Last week, parliament passed the Financial Accountability Regime (FAR). A Treasury media release said the legislation is the final major recommendation from the 2019 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne Royal Commission).
Insurance Business is investigating the implications for Australia’s insurance industry.
The Treasury release said the FAR ensures that institutions, including insurance companies, “clearly identify individuals who will be held accountable for the actions of the organisation.”
An executive who breaches these obligations, said the release, “can be penalised with a loss of income, disqualification from working in the sector, and individual civil penalties for assisting in the organisation’s contravention of its obligations.”
During an interview with Insurance Business, Liam Hennessy, a partner with global law firm Clyde & Co, said this legislation “is arguably the most significant change to Australia’s financial services regulatory landscape in a generation.”
Annette Hang (pictured above), a partner with global brokerage Aon, in the talent solutions department, suggested she agreed with Hennessy.
“As signalled by APRA [Australian Prudential Regulation Authority], FAR is intended to transform governance, risk culture, remuneration and accountability outcomes,” she said. “Given FAR is the Federal Government’s response to recommendations made by the Hayne Royal Commission to extend the current Banking Executive Accountability Regime [BEAR] to the insurance and superannuation industries, the scope of the regime is certainly far reaching.”
Sydney-based Hang said appreciating the breadth of this regime means remembering that it aims “to strengthen and uplift both individual and organisation-level accountability across the financial services sector.”
IB asked Hang for a layperson’s explanation of what the FAR will make insurance companies do in order to be compliant?
“As the name suggests, FAR spells out requirements for insurers to ensure that they have clarity on who is accountable for poor outcomes,” she said. “Entities must develop and implement new and enhanced comprehensive risk and reporting frameworks, consequence management, policies and procedures.”
Hang said it is “really important” for all insurance companies to review their organisational structure, assess their FAR readiness and take proactive steps now to ensure compliance when the regulation comes into effect.
One novelty, she said, about this regulation from the insurance industry’s perspective, is that there wasn’t anything like it for the industry before.
“Unlike the banking sector, insurers have not had to implement BEAR previously, so the execution of the FAR will require greater planning, board and executive education, stakeholder engagement and a roadmap for the next 18 months,” said Hang. “The lead time to appropriately prepare for these changes cannot be underestimated.”
She said FAR obligations will apply at both an entity level and an individual level, so directors and most senior and influential executives.
“The FAR will introduce new accountability obligations, key personnel obligations, notification obligations that take into account the size of the organisation, higher maximum penalties for breaches, and a simplified remuneration deferral requirement for accountable persons,” said Hang.
As with BEAR, she said accountable persons must be able to demonstrate that they have taken reasonable steps to discharge their obligations.
“Evidence is key and this goes beyond having frameworks and controls,” said Hang.
According to Treasury, The FAR will apply to the banking industry six months after Royal Assent and to the insurance and superannuation industries 18 months after Royal Assent.
The release also said the passing of this legislation followed the Government’s establishment of a Compensation Scheme of Last Resort (CSLR). This scheme obliges organisations, including insurers, to provide compensation of up to $150,000 to victims of financial misconduct that have an unpaid determination from AFCA.
“The 10 largest eligible financial institutions will be required to provide compensation of around $230 million to victims for heritage claims as part of this scheme,” said the release. According to a proposal paper, some of those institutions are insurance companies.
Hennessy, the Clyde & Co partner, said insurance companies should engage directors and executives about the FAR changes early. His firm expects FAR implementation time for a small insurer to be six to nine months.
“FAR is deceptively simple in practice and tricky to implement in actuality,” said Hennessy. “It is also emotive as it potentially impacts on personal finances, reputations and responsibilities.”
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