HR DEPARTMENTS at financial services institutions are expected to play a key role in new risk management requirements from sector regulators
HR DEPARTMENTS at financial services institutions are expected to play a key role in new risk management requirements from sector regulators.
The Australian Prudential Regulation Authority (APRA), which regulates Australia’s financial services industries, is set to mandate the testing of senior executives and responsible persons to establish their fitness and propriety.
APRA’s proposals, released in June, require regulated institutions to develop and document appropriate policies for making fit and proper assessments.
The move is designed to shore up public confidence following the collapse of HIH Insurance and the subsequent fallout in the courts, where several senior executives of the failed insurer have been jailed.
However, APRA has said it is the responsibility of each APRA-regulated institution to ensure that people who fill positions of responsibility are fit and proper.
APRA will only become involved when it has specific concerns about an individual and the institution concerned cannot or will not take action to overcome the problem.
“No-one expects a lot of people to suddenly be disqualified from working in the insurance industry, but they recognise it as an additional level of HR in assessing fitness and propriety,” said Fred Hawke, partner at Clayton Utz.
“It’s another issue to be added to the employment process. What [banks and insurance companies] are looking for is detail about how far they have to drill down into assessments and what will be a good policy,” he said.
“Nobody is saying that if a bad apple gets through, the company will have automatically breached the rules. But what will be looked for is whether there’s an appropriate policy in place and was that policy pursued.”
The problem facing many firms, and an opportunity for HR to step in, is that APRA has said that by “responsible person” it is understood “that the activities of the person materially affect the whole or part of the institution’s financial position”.
In a large insurance company, for example, this could include a multitude of roles, not just those at the executive and board level.
A secondary issue, meanwhile, is that boards cannot maintain independence (a key pillar of APRA’s approach to governance) if the board is being assessed by senior management.
According to Hawke, the lack of prescriptive rules regarding the tests is an issue, given they must assess qualities such as integrity and ethics.
“It’s recognised that you can’t legislate for ethics and there’s no established calculus of integrity you can use,” he said.
“In the corporate governance area, there’s no 20 questions test that you can apply to determine whether someone is fit and proper.
“If there was one, it would be easy for your classic corporate psychopath to fool it anyway! What I think they are saying is that we have to have something in place for wider community acceptance.
“It’s also partly about minimising the risk of a bad apple getting into a responsible position.”
Hawke added that there have been several cases in the past showing why organisations need to assess senior management and board members.
“There have been cases where suspect people have achieved significant positions in insurance companies,”he said.
“In the early 1990s a director of a life insurance company nearly bought the company with its own statutory funds and almost got away with it.
“A few years earlier a fellow got control of a local subsidiary of an overseas company. He was the managing director and chairman and walked out of the door with the investment portfolio under his arm in a leather satchel one afternoon.”
