The word "Executive" may have been removed from the FAR acronym, but executives remain front and centre in Treasury's proposal to extend the BEAR to insurers and superannuation entities.

Treasury's Proposal Paper1, released on 22 January 2020, sets out its plans to extend the operation of the existing Banking Executive Accountability Regime (BEAR) to other APRA regulated entities – that is to general, life and health insurers, Registrable Superannuation Entities (RSEs) and non-operating holding companies.

Treasury's approach, which will operate under the acronym "FAR", uses the "essential structure" of the BEAR and applies many of the same obligations as those currently in place under it. However, there are also some differences and the most important of those are focused on senior executives.

Accountable Persons

As with the BEAR, the FAR will define "Accountable Persons" in two groups. The first, using a "principles-based element", will include senior executives who hold positions with a defined level of management or control within the organisation. There's no change there. The second group, using a "prescriptive element", will capture persons who carry out roles which fulfil certain prescribed responsibilities, such as risk management, compliance, human resources and internal audit. This is also consistent with the BEAR except that, for FAR, this list is going to be quite a bit longer.

Treasury has included an "indicative list" of these prescribed roles with its Proposal Paper. The list picks up a range of functions which, today, may not fall to the responsibility of a single person. For insurers, for instance, it includes those responsible for setting staff and partner incentives, claims management, internal and external dispute resolution, breach reporting and customer remediation – just to name a few. While these functions are all undeniably important, entities may find it challenging to identify a single person with accountability for delivery, at least without giving rise to duplication and overlap. If implemented, therefore, further thought may need to be given to internal business structures and, inevitably, there will be more executives needing to be registered as Accountable Persons.

End-to-end product accountability

Included in Treasury's indicative list is a role with responsibility for "end-to-end management" of the entity's products. That role, which is the product of a Financial Services Royal Commission recommendation, is described as including responsibility for "all steps in the design, delivery, maintenance and any necessary remediation of customers in respect of the product or product group". Its inclusion follows APRA's consultation on this topic in June 2019, which received submissions pointing out the practical challenges that would arise in connection with such a responsibility. It would require insurers, for instance, to fashion roles with appropriate responsibility for the full lifecycle of their products, from design, through to distribution, servicing, claims management and compliance outcomes. While Treasury indicates in its paper that the outcomes of APRA's consultation are yet to be finalised (it says that those outcomes will be "subsumed" into the FAR), at this stage the end-to-end product accountability remains very much a live proposition.

Accountable Persons obligations

The expanded group of Accountable Persons under the FAR will have the same obligations as currently exist under the BEAR, except in one very important respect. In addition to being required to take reasonable steps to prevent matters from arising that would adversely affect the entity's prudential standing or reputation, as is currently the case under the BEAR, Accountable Persons will also be required to take reasonable steps "to ensure that the entity complies with its licensing obligations". Those "obligations" would include compliance with both the relevant prudential legislation and with the entity's obligations under the Corporations Act and other "financial services laws".

While this extension was expected at a conceptual level, the change will pack a punch. An executive with Accountable Person responsibility for activity which results in a breach of these laws, will themselves be in breach of their accountability obligations if they cannot show that they took reasonable steps to prevent that outcome. Whether this is the right approach (and wording – taking reasonable steps "to ensure" compliance poses a particularly high standard) will no doubt see some debate. In any case, though, close regard will have to be given by Accountable Persons to the steps needed to achieve compliance with relevant laws in their area of responsibility.

Penalties

To complement these new obligations, Treasury has proposed introducing civil penalties for the breach by Accountable Persons of their obligations under the FAR. These will complement the power to disqualify an Accountable Person (now to be given to both APRA and ASIC), which already exists under the BEAR. Consistent with the BEAR, the FAR will prohibit entities from indemnifying or obtaining insurance for their Accountable Persons with respect to these penalties. However, Accountable Persons will remain free to obtain such insurance themselves.

Deferred Remuneration

In relation to the deferral of remuneration for Accountable Persons, Treasury has proposed a simpler approach.

The amount of remuneration to be deferred will be calculated as a proportion of variable remuneration alone; not also by reference to total remuneration, as is currently the case under the BEAR. This means that an Accountable Person who does not receive variable remuneration will not be subject to a deferral at all.

