New cross industry guidance on FAR implementation released
On 14 March 2024, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) (the regulators) released new cross-industry guidance - RG 279 Financial Accountability Regime: Information for accountable entities - to support accountable entities (AEs) and their accountable persons (APs) to understand and comply with their FAR obligations.
Some points to note
Guidance on the completion of accountability statements and accountability maps: 'Enhanced entities' will need to submit an accountability statement for each of its APs and an accountability map showing lines of reporting and responsibility within the entity (or their relevant group).
RG 279 offers the following guidance on completing accountability statements:
'Accountability statements must reflect actual accountability as it operates in practice within the accountable entity and its relevant group. Accountability statements should be specific to both the accountable entity and the individual accountable person. The Regulators expect the content of the accountability statement of an accountable person would align with the accountable person’s allocated key function(s). However, the Regulators do not expect that the allocation of any key function(s) to an accountable person would, in itself, materially shape the content or structure of the accountability statement of the accountable person. The Regulators expect individuals nominated as accountable persons to be closely involved in the development of their own accountability statement. These individuals should have read, understood and accepted the areas of accountability as drafted, as well as the accountability obligations of an accountable person under the FAR Act. Individual accountable persons must sign their accountability statement declaring that the content inaccurate and they understand their accountability obligations'.
Further detail around the regulator's expectations of the minimum content to be included and a 'suggested template' has also been released in a separate document see: Financial Accountability Regime: Accountability statement guidance and template | APRA
RG 279 offers the following guidance on completing accountability maps:
'The Regulators have not provided a suggested template for an accountability map. Accountable entities are encouraged to consider constructing their map in a way that will best help them clarify their organisational structure and chart where ultimate accountability for their various businesses and functions lies across the accountable entity or its relevant group. In particular, the Regulators expect an accountability map would include reporting lines to and from each accountable person. To promote consistency and readability, the Regulators also expect the language used in an accountability map to align with that in accountability statements.'
The regulators also flag that they:
'are taking a principles-based approach to administering obligations about the content of statements and maps, and will periodically assess whether additional content needs to be prescribed in the Regulator rules.
Identifying Significant Related Entities (SREs): RG 279 makes clear that when undertaking the task of identifying their SREs AEs are expected to: 'consider both financial and non-financial risk factors when assessing whether an entity is an SRE'. RG 279 states that these risk factors should include:
- 'the nature and scale of the entity’s business or activities;
- the nature and extent of any interdependency between the entity and the accountable entity; and
- any organisational, financial or administrative arrangements, including any material business activity, between the entity and the accountable entity'.
It's observed that:
'Paragraph 1.36 of the Explanatory Memorandum describes the relationship between an accountable entity and its SRE in a similar way to how APRA defines ‘material business activity’ in Prudential Standard CPS 231 Outsourcing (CPS 231), Prudential Standard HPS 231 Outsourcing (HPS 231) and Prudential Standard SPS 231 Outsourcing (SPS 231)'.
In addition, AEs are expected to:
'consider whether the business activities of the related entity could have a substantial impact on their customers, operations, brand, reputation, legal and regulatory compliance, and people, regardless of the size of the related entity. The Regulators expect an accountable entity to put in place robust methodologies and procedures to assess which of their subsidiaries or connected entities are SREs. Such methodologies and procedures should align and integrate with the accountable entity’s broader risk management framework'.
Guidance on deferred remuneration obligations under the FAR (and the interaction between FAR and CPS 511):
Appendix B to RG 279 provides a comparison of the deferred remuneration obligations under the FAR vs the obligations under CPS 511. The regulators' comment:
'While the two regimes broadly align, Appendix 2 [called Appendix B in RG 279] outlines certain nuances that accountable entities should be aware of during implementation'.
A key difference highlighted by the regulators is that CPS 511 deferred requirements do not apply to non-SFIs whereas under the FAR variable remuneration deferral obligations apply to accountable entities regardless of size.
Another difference highlighted concerns the percentage of variable remuneration required to be deferred. Under the FAR an accountable entities must defer 40% of the variable remuneration of all APs for a minimum of four years (with no pro rata vesting permitted).
Under CPS 511 deferral requirements are 'more stringent' for CEOs – under CPS 511, 60% of CEOs variable remuneration must be deferred for a minimum of six years (with pro rata vesting permitted after four years).
RG 279 states that:
'accountable entities that are SFIs will in most cases satisfy the FAR deferred remuneration obligations when complying with the CPS 511 deferral requirements. That is because the CPS 511 deferral requirements are generally more prescriptive than the deferred remuneration obligations under the FAR'.
