Tougher accountability rules not far off for insurers, super funds

Sweeping change will makes execs and managers accountable for compliance failings or poor decisions at insurers, super funds.

APRA’s deputy chair Helen Rowell. (AAP Image/Mick Tsikas)

The federal government plans to introduce long-awaited legislation formalising tougher accountability measures at insurers and superannuation funds in the winter parliamentary sitting months.

Sources said the legislation, which requires clear lines of accountability for executives and managers under the Financial Accountability Regime was being drafted and formalised.

It is a sweeping change and makes executives and managers accountable for any compliance failings or poor decision-making.

The legislation will follow the release by government and Treasury of a proposal paper in January last year, just months before the pandemic started to grip global financial markets and shifted regulatory priorities.

The FAR stems from recommendations made by the Hayne royal commission, which advised that the Banking Executive Accountability Regime should be extended to cover health, life and general insurers and super funds and trustees.

While the industries caught by the new regime have started working on the proposed changes, they will be keen to see the final framework, timeline and whether individuals can be hit by civil penalties.

“Assuming the legislation tracks the proposals presented previously by government … more categories of executive will be covered by the FAR,” said Jonny Gordon, global co-head of Ashurst’s financial regulation practice. “There will be increased financial penalties for institutions for breaching the regime. However, the real game-changer for executives is that under FAR they will be subject to personal liability through civil penalties. This is not a feature of BEAR and is sure to raise the stakes.”

The government’s FAR proposal showed that as well as consequences for entities, individuals could face a penalty that is the greater of $1.1m or the “benefit derived or detriment avoided because of the contravention” multiplied by three. Regulators can also disqualify an accountable person if they fail to comply with their responsibilities.

The rationale behind the BEAR and FAR is that companies and regulators need to know who is accountable for relevant areas, particularly when there are compliance or other failings.

Mr Gordon said the regimes were not a “set and forget” compliance program, nor a box-ticking exercise.

“It requires the institution to have a deep understanding of its business and who is responsible for what,” he said.

“Once implemented there is a real need to continue to ensure that the obligations are being met and that the accountability framework develops as the business changes. Executives will want to ensure they have a clear line of sight on what is happening on their watch, given the consequences of getting it wrong.

“It is a big job, but many are quite well advanced in their [FAR] preparation.”

A FAR report by Deloitte, published in November, noted entities needed to establish pay policies and arrangements to support deferral of a portion of variable remuneration for at least four years, and a cut in pay, in the event of a breach. The banking royal commission urged the government to put in place the FAR and noted it should be jointly administered by the corporate regulator and Australian Prudential Regulation Authority.

In a speech last year, APRA deputy chairman Helen Rowell said the FAR proposals provided an opportunity for entities to pre-emptively establish clear accountability lines to “potentially head off future problems”.

“Doing so will ensure that if and when significant failings happen, the entity itself can quickly and effectively enforce appropriate accountability,” she said.