Australia: BEAR essentials - 2018 a big year for banking reforms

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is underway and Australian banks, superannuation providers and insurance companies are gearing up for an eventful year to ensure they are aware of Australian Prudential Regulation Authority's (APRA) policy priorities for 2018 and authorised deposit-taking institutions' (ADI) new accountability obligations under the Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2018 (BEAR).

APRA priorities for 2018

The 2018 APRA priorities have been announced and are aimed at strengthening the prudential framework across the banking, superannuation and insurance industries.


Minimum regulatory capital requirements for banks and other ADIs in Australia are designed to reflect inevitable risks in their business and ensure they hold a minimum amount of capital to absorb any potential losses. APRA is beginning public consultation on changes to its prudential requirements for minimum ADI capital, in accordance with the Basel III reforms and meeting the objectives of unquestionably strong capital.

Later in 2018, APRA expects to start consultation on proposals to implement the Financial System Inquiry's recommendation for a framework that minimises loss-absorption and that creates credible alternatives to using taxpayer funds to resolve a bank. APRA also plans to finalise requirements for counterparty credit risk—that were previously subject to consultation—for intended implementation in 2019.


In early 2018, APRA will consider submissions in response to its December 2017 consultation package, which outlined proposals to strengthen superannuation member outcomes, namely through changes to the existing Prudential Standard SPS 220 relating to strategic planning and fund expenditure policies, and Prudential Standard SPS 250 to require registrable superannuation entity licensees to provide straight-forward processes for opting-out of all insurance products.


While the insurance policy agenda for 2018 remains otherwise stable, APRA notes its intention to update aspects of the reinsurance framework for life insurers, including approval requirements for certain types of reinsurance arrangements under Prudential Standard LPS 230.

Despite a strong focus on accountability and remuneration within ADIs in previous years, APRA has acknowledged the lack of necessity to make any related reforms given the introduction of the new banking executive accountability regime.

New accountability obligations for ADIs

The Federal Government announced a comprehensive package of reforms designed to enhance accountability and competition in the banking sector under its 2017-2018 Budget. On 20 February 2018, the BEAR received royal assent to amend the Banking Act 1959 (Cth), which will take effect from 1 July 2018.

Drawing inspiration from the UK's Senior Managers Regime and Hong Kong's Managers-in-Charge measures, the new regime will require ADIs and their subsidiaries to meet a number of new accountability obligations, restrict the variable remuneration of certain executives and be subjected to a greater range of penalties under the APRA's increased powers.

These obligations will apply to all Australian banks, Australian branches of foreign banks, subsidiaries and overseas branches of Australian ADIs, and will be imposed on "accountable persons" that have "management or control of a significant or substantial part or aspect of the operations of the ADI...and its subsidiaries" (including CEOs, CFOs and internal audit managers). Unlike the UK regime, these obligations are not currently imposed on insurers and superannuation funds.

How to prepare for your new obligations

Large financial institutions will need to ensure their BEAR compliance by 1 July 2018, while smaller and medium sized institutions will be given an extra 12 months to account for the comparatively limited resources they have available to make the necessary adjustments within the short timeframe.

To avoid being penalised, ADIs will need to:

  • conduct their business with honesty and integrity, due skill, care and diligence
  • deal with APRA in an open, constructive and cooperative way
  • prevent matters from arising that would adversely affect their prudential standing or reputation
  • take reasonable steps to ensure each of their accountable persons meet the above obligations
  • defer a percentage of the variable remuneration (which typically comes in the form of bonuses) of accountable persons for a minimum of four years, to ensure accountable persons do not engage in non-compliant behaviour
  • have in place a remuneration policy that proportionately reduces accountable persons' variable remuneration if they fail to comply with their obligations
  • register their accountable persons with APRA on a regular and ongoing basis
  • provide APRA with an accountability statement that accurately describes the functions and responsibilities designated to newly registered accountable persons
  • provide APRA with an "accountability map" containing the names of all accountable persons, their responsibilities and details of their reporting lines, and
  • notify APRA of any conduct (either by the ADI or an accountable person) that falls short of any of the above accountability obligations.

The penalties for a failure to comply

One of the most notable changes to the Banking Act will be the new powers conferred on APRA to:

  • ask the Federal Court to impose civil pecuniary penalties for breaches of the BEAR, with smaller ADIs being potentially held liable for $10.5 million and larger ADIs being held liable for up to $210 million (depending upon the seriousness of the breach and the size of the ADI), and
  • disqualify a person from acting as an accountable person for breaching the BEAR, for a period that APRA considers appropriate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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