Less than one year to go! How FAR along is your organisation with implementation planning? (Part 2/3)

Key insights in preparing for FAR as the countdown for insurers and RSEs continues (Part 2/3).

The impending introduction of the Financial Accountability Regime (FAR) is now a key focus area for insurers and RSEs. 

In Part 1 of this series on Key Insights for FAR as the countdown for insurers and RSEs continues, we focused on Accountability Statements for Senior Executive Managers and the impact of the regime on Directors. 

In this part we consider what’s at stake for accountable persons and accountable entities, and highlight the importance of putting a reasonable steps framework in place.  

1.    Accountable persons: What’s at stake?

A key focus for FAR implementation projects is the impact of the regime on accountable persons (APs). 

This is understandable given the high personal and professional stakes for these individuals under FAR. Failure by APs to comply with their obligations under the regime will have material consequences, such as temporary or permanent disqualification from being an AP with the inevitable adverse impact on reputation, and a direct impact on deferred remuneration.

Using compensation structures to promote effective and prudent risk management will be a familiar concept for prospective APs following the recent application of CPS 511 to APRA-authorised entities. But there are important differences between CPS 511 and the deferred renumeration obligations under FAR. 

In particular, the mandatory deferred requirements under CPS 511 only apply to significant financial institutions. There are no exceptions for accountable entities under FAR: every organisation will be caught and must apply the variable remuneration deferral obligations accordingly. 

Another key difference is that CPS 511 applies the deferral requirements proportionately with a more punitive regime for the most senior individuals (e.g., 60% of variable remuneration of CEOs must be deferred for a minimum period of 6 years with pro rata vesting permitted after 4 years). FAR does not distinguish between seniority of APs.

Practical tips: An RSE licensee with total assets of $15 billion has recently implemented a CPS 511-compliant remuneration policy and framework.

The following strategies may assist the RSE in uplifting its existing remuneration framework to comply with FAR: 

• briefing the senior executive team in relation to the core differences between CPS 511 and the application of FAR to all APRA-authorised entities; 
• carefully reviewing existing remuneration and consequence management frameworks along with associated documentation to determine the extent of the required adjustments; and 
• working with external advisors to implement the necessary changes. 

2.    Accountable entities: understanding the obligations

It is important to remember that accountable entities also have specific obligations under the FAR regime and the penalty regime is very much focused at the entity level. 

Accountable entities are required to comply with defined obligations in relation to:

• accountability - to take reasonable steps to conduct its business with honesty and integrity, deal openly with the Regulators and avoid matters arising that may compromise its prudential standing;
• key personnel - to ensure that responsibilities for every aspect of its business are appropriately allocated to suitable individuals;
• deferred remuneration - to defer a prescribed portion of the variable remuneration of APs; and
• breach notification - to inform the Regulators of the occurrence of certain events (such as a departure of an AP from the business or a reduction in the variable remuneration of an AP). 

While the key personnel and deferred remuneration obligations are relatively well understood, the scope of the accountability obligations is not defined in the legislation and is likely to be developed and refined over time through guidance from regulators and the courts. 

The breach notification regime should be an area of particular focus at the entity level. As FAR is an intensely evidenced-based regime, it is particularly critical for accountable entities to get this right.  

Practical tips: An insurer has well established systems and controls designed to pre-empt, identify the occurrence of, and take appropriate action to remedy breaches of its prudential obligations. 

The following strategies may assist the insurer in adapting its existing frameworks in light of its obligations as an accountable entity under FAR:

• identifying the events that require notification to the Regulators by reference to the relevant thresholds (with accountable entities within the enhanced notification threshold having additional notification events, such as material changes to accountability statements);
• undertaking a gap analysis to determine the extent of any required changes to governance structures to ensure timely identification of notification events under FAR;
• recognising the obligations that necessitate subjective assessment (e.g., if there is “reasonable grounds to believe” that there has been a failure to comply with accountability obligations) as well as the more straightforward notification obligations (e.g., departure of APs from the business); 
• benchmarking the mandated obligations and time periods under FAR with other regulatory requirements to identify synergies (e.g., pursuant to ASIC’s breach reporting regime addressed in RG 78 for APRA-authorised insurers who are also AFSL-holders); and
• understanding the process for notification with the relevant forms via APRA Connect. 

3.    The importance of reasonable steps frameworks

Undertaking a reasonable steps review and building a comprehensive framework that captures the specific processes, policies and procedures of an organisation is a fundamental component of any FAR implementation project. 

From the perspective of the APs, if done well, this reasonable steps framework should operate as an effective shield in an investigation scenario. 

For the accountable entity, it is helpful evidence that it has complied with its accountability and key personnel obligations.  

There is no boilerplate for this process or required template specified by the Regulators. Instead, organisations need to consider what will constitute “reasonable steps” under section 22 of the legislation by reference to each of the specific accountabilities listed for each director and executive, identify all supporting artefacts that evidence the relevant controls and create a bespoke document that captures this information in alignment with its governance protocols and safeguards. 

Practical tips: An insurer has prepared detailed accountability statements that have been signed off by its APs.

The following strategies may assist the insurer with the preparation of its reasonable steps framework: 

• educating APs as to the purpose of the reasonable steps review;
• matching the identified responsibilities of APs to corresponding policies, protocols and governance frameworks within the organisation;
• identifying a format for the output of the review that is consistent and compatible with existing controls; and
• revisiting accountability statements in light of any identified discrepancies. 

Stay tuned for the next part in the series!