Allens

Banks & Financial Institutions

Increase text sizeDecrease text sizeDefault text size

Client Update: Grizzly times ahead for banks

14 July 2017

In brief: A consultation paper on the BEAR has been released, confirming the Federal Government’s intention to impose an executive accountability regime on banks and their subsidiaries that follows important elements of current international accountability regimes. You have three weeks to provide your comments to the Government. Partner Michelle Levy (view CV), Senior Associate Sarah Burgemeister and Associate Katie Gardiner report.

Background

On 13 July 2017, following the announcement in May's Federal Budget of the proposed Banking Executive Accountability Regime (BEAR), the Federal Government released a consultation paper seeking comments in response to the detailed policy considerations and the mechanics of BEAR.

BEAR's objective is to 'apply a heightened responsibility and accountability framework to the most senior and influential directors and executives within'  authorised deposit taking institutions (ADIs), with the intention of supplementing, rather than replacing or changing, the existing prudential framework and directors' duties.

As expected, the consultation paper confirms the Government’s intention to emulate significant elements of existing international accountability regimes, specifically the United Kingdom’s Senior Managers and Certifications Regime (SMCR), which has been in force since March 2016 for banks and Hong Kong’s Manager-in-Charge measures, which are in the process of implementation. The consultation paper recognises that not all aspects of the SMCR will be appropriate for the Australian banking sector.

Who is affected?

BEAR is intended to apply to all ADIs and their subsidiaries, including foreign subsidiaries. If this proposal survives, it means that those life insurance companies, general insurance companies, superannuation fund trustees and responsible entities that are subsidiaries of a bank will be subject to an accountability regime that their competitors will not be obliged to comply with, at least on day one. The explanation provided in the consultation paper for applying the regime to subsidiaries is that consumers will often associate the wide range of financial services and activities provided by these subsidiaries with the ADI – it noted that recent 'poor behaviour' regarding insurance products and financial advice by such subsidiaries have caused concerns with consumers.

In seeking to identify the relevant individuals who will be captured by this regime (Accountable Individuals), the Government is looking to tie accountability to responsibility. To do this, it proposes to identify the Accountable Individuals by adopting a combination of prescription and principles. The SMCR adopts a similar method, with the regime applying to both:

  • those individuals who have a prescribed function, being an oversight function or an executive function; and
  • those individuals who have significant influence over conduct and behaviour, and whose actions pose a risk to both the business and customers. Such an individual could be the head of a key business area.

Each ADI will need to identify the Accountable Individuals within its group, having regard to its framework of operation. While there will be some commonality across the ADIs for individuals holding prescribed positions, such as those individuals chairing board committees, beyond that Accountable Individuals may occupy very different positions and have different titles between the ADIs; and, as noted, they may not even be an employee or officer of the ADI. Accountable Individuals may be directors or senior executives of a subsidiary of an ADI.


Expectations

The Government says that it expects ADIs, and the Accountable Individuals, to meet the expectations of the community by conducting their businesses consistently with 'good prudential outcomes'. The new expectations are intended to supplement existing concepts of behaviour, such as the Australian Prudential Regulation Authority's (APRA) Fit and Proper person framework. Again, the Government's expectations are 'guided' by the expectations contained in the SMCR, but BEAR will focus somewhat more on systemic and prudential matters. The suggested expectations include:

  • an ADI will conduct its business with integrity, due skill, care and diligence, and deal with APRA in an open and cooperative way;
  • an ADI will take reasonable steps to maintain a culture that supports APRA's prudential standards, and ensure that the expectations and accountabilities of BEAR are applied;
  • Accountable Individuals will act with integrity, due skill, care and diligence, and be open and co-operative with APRA;
  • Accountable Individuals will take reasonable steps to ensure that:
    • the activities or business of the ADI for which they are responsible are controlled effectively, and comply with relevant regulatory requirements and standards;
    • responsibilities are delegated to an appropriate person and carried out effectively; and
    • the expectations and accountabilities of BEAR are met in the business of the ADI group for which they are responsible.

Registration

Proposed regime

APRA must be notified of the intended appointment of all Accountable Individuals at ADIs. If the individual is not disqualified, the ADI can proceed with the appointment and must register the Accountable Individual with APRA. The Accountable Individual's registration will result in personal responsibility for complying with their specified obligations. The ADI will need to produce to APRA: first, accountability statements detailing the roles and responsibilities of each accountable individual; and, second, an accountability map of the ADI group reflecting these accountability statements.

