From March 15, the Financial Accountability Regime (FAR) will apply to Australia’s biggest general insurers - those with a total asset value of $10 billion or more. Some industry stakeholders have described FAR as one of the most significant changes to financial services regulations in a generation.
However, two weeks from implementation, global law firm Clyde & Co has told Insurance Business that “several issues” have surfaced during the preparation period. The implications of non-compliance are significant, said managing partner, Rebecca Kelly (pictured above).
“The stakes are high,” said Kelly. “To give you an idea of the weight of FAR, there are significant civil penalties for non-compliance: $16.5 million for breach by body corporate and $1.65 million for individuals.”
There are also personal criminal liability risks, she said, related to “accountable persons” (APs) including imprisonment for failure to comply with directions from the Australian Prudential Regulation Authority (APRA) and key personnel obligations.
Kelly said some of the challenges for insurers during their preparation have concerned gaps and deficiencies in their draft FAR documentation. “Which if not addressed means that when it comes to implementation, entities will find some responsibilities unallocated, or that responsibilities do not ‘cascade’ properly from the top-down,” she said.
Kelly said there can also be challenges in the practical allocation of the reasonable steps and procedures that insurers are required to develop
“We have had numerous requests for assistance in understanding the application and operation of the deferred remuneration obligations under FAR, which can be challenging to navigate and apply,” she said.
The legal expert said her firm has also seen many questions related to the registration process, forms and requirements for registering APs and varying obligations for core and enhanced entities.
There are also the more precise challenges that a new regime like FAR presents to particular insurance lines.
“The key question for indemnity insurers is whether the operation and application of FAR to Australian non-bank entities will be materially different from its application to banks: particularly if the regulatory oversight and enforcement approach will differ,” said Kelly.
She said insurers need to understand exactly what fines, penalties, legal and defence costs that could apply under the regime can be insured, both for the entity and its individual APs.
“Insurers also need to assess and determine the relative preparedness of insured entities and key stakeholders which operate in and are subject to the newly extended regime,” said Kelly.
This will help them, she said, understand their new level of underwriting risk exposure.
There are also new possible risks for directors and officers (D&O) insurers.
“The regulators already have extremely broad powers and FAR does not significantly extend these,” said Kelly. “However, the regulators will have the power to make a range of FAR related directions, such as the power to order an audit, make changes to an entity’s systems and operations, reconstruct the business, and reallocate responsibilities.”
Kelly said to be sure of compliance, insurers under the FAR regime - and their insureds – need to regularly check their insurance coverage and Deeds of Access and Indemnity. This is a legal document that protects directors while performing their company duties.
FAR replaces the Banking Executive Accountability Regime (BEAR), which dates to the Banking Act 1959. However, BEAR only applied to banks. FAR extends BEAR-like accountability to the insurance and superannuation industries.
According to a Bills Digest on the Parliament of Australia website, FAR “imposes four fundamental sets of obligations.” The Digest describes these obligations as relating to accountability, key personnel, deferred remuneration and notifications.
Some experts say one feature of the new regime is how it is very evidence-based. Another feature, they say, is how the way personnel across divisions work together to deal with risks will be key FAR drivers in both implementation and operation.
Clyde & Co has published a practical guide to help insurers and other financial services companies understand FAR: “Practical pitfalls for FAR implementations – Seven deadly sins”.
Are you working at a general insurer preparing for FAR? Please explain one of your compliance challenges below
