New regulation: Preparing for change in 2025

Vol 47: Issue 1 | April 2024

Both Australia and New Zealand already have legislation in place to protect consumer rights and ensure customers get a fair go. But new laws coming into effect early next year go much further in those protections — and will require considerable preparation on the part of insurers.

FAR replaces BEAR in Australia

The Financial Accountability Regime (FAR) was given the go-ahead by the Australian Parliament in September last year. The legislation, which implements a number of recommendations made by the banking royal commission, replaces the current Banking Executive Accountability Regime (BEAR) and will apply to insurers from 15 March 2025. 

Similar to the BEAR, the FAR imposes obligations in four core areas: accountability, notification, key personnel and deferred remuneration. However, it extends the provisions to all entities regulated by the Australian Prudential Regulation Authority (APRA). 

“The FAR will also introduce new expectations for insurers and their most senior executives by requiring them to conduct their activities in accordance with broader obligations such as integrity, skill and co-operation with regulators,” says Alexandra Hordern, general manager, Regulatory and Consumer Policy, at the Insurance Council of Australia (ICA). 

Australia’s Assistant Treasurer and Minister for Financial Services, Stephen Jones, pointed out in a media release that decisions made by financial services executives have an impact on the lives of all Australians. 

“The FAR ensures that these institutions [banks, insurers and superannuation funds] clearly identify individuals who will be held accountable for the actions of the organisation,” he said.

“An executive who breaches these obligations can be penalised with a loss of income, disqualification from working in the sector and individual civil penalties for assisting in the organisation’s contravention of its obligations.”

Joint APRA and ASIC administration

Unlike the BEAR, which is supervised solely by APRA, the FAR will be jointly administered by APRA and the Australian Securities and Investments Commission (ASIC). ASIC will focus on impacts to market integrity and consumer protection in the financial and payments systems, while APRA will oversee the prudential soundness of regulated entities and overall financial stability.

“Just as the BEAR has helped to sharpen risk culture and governance in the banking sector, we expect the FAR to have a similar positive impact in improving standards of accountability across insurance and superannuation,” said APRA deputy chair Margaret Cole in a media release. 

The ICA is keen to see a robust, fit-for-purpose and right-sized regulatory system that provides the best-possible outcomes for consumers at what are often very challenging times in their lives. 

“The FAR differs from the General Insurance Code of Practice, which centres on customer interactions with insurers, but the two systems will work together to enhance industry culture and customer support,” says Hordern.

What should insurers be doing now?

Implementing any new regulatory regime will inevitably bring challenges.

“It requires teams to understand the changes and test and evaluate existing systems to ensure they meet the new requirements,” says Hordern. 

Raymond Giblett, Sydney-based partner of law firm Norton Rose Fulbright, believes there are lessons to be learned from the implementation of the BEAR in 2018. 

“This needed substantial investment in resources and time across the business, the board and senior executive teams,” he says. 

Giblett recommends that insurers take the following six actions to ensure they’re ready to implement the FAR.

1. Conduct a whole-of-business mapping exercise to develop an overall picture of responsibilities and delegations. 
2. Identify the people who will be accountable for the FAR within the business and ensure they’re clear about their roles and responsibilities.
3. Implement a ‘reasonable steps’ framework to ensure that the business can demonstrate compliance with the regime at all times. 
4. Review and implement changes to the remuneration structure with the appropriate accountable person. 
5. Build a breach notification system, including internal reviews of anything that may need to be reported to regulators, and appropriate escalation.
6. Implement a training schedule for employees, including those engaged in governance, risk and compliance arrangements, as well as accountable persons. All staff will need to be aware of reporting obligations.

“Insurers still have time to undertake the necessary changes to their frameworks and processes,” says Giblett. “However, experience shows those who engage early in the process will be best placed to ensure complete implementation in the timeframe.”

The CoFI embraces fairness in New Zealand

In New Zealand, the Conduct of Financial Institutions regime (CoFI) significantly expands the mandate of the Financial Markets Authority (FMA) to include financial institutions and confers new responsibilities in terms of licensing, monitoring and enforcement.

These include the ability to impose fines and other penalties on financial institutions that breach the rules. 

The regime, which commences on 31 March 2025, aims to protect consumers by ensuring that registered banks, licensed insurers and licensed non-bank deposit takers comply with the fair conduct principle. 

“Fair conduct — treating consumers fairly — is the overarching principle of CoFI,” says Clare Bolingford, executive director, Regulatory Delivery, at the FMA.

“The fair conduct principle ensures that consumers get financial products and services when they need them throughout their life, and have trust and confidence that these will do what they should.”

“The [CoFI] Act applies only to licensed insurers who provide insurance to consumers,” says Tim Grafton, outgoing CEO of the Insurance Council of New Zealand (ICNZ). “These organisations must obtain a licence under the CoFI legislation from the FMA, comply with regulations prohibiting certain sales incentives and establish and comply with a fair conduct program (FCP).”  

The FMA has been accepting licensing applications since July 2023. 

A program to ensure compliance

FCPs are designed to ensure the financial institution’s compliance with the fair conduct principle.  

“We expect financial institutions to be able to identify all of the policies, processes, systems and controls that form their FCP,” says Bolingford. “FCPs are the responsibility of the board and should be relevant and proportionate to the financial institution’s business. They may require one document or many.”

Preparations for the implementation of CoFI include ensuring that every employee who has an impact on how consumers are treated understands the FCP. The FMA considers initial and regular communication and training to be essential. Any technology needed to support new processes and procedures should also be in place.

Relevant across the policy lifecycle

Suncorp New Zealand’s executive manager Conduct Risk, Chris Taylor, says CoFI will apply across the policy lifecycle of Suncorp New Zealand operations, including Vero insurance, Asteron Life and AA Insurance, which is Suncorp New Zealand’s joint venture with the New Zealand Automobile Association. 

CoFI applies from product design through to claims and customer communications.

“Our approach is to ensure that fair customer outcomes are central to decision-making across our entire organisation, extending beyond the product lifecycle to essential infrastructure needed to ensure customers consistently and sustainably receive fair outcomes,” says Taylor. “Suncorp New Zealand engaged in conduct and culture reviews in 2019, and we work continuously to improve customer outcomes. This includes introducing a framework to support customers experiencing vulnerability, acting on insights from our customers and taking customer perspectives on board when reviewing product performance.” 

The ICNZ’s Fair Insurance Code 

Since 1994, the Fair Insurance Code developed by ICNZ has set out the level of service that member companies must provide to their customers. The most recent version of the Code came into effect in April 2020.

“The Code sets high standards of conduct and professionalism for our members in all their dealings with consumers, as well as small-to-medium enterprises in the general insurance industry,” says Grafton.

“It also sets out best-practice standards for insurers. As both the Code and the CoFI legislation require insurers to treat customers fairly, they’re aligned in terms of what they are trying to achieve, though the Code is more specific in some areas, such as setting timeframes for dealing with claims and complaints. The Code is not enforceable by law but works in addition to the relevant laws in place at the time.” 

Input from the new government

While the date is set for the CoFI legislation to come into force, the recently elected National Party government’s intentions to change it are not yet clear. 

“The legislation was passed into law before the 2023 general election,” says Taylor. “During the election campaign, the National Party indicated that it intended to reduce ‘red tape’ and administrative burdens on businesses, and that it would look at making changes to CoFI. 

“At this stage, it’s still too early to tell what those changes might be. However, many of the new CoFI requirements under the Act align with Suncorp’s existing programs of customer and conduct work.” 

Read this article and all the other articles from the latest issue of the Journal e-magazine.

 Read issue 1 of the Journal