Less than one year to go! How FAR along is your organisation with implementation planning? (Part 1/3)

Key insights in preparing for FAR as we hit the twelve-month countdown for insurers and RSEs (Part 1/3).

The Financial Accountability Regime (FAR) is now firmly on the horizon for insurers and RSEs. While most entities are now well underway with their implementation planning, we know from our experience of equivalent regimes, such as the Senior Manager & Certification Regime in the UK, the Certification Regime in Hong Kong and closer to home in Australia, the Banking Executive Accountability Regime that compliance with the black letter law is only half of the battle.

1. Enlivening the regime within your organisation

FAR represents a dramatic shift in how APRA-regulated insurers and RSEs will self-govern and self-police from March 2025. FAR will provide a clear window for APRA and ASIC into the internal governance and consequence management machines of both Australian-based entities, local branches and potentially the global group.

The consequences of FAR for Accountable Entities and Accountable Persons (APs) are serious. However, the practical reality of FAR may not have hit home for all APs.

Even APs based overseas in jurisdictions may be caught if they have a material say in the operations of the entity operating in Australia.

Practical example: A global insurer based in Spain with an APRA-regulated branch in Australia. 

The following strategies may assist the insurer with its FAR implementation project:  

• providing clear Q&A documents early in the process to relevant offshore persons;
• exploring offshore governance structures in detail to ascertain whether participation on executive boards overseas may mean that certain individuals are brought within scope of FAR; and
• identifying and focussing on key issues for offshore and onshore APs. These include the extent to which the requirements under FAR are compatible with existing compensation structures and whether any deferred remuneration will be captured. 

2. Accountability Statements: Where to start? 

A basic principle of FAR is that Accountability Statements must address each of the prescribed responsibilities and positions under the Minister Rules, as well as the key functions under the (draft) Regulator Rules, with sufficient detail and clarity. 

At a high level, these documents are designed to act as “road maps” for ASIC and APRA in an enforcement scenario and are an important risk management tool for directors and executives. 

Directors and executives usually fit within five main functional roles for each area of risk or responsibility: 

1. decision makers (usually board / CEO); 
2. manufacturers (e.g., of a policy); 
3. implementers (e.g., of a policy from another division); 
4. overseers (e.g., of a particular process); and 
5. leaders (e.g., of a division). 

All APs will have a combination of these functional roles depending on their specific remit within the organisation. For instance, no AP will just be a ‘leader’. An AP who is a ‘decision maker’ is unlikely to be an ‘implementer’ but may be an ‘overseer’. 

A clear grasp of these delineations is a fundamental component for drafting effective Accountability Statements that accurately capture the individual AP’s accountabilities. It is also important not to unnecessarily expand the application of the regime. 

Once the drafting is bedded down, it is then a matter of ensuring that there is no overlap but also, and just as importantly, no gaps. 

Practical example: A RSE has identified twelve APs within scope of FAR. Each of these APs has attended multiple briefing sessions in relation to the application of FAR to their organisation and are ready to tackle the implementation of FAR. 

The following strategies may assist the RSE in preparing its Accountability Statements: 

• designating one or more individuals to prepare the Accountability Statements or act as a “master reviewer” if they are being prepared externally;
• explaining the approach to individuals and providing sufficient time for individual feedback; 
• undertaking a series of meetings with small groups of APs that may have similar areas of responsibility to ensure that accountabilities are correctly allocated between them; and
• running workshops on functions that are spread across the organisation to align the approach.

3. Directors: What’s the difference? 

Under FAR, the directors (including non-executive directors) of an Accountable Entity are prescribed under the Ministerial Rules as APs. All APs, including directors, must comply with broad principles-based obligations, which include:
(a) acting with honesty and integrity, and with due skill, care and diligence;
(b) dealing with the Regulator in an open, constructive and cooperative way; and
(c) taking reasonable steps to comply with the law.

At a first glance, these obligations appear to have a lot in common with existing corporate governance requirements in Australia under the Corporations Act and APRA Prudential Standards. However, FAR contains several new concepts that are not defined. 

• What does it mean to engage constructively? 
• What level of cooperation will be expected by regulators?  
• Is honesty and integrity limited to conduct in the workplace?

Practical example: A local insurer has a highly engaged and well-educated board of directors that has a great understanding of its obligations under the Corporations Act, CPS 510 and 520 and broader industry standards and best practice protocols. Some of the directors are unclear how and to what extent their current obligations will change under FAR.

The insurer may wish to consider the following steps as part of its implementation planning:

• scheduling FAR-specific briefings for the Board and delegated committees to ensure that the members are fully briefed as to the scope of the regime;
• considering the application of overseas regimes, particularly in the UK, to provide the directors with some guidance as to how the untested concepts may be interpreted by APRA, ASIC and the Courts; and
• developing a clear framework for both executive and non-executive directors that sets out the consequences for directors operating under FAR. 

Stay tuned for the next parts in the series!