Australia: Changes to corporate governance in banking groups: impacts of the Banking Executive Accountability Regime (BEAR)

ADIs and their subsidiaries need to take four steps to get ready for the Banking Executive Accountability Regime.

On 19 October 2017 the Government introduced into Parliament the Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2017, otherwise known as the "Banking Executive Accountability Regime" (BEAR).

While political outcomes are generally uncertain in Federal politics, given the policy rhetoric of all parties is for increased accountability in the banking sector, ADIs should plan for the BEAR to become law in the first half of next year. The bill currently contains a commencement date of 1 July 2018.

The BEAR applies to authorised deposit-taking institutions (ADIs) and their subsidiaries. These organisations will need to take the following steps to prepare for commencement of the BEAR:

  • Update Policies, Systems and Training: understand the new set of BEAR obligations to be met by ADIs and "accountable persons" (described below), update their governance policies, procedures and systems to reflect the BEAR and ensure that their accountable persons understand those obligations;
  • Identify and register all "accountable persons": identify each "accountable person" within their organisation, being a director or senior executive who exercises significant influence over conduct of and behaviour within the ADI, so that their names and roles can be registered with APRA on commencement of the BEAR;
  • Review Governance Structures and prepare Accountability Statements and Maps: review their governance structures and prepare accountability statements and accountability maps which will need to be provided to APRA and kept updated; and
  • Revise Remuneration Policies and Deeds of Indemnity: revise their remuneration policies and procedures (and Deeds of Indemnity) for "accountable persons", including to reflect the mandatory four year deferral of a component of remuneration required by the BEAR.

Which organisations will be affected?

The BEAR applies to all entities within a group with an ADI parent. Where a group has a non-ADI parent but ADI subsidiaries, BEAR will apply to the subgroup(s) under the control of the ADI(s).

This means that a number of APRA-regulated entities that are not ADIs, such as insurance companies and superannuation funds, will not be covered by BEAR unless they have an ADI parent. This point has attracted some criticism for its potential to distort business structures and competition, but although the Treasurer has the power to exempt certain ADIs from the operation of the BEAR, this approach remains a feature of the regime.

The BEAR will only apply to foreign ADIs to the extent of the operations of a branch of the foreign ADI in Australia.

In addition to the "big four" banks there are over 140 medium and small ADIs that will be affected by the regime.

Which bank directors and executives will be affected - who are the "accountable persons"?

The BEAR introduces the concept of an "accountable person", being a director, executive or other person considered to exercise significant influence over conduct of and behaviour within an ADI (accountable person). Accountable persons will be identified using a combination of prescriptive and in-principle criteria.

The in-principle criteria provide that an individual is an accountable person if they have senior executive responsibility for management or control of the ADI, or of a significant or substantial part or aspect of its operations.

The positions that are then further prescribed as accountable persons include the members of the board of the ADI, the CEO, CFO, COO, CIO (or CTO), Chief Risk Officer, Head of Compliance/Chief Compliance Officer, Head of Internal Audit, Head of Human Resources and the Anti Money Laundering Officer.

Under the BEAR, persons holding positions in Australian branches of foreign ADIs will be exempt from the prescriptive test of an accountable person, but foreign ADIs will still be subject to the in-principle test - so a person who has senior executive responsibility for the conduct of all of the activities of an Australian branch of the foreign ADI, or of a significant or substantial part or aspect of its operations, will be an accountable person.

Registration of "accountable persons" and "accountability statements" with APRA

Under BEAR, prior to appointing any person to an office where they could be deemed an accountable person, ADIs will be required to:

  • advise APRA of the potential appointment; and
  • provide APRA with an "accountability statement" which would detail the roles and responsibilities of the individual within the ADI.

APRA would then add this person's information to a non-public register, which it could use to determine whether a prospective appointee had any disciplinary record which might affect their suitability.