Policy considerations

The proposed registration process will entail:

  • before appointment, the ADI advising APRA of the intended appointment and providing the necessary information on the individual’s suitability;
  • APRA consulting its internal register of accountable individuals; and
  • APRA advising the ADI if the individual has been removed or disqualified by APRA, or if it has any other issues with the individual’s suitability for the role.

The ADI retains responsibility for assessing suitability and appointing accountable individuals, and Accountable Individuals will not be approved by APRA before appointment.

Accountability statements will be produced, to detail the roles and responsibilities of each accountable individual. These statements will be consolidated into an accountability map reflecting the allocation of roles and responsibilities across the ADI group. These maps are intended to cover a broad range of responsibilities in all aspects of the ADI’s operations. The consultation paper indicates there will be a focus on the right person being the accountable individual for the responsibilities assigned. The SMCR is, again, suggested as providing a template for the minimum set of responsibilities.

The Government recognises that an appropriate transition period will be necessary.


Powers and penalties

Proposed regime

The BEAR regime will give APRA a new civil penalty to impose on an ADI that fails to meet the additional expectations it will apply to the conduct of business. This penalty will be a maximum of $200 million for larger ADIs, and $50 million for smaller ADIs that breach misconduct rules.

In addition, APRA will have enhanced powers to remove Accountable Individuals from their register if they have failed to meet its expectations. This will possibly affect the individual's remuneration and prevent them holding a senior role in the banking sector (and possibly elsewhere). APRA will be able to impose penalties on ADIs if they fail to appropriately monitor the suitability of their accountable individuals. 

Policy considerations

APRA already has the power to seek to remove and disqualify individuals from APRA-regulated institutions by bringing proceedings against them in the Federal Court. The Consultation Paper suggests these powers should be enhanced and widened – applying to all APRA-regulated institutions (and not merely ADIs and their related bodies corporate). Of note is the suggestion that APRA has the ability to disqualify an accountable individual, director or auditor of an APRA-regulated entity where it is satisfied they are not a fit and proper person, without needing to proceed in the Federal Court.

To assist with enforcement, ADIs may be required to inform APRA of individuals who are subject to internal disciplinary proceedings, including those with penalty outcomes.

In an attempt to ensure this acts as a sufficient deterrent to poor behaviour, it is suggested that individuals may be prevented from taking out insurance against removal/disqualification by APRA.

Civil penalties could be sought against an ADI where the ADI:

  • fails to meet the new expectations of an ADI under BEAR;
  • fails to hold Accountable Individuals to account under BEAR; and
  • does not appropriately monitor the suitability of accountable individuals.

The Federal Government notes these penalty amounts are maximums and, with the court having discretion, there would be consideration of the seriousness of the offence when determining quantum.


Remuneration

Proposed regime

At least 40 per cent of variable remuneration, and up to 60 per cent for certain Accountable Individuals, will be deferred for a minimum of four years. APRA will also have stronger powers to require ADIs to review and adjust their remuneration policies in circumstances where it identifies inappropriate outcomes.

Policy considerations

The purpose of deferring variable remuneration is to allow sufficient time for risks to crystallise and remuneration to be adjusted. The purpose of this time period is to encourage Accountable Individuals to focus on the long-term impact of their decisions. This will be applicable to those performing executive functions, with bank CEOs facing the largest deferral.

The Government recognises that there are risks in requiring variable remuneration to be deferred, with the potential that all that will happen is there will be a shifting of remuneration from variable to base without any change in behaviour.

The consultation paper suggests that variable remuneration would include any discretionary remuneration that is conditional upon performance and delivery of results, both on an individual and business basis. 

Timing

The consultation paper does not indicate when BEAR will begin. The Government is so eager to implement BEAR that it has provided only a three-week consultation period. This is too short, given the wide-ranging effect the regime would have. 

How can Allens help you?

BEAR marks a significant development in Australian financial regulation. We appreciate the concerns that ADIs will have about the organisational-wide impact of this proposed regime.

Allens has been closely involved with the implementation of the SMCR in the UK and Manager-in-Charge regime in Hong Kong, and provided wide-ranging advice to various financial institutions. We will continue to closely monitor developments and provide updates. In the meantime, we would be happy to discuss your submissions with you.

For further information, please contact:

Share or Save for later

What are these?

 

To save this publication on your smartphone or
tablet for off-line reading (eg on a plane flight),
we recommend Pocket.

 

 

You can leave a comment on this publication below. Please note, we are not able to provide specific legal advice in this forum. If you would like advice relating to this topic, contact one of the authors directly. Please do not include links to websites or your comment may not be published.

Comment Box is loading comments...