In CHOICE’s submission, it said the proposed deferred remuneration obligations were weaker than the existing requirements in the Banking Executive Accountability Regime (BEAR).
Under the FAR draft released last October, accountable entities must defer at least 40% of the variable remuneration of their directors and most senior and influential executives for a minimum of four years, and reduce their variable remuneration for non-compliance with their accountability obligations.
CHOICE said: “This represents a step backward in that there are weaker financial incentives for senior executives to avoid misconduct and unfairness”.
Senator Scarr asked whether CHOICE’s proposal that the Government bolster the FAR’s deferred remuneration obligations for senior executives would have unintended consequences, such as directors seeking base fixed remuneration over variable options.
“That’s a negative development because I think short-term incentives and long-term incentives are intended to drive the right behaviour, and also align the performance of the senior executive with the performance of the company overall,” Scarr said.
Kirkland said there may be changes to the remuneration mix but that could be better for the long-term interests of shareholders.
“Short-term incentives can encourage behaviour towards short-term metrics or outcomes that may be contrary to the longer-term interests of the shareholders and indeed, more importantly, to the interests of customers,” he said.
“If you do have those short-term incentives in place and the FAR doesn’t seek to ban them, you just have reasons that allows for them to be deferred and clawed back where there is misconduct that breaches the accountability obligations.”
