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.
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.
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.
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.
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.
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.
A link to Treasury's Proposal Paper can be found here:
For more information on the application of the BEAR to financial services, please contact insurance advisory principal, Mathew Kaley.
1 APRA Proposal Paper, Implementing Royal Commission Recommendations 3.9, 4.12, 6.6, 6.7 and 6.8 Financial Accountability Regime, 22 January 2020
2 Draft Prudential Standard CPS 511 Remuneration
3 Speech to Women in Banking and Finance Series Luncheon, 13 November 2019