Preparing for FAR commencement: Regulators outline their expectations of the super and insurance sectors
APRA and ASIC have set the expectation that insurers and superannuation funds undertake the following actions ahead of the 15 March 2025 (when the FAR will apply to these sectors).
- Review the FAR implementation guidance in Financial Accountability Regime: Information for accountable entities (RG 279)
- Determine whether they are an ‘enhanced’ or ‘core’ accountable entity based on the enhanced notification thresholds in the Financial Accountability Regime (Minister) Rules 2024 (see: FAR implementation | Financial Accountability Regime (Minister Rules) 2024 published) and identify their significant related entities (SREs) (guidance on this is included at para 2.1 of RG 279)
- 'Undertake accountability mapping to support compliance with relevant key personnel obligations' (guidance on this is included at para 2.4 of RG 279)
- 'Identify their accountable persons, and accountable persons of their SREs' (guidance on this is included at para 3.2 of RG 279)
- 'Put in place processes to ensure they comply with their notification obligations' (guidance on this is included in Chapter 4 of RG 279)
- 'For entities that are part of a corporate group, determine the impact of the FAR on other entities within the group' (including any SREs)' (guidance on this is included in Chapter 4.2 and 4.2.4 of RG 279)
- 'Assess and strengthen their remuneration policies to comply with the deferred remuneration obligations under the FAR' (guidance on this is included in Chapter 5 of RG 279)
- 'Participate in' the consultation on the draft Financial Accountability Regime Regulator Rules Amendment Instrument No. 1 of 2024 which includes a proposed list of Insurance Key Functions and RSE licensee Key Functions and the separate descriptions of each. (More on the consultation below).
ASIC and APRA also expect enhanced insurance and superannuation entities to:
Consultation on proposed 'key functions' and key function descriptions for insurance and superannuation entities
The Regulators are required to establish and keep a register of Accountable Persons under the FAR. The Financial Accountability Regime Act (Information for register) Regulator Rules 2024 (Regulator Rules) prescribes the information for inclusion in this register – including 'key functions' information. The current version of the Regulator Rules only prescribe 'ADI Key Functions'. Read: FAR transition | Regulators issue final Rules
Ahead of the FAR commencement date (15 March 2025) for the super and insurance sectors, the Regulators are consulting on a draft instrument–Draft Financial Accountability Regime Regulator Rules Amendment Instrument No. 1 of 2024 – setting out a proposed list of Insurance and RSE licensee Key Functions together with a separate document describing each the proposed Key Functions.
Proposed Insurance Key Functions: For each AP, the accountable entity is proposed to be required to report to the regulators whether each of their APs has 'actual or effective senior executive responsibility for management or control of the whole of, or a significant or substantial part or aspect of' any of the following 'key functions' (to enable this information to be included in the FAR Register):
'(a) capital management;
(b) collections and enforcement (default, debt collections and recovery);
(c) conduct risk management;
(d) data management;
(e) financial and regulatory reporting;
(f) hardship processes;
(g) insurance risk management;
(h) operational risk management;
(i) product design and distribution obligations;
(j) product origination;
(k) recovery and exit planning and resolution planning;
(l) reinsurance management;
(m) scam management;
(n) technology management;
(o) training and monitoring of relevant representatives and staff;
(p) underwriting; and
(q) whistleblower policy and process'.
Proposed RSE Key Functions: For each AP, the accountable entity is proposed to be required to report to the regulators whether the AP has 'actual or effective senior executive responsibility for management or control of the whole of, or a significant or substantial part or aspect of' any of the following 'key functions' (so that the information can be included in the FAR register).
'(a) conduct risk management;
(b) data management;
(c) financial and regulatory reporting;
(d) hardship processes;
(e) investment management;
(f) liquidity management;
(g) marketing and advertising;
(h) member outcomes;
(i) operational risk management;
(j) product design and distribution obligations;
(k) product origination;
(l) recovery and exit planning and resolution planning;
(m) scam management;
(n) technology management;
(o) training and monitoring of relevant representatives and staff; and
(p) whistleblower policy and process'.
Timing: The due date for submissions to the consultation is 19 April 2024. The regulators expect to finalise the instrument in 'quarter 2 of 2024'.
Planned engagement with insurers and RSE licensees
The Regulators plan to 'engage with and support' entities in the lead up to FAR commencement.
The Regulators plan to send webinar invitations 'shortly' to give entities an opportunity to ask questions about the information package in April, dates below.
- Tuesday, 9 April for superannuation entities
- Wednesday, 10 April for general and life insurance entities
- Thursday, 11 April for private health insurers
The Regulators flag that they
'will also consider conducting targeted activities to support the effective implementation of the FAR. The Regulators intend to adopt a risk-based, proportionate approach to implementation and will communicate further detail in due course'.