Importantly, the BEAR prohibits a person from being an accountable person if the person has not registered with APRA. If an application meets APRA's requirements for registration (discretion for which is given to APRA), APRA has 14 days from the date an application for registration is made to register the person as an accountable person.

Preparing and maintaining "Accountability Maps" - and reporting requirements

In addition to accountability statements, ADIs will also be required to provide an "accountability map" to APRA. This map must identify accountable persons in the ADI and their responsibilities, details of reporting lines and lines of responsibility, and must include "sufficient information" to identify the relevant accountable persons for specific issues and obligations.

ADIs will need to notify APRA within 14 days of any change to an accountability statement or map, as well as for a range of prescribed events (including if the ADI suspects that it has breached the broad accountability obligations referred to below).

New "accountability obligations" for ADIs and individuals

In addition to their existing obligations under the APRA Prudential Standards and the Corporations Act, accountable persons will be subject to a new set of "accountability obligations".

For ADIs, the obligations include taking reasonable steps to:

  • conduct their business with "honesty and integrity, and with due skill, care and diligence";
  • "in conducting its business, prevent matters from arising that would adversely affect the ADI's prudential standing or prudential reputation";
  • deal with APRA in an "open, constructive and cooperative way"; and
  • ensure that BEAR is complied with by the ADI's subsidiaries and by each of its accountable persons.

The personal obligations of individual accountable persons largely mirror or complement those of the ADI itself.

Noting that the new expectations have been criticised for being vaguely worded and subjective, ADIs will nonetheless need to:

  • modify current, or create new, internal processes for ensuring compliance with the new expectations; and
  • determine whether certain planned actions or conduct would be in breach of the new expectations.

Civil penalties, removal and disqualification

ADIs that fail to meet the new obligations under BEAR will face significant penalties, with maximum civil pecuniary penalties ranging from $10.5 million to $210 million depending on the size of the ADI, with ADIs to be classified as either small, medium or large pursuant to regulation.

Accountable persons will face similarly significant penalties should they fail to meet the obligations. In addition to APRA's extant power to direct an ADI to remove a director or senior manager under threat of losing authority to carry on banking practices, the BEAR grants APRA power to summarily disqualify accountable persons from acting in their positions within ADIs.

This enhances APRA's current disqualification powers, which only allow it to apply to the Federal Court for a disqualification order; and would also extend the scope of these powers from directors and senior managers to all persons falling within the broader definition of accountable persons.

That being so, APRA will be required to notify the relevant person in writing before disqualifying them, and to grant them an opportunity to make submissions related to the proposed disqualification. The BEAR also provides for merits review of a decision by APRA to disqualify an individual.

Mandatory four-year deferral of a portion of remuneration for "accountable persons"

The BEAR requires that the lesser of 60% of bank CEOs' variable remuneration, and 40% of their total remuneration, be deferred for a specified period. These requirements fall to and 40% of variable remuneration or 20% of total remuneration for other accountable persons in large and medium ADIs, and 40% of variable remuneration or 10% of total remuneration for small ADIs.

For all of these individuals, the relevant proportion of their remuneration will be required to be deferred for at least four years; the rationale being that this period is sufficient to cause ADIs and their stakeholders to fully realise the impact of risk-taking behaviour and to adjust variable remuneration accordingly.

The BEAR provides that these changes need to be reflected in remuneration policies from 1 July 2018 - which will require a significant review of remuneration within the organisation to be undertaken.

Insurance restrictions

An ADI is prohibited from taking out insurance against any consequences of breaching the BEAR.

In addition the BEAR prohibits ADIs from:

  • indemnifying accountable persons against the consequences of breaching BEAR; or
  • paying for insurance against such consequences.

However, the prohibition does not apply to liability for legal costs.

ADIs will need to review their insurance policies and any deeds of indemnity with directors and officers to reflect the BEAR.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Australia
Sparke Helmore Lawyers
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Norton Rose Fulbright Australia
Sparke Helmore Lawyers
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions