Australia: Banking Executive Accountability Regime (BEAR) becomes law

Services: Banking & Finance
Industry Focus: Financial Services

What you need to know

  • On 7 February 2018 the Senate passed the Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2018.
  • Under the regime known as the BEAR, ADIs and their subsidiaries will have additional obligations to conduct their business with integrity (and report on any failures), face restrictions in relation to variable remuneration of certain executives, and be subjected to a greater range of penalties under the increased powers of the Australian Prudential Regulation Authority (APRA).
  • Large financial institutions will need to be BEAR compliant by 1 July 2018, while smaller and medium sized institutions will have an extra 12 months to comply with the new regime.

In early 2017, the Federal Government announced in the 2017-2018 Budget a comprehensive package of reforms to strengthen accountability and competition in the banking sector.

On 22 September 2017, the Government released for public consultation an exposure draft of the Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2018 (Bill) to amend the Banking Act 1959 (Cth) to establish the BEAR. The BEAR is intended to strengthen the responsibility and accountability framework for the most senior and influential directors and executives in ADIs and their subsidiaries.

The BEAR aims to emulate and draw on elements of existing international responsibility and accountability frameworks such as the UK's Senior Managers Regime and Hong Kong's Managers-in-Charge measures.

There was a very short one-week consultation period for the draft Bill and Explanatory Memorandum.

Following its introduction to the House of Representatives on 19 October 2017, the Bill was referred to the Senate Economics Legislation Committee (Committee) which released its report on 24 November 2017.1 The Committee recommended that the Bill be passed into law, but also recommended that the commencement of the BEAR be delayed.2

On 7 February 2018, the Bill passed the Senate and will take effect from 1 July 2018. This short implementation timeframe is ambitious (by comparison, the equivalent regime in the UK had a three-year implementation period) having regard to complexity of the regime and the significant amount of work that will be required to ensure compliance with the BEAR's obligations.

Who will be impacted by the BEAR?

Obligations will be imposed upon:

  • ADIs including all Australian banks and Australian branches of foreign banks, subsidiaries of ADIs (including those which provide non-banking services) and overseas branches of Australian-based ADIs.
  • 'Accountable persons', defined as individuals holding particular positions in an ADI and having a certain level of responsibility including the chief executive officer, chief financial officer, head of internal audit, and anti money laundering officer amongst others.

The extension of the definition of 'accountable persons' to include non-executive directors has been questioned by some industry professionals, due to the existing obligations that apply to directors and the inherent oversight role performed by non-executive directors. The BEAR will apply to a non-executive director's performance of an oversight function, rather than day-to-day executive and management functions. This can be contrasted with the BEAR's coverage of an executive director's oversight roles and executive and management functions.

Insurers and superannuation funds are not currently subject to the BEAR, and there are no current plans to extend the BEAR's remit. In contrast, the UK legislation targets both ADIs and non-ADIs.

What obligations will the BEAR introduce?

ADIs will:

  • be required to register their accountable persons with APRA on an ongoing basis.
  • have ongoing obligations to provide APRA with accountability statements each time an accountable person is registered. An accountability statement is a comprehensive description of the areas of responsibility attributable to management roles in an ADI and its subsidiaries. These statements should align with the accountable person's functions and responsibilities.
  • be expected to provide APRA with an 'accountability map' containing the names of all accountable persons, their responsibilities, and details of their reporting lines.
  • need to comply with remuneration obligations, explained in more detail below
  • take reasonable steps to ensure that:
    • each of the ADI's accountable persons complies with their accountability obligations
    • each of the ADI's subsidiaries complies with the same obligations.

Obligations that will apply to both ADIs and 'accountable persons' are to:

  • act with honesty, integrity, and with due skill, care and diligence
  • deal with APRA in an open, cooperative and constructive way
  • take reasonable steps in conducting business to prevent matters from arising that would adversely affect the ADI's prudential standard or reputation.

The BEAR requires that APRA be notified of any conduct (either by the ADI or an accountable person) which falls short of the above standards of conduct. Identifying the reporting threshold may be challenging in practice.

What are 'reasonable steps'?

Several of the obligations are predicated on ADIs taking 'reasonable steps'.

The Bill has provided a non-exhaustive list of what constitutes a 'reasonable step', including ensuring that:

  • there is appropriate governance, control and risk management
  • any delegations of responsibility are appropriate
  • there are appropriate procedures for identifying and remediating problems that arise or may arise.

'Prudential standard or reputation' and 'honesty, integrity, and with due skill, care and diligence' – what does it all mean?

The terms 'prudential standard or reputation' and 'honesty, integrity, and with due skill, care and diligence' are not defined in the BEAR. According to the Explanatory Memorandum, the ordinary meanings of these terms should be well understood, and ADIs and accountable persons should be guided by how these terms have been interpreted in 'established case law'.

What do the remuneration obligations involve?

The BEAR introduces new requirements obliging ADIs to defer a percentage of the variable remuneration (in the nature of bonuses) of certain accountable persons for a minimum of four years, for the purpose of ensuring that an accountable person does not engage in behaviours inconsistent with their BEAR obligations. The deferral amount varies from 10%-60% depending on multiple factors, such as the size of the ADI and the accountable person's position.

ADIs will also need to have a remuneration policy in force that requires a person's variable remuneration to be reduced if the person has failed to comply with their accountability obligations. The amount of the reduction is to be proportionate to the failure or likely failure.

Further, APRA will also have the power to require ADIs to review and adjust remuneration policies of certain accountable persons if APRA believes these policies are producing inappropriate outcomes.

Penalties

APRA will have new and strengthened powers to:

  • remove and/or disqualify persons from ADIs for breaching the BEAR
  • seek a civil penalty for a breach of the BEAR, ranging from $10.5 million for smaller ADIs to $210 million for larger ADIs.

Although APRA is the body that determines whether or not a breach has occurred under the BEAR, it is the Federal Court that determines and imposes the appropriate civil pecuniary penalty. The Court will need to consider the seriousness of the breach and the size of the ADI when determining the quantum of the penalty.

If a person is disqualified by APRA for breaching the BEAR, that person will have a right of appeal to the Federal Court.

Commencement of the BEAR

Large ADIs must comply with the BEAR from 1 July 2018. Smaller and medium sized ADIs will have another year to comply, commencing on 1 July 2019. The Treasurer, Scott Morrison is reported to have said that the reason for the year-long exemption from the BEAR on smaller institutions is because smaller ADIs were not the real target of the regime and would also lack the resources to make the necessary adjustments within the shorter timeframe.3

The BEAR is the latest in a long line of regulatory changes to impact the banking industry since the global financial crisis. To the extent that it mirrors longstanding international norms, the BEAR will bring Australia's banking industry into line with regimes in other financial markets. That said, legislation such as the BEAR and that establishing Australian Financial Complaints Authority (see our previous update on the AFCA here) represent an uptick in regulation of the banking sector which will continue alongside the Royal Commission into the financial services sector which has recently begun. For more on the Royal Commission, you can read our previous update here.

This article is intended to provide commentary and general information. It 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 article. Authors listed may not be admitted in all states and territories

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