The proportion of variable remuneration to be deferred will be set at 40% and the period of that deferral will be a minimum of four years. The FAR will retain the current exemption for the deferral of amounts under $50,000, so the end result will be that the deferred remuneration arrangements only apply to Accountable Persons who become entitled to receive variable remuneration of $125,000 or more in a financial year.

This approach will apply to all FAR entities and Accountable Person positions. No longer will it vary based on the size of the entity and the seniority of the Accountable Person (for instance, whether they are also the CEO), as is currently the case under the BEAR.

While this simplified approach may be welcomed, it does not seem to be a signal as to the approach that APRA will take to the new remuneration requirements it proposed in July 20192. Treasury states that the FAR "will not limit a regulator's ability to apply additional requirements on remuneration." On that topic, APRA Chairman Wayne Byers indicated in November 20193, for instance, that APRA's proposal to apply a cap on variable remuneration based on financial metrics would be retained, though possibly with some flexibility applied to it. If APRA proceeds on that basis, such a cap and APRA's other remuneration requirements will apply in addition to the FAR proposals. APRA originally stated that it would publish its response to submissions on the remuneration requirements in late 2019 or early 2020, so those are likely to be released shortly.

Entity classification

Treasury is also proposing to replace the small, medium and large entity classification used in the BEAR with a split between "core compliance entities" and "enhanced compliance entities".

The difference will be important with respect to accountability maps and statements. Only Enhanced Compliance Entities will be required to submit accountability maps and statements to regulators and to notify them of changes made to those documents. Core Compliance Entities will not be required to meet these requirements, but will remain subject to all other FAR obligations, including identifying and registering Accountable Persons. The principal effect of this qualification is therefore likely to be that Enhanced Compliance Entities will face a higher level of regulatory oversight than Core Compliance Entities, rather than there being any material difference in the underlying regulatory requirements.

As to the method for determining which category an entity falls into, Treasury has proposed that the entity's total assets be the principal measure. For general insurers, for instance, it is proposed that entities with more than $2B in total assets would be Enhanced Compliance Entities (based on recent APRA statistics, there are nine direct insurers and two reinsurers currently in this group). The same threshold would apply for health insurers, while life insurers would have a higher threshold of $4B. Note, though, that Treasury plans to also give ASIC and APRA the power to reclassify entities where their governance and accountability justify it, so there may be some flexibility in its application.

Administration

Given that the BEAR has both a conduct and prudential purpose, the Royal Commission recommended that APRA and ASIC jointly administer the new provisions. For the FAR, ASIC will be given responsibility for those parts that concern consumer protection and market conduct. APRA will take responsibility for the prudential aspects. At this stage, the mechanics of how that will work in practice is not clear. Treasury's paper refers to the regulators exercising certain of their powers jointly where they affect entities which fall under both of their regulation (which will be the case more often than not). Certain documents and notifications will also need to be made to both regulators or shared between them. Further detail of this will no doubt follow.

Roll-out

The Royal Commission recommended that "provisions modelled on BEAR" be applied to all APRA-regulated financial institutions, in a sequential manner; first to the largest RSE licensees, then to the balance of those licensees, then to the largest insurers and finally to the balance of insurer licensees. In support of that approach, Commissioner Hayne stated "These changes cannot and should not be made at once. They must be made sequentially, and they will take time."

There was no reference to that sequential approach in Treasury's Implementation Roadmap, released in August 2019 and, likewise, Treasury's Proposal Paper does not touch on it. The Roadmap includes a commitment to consult on and introduce legislation to extend BEAR to all APRA regulated entities by the end of 2020, so current indications seem to point to the FAR being rolled out in one go.

Extension to ASIC regulated entities

As to the Federal Government's announcement in February 2019 that it would introduce a "similar regime for non-prudentially regulated financial firms focused on conduct", for instance for Australian Financial Services Licence or Australian Credit Licence holders, Treasury states that that will only progress following the "initial implementation" of the FAR to all APRA regulated entities. At this stage, Treasury expects the ASIC regulated entities to be brought into the scope of the FAR through legislative instrument. The particular rules and responsibilities that will apply to ASIC regulated entities will be the subject of consultation at a later time.

Submissions

Treasury has invited submissions, seeking "targeted feedback" on how the proposals will best be implemented; not on whether it should be implemented. It has offered just three weeks to make those submissions, which are due by Valentine's Day – 14 February 2020.

A link to Treasury's Proposal Paper can be found here: https://treasury.gov.au/consultation/c2020-24974