In brief - APRA regulated financial institutions should be aware of the changes from the BEAR to the FAR and other reforms proposed by Treasury
In 2020, we expect to see a number of the regulatory reforms arising from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry take effect.
One such reform is the extension of the Bank Executive Accountability Regime (BEAR) to all APRA regulated entities (see Recommendations 3.9, 4.12, 6.6 to 6.8), which has now progressed to a proposals paper by Treasury in the form of FAR (the Financial Accountability Regime).
The BEAR was enacted in February 2018, and set out in Part IIAA of the Banking Act 1959 (Cth). The BEAR establishes accountability obligations for authorised deposit-taking institutions (ADIs) and their senior executives and directors, and is administered by APRA.
Broadly, key responsibilities of the accountability regime under BEAR include:
- for each ADI to take reasonable steps to conduct its business with honesty and integrity, and with due skill, care and diligence, deal with APRA in an open, constructive and cooperative way and ensure that each of its accountable persons meets his or her accountability obligations
- the creation of a class of accountable persons comprising all directors of the board of an ADI, individuals with actual or effective senior executive responsibility for management or control of a significant or substantial part or aspect of the operations of the ADI or ADI group and individuals with senior executive responsibility for one of the particular responsibilities specified in the legislation
- registration of each accountable person with APRA
- the preparation of accountability statements
- it is not permitted to insure BEAR responsibilities (except for defence legal costs), and
- there are no BEAR private causes of action (and so in particular no class actions are available directly under BEAR)
An Australian branch of a foreign ADI must comply, with the senior manager or head of branch likely to be the responsible person.
Treasury's Financial Accountability Regime proposals
In the proposal paper published by Treasury, a comparison table for the BEAR and FAR is included (in Attachment A) with respect to responsibility and it is critical that APRA regulated financial institutions consider this. Of note are the following reforms:
- To expand the accountability regime to entities beyond ADIs and to include all general and life insurance licensees, all private health insurance licensees, all RSE licensees and licensed non-operating holding companies.
- For classification of entities as either core compliance entities or enhanced compliance entities, with asset size for the entity provided as a guide to whether the entity is classified as core or enhanced, complexity is also identified as a factor (but without further explanation). A core compliance entity is subject to reduced compliance and APRA identifies that it has found accountability maps and statements more beneficial to large and more complex institutions. Presumably, a core entity will not be required to meet these requirements.
- The inclusion of an indicative list of particular responsibilities for which a person may be an accountable person, potentially increasing the number of persons within an institution that are accountable persons.
- The inclusion of a product responsibility obligation. Recommendation 1.17 of the Royal Commission provided that (after appropriate consultation) APRA should determine for the purposes of section 37BA(2)(b) of the Banking Act, a responsibility, within each ADI subject to the BEAR, for all steps in the design, delivery and maintenance of all products offered to customers by the ADI and any necessary remediation of customers in respect of any of those products.
- Enhanced penalties (a further shift away from the "white collar paradise").
The Royal Commission identified a number of deficiencies with respect to ADIs' management of their product responsibilities and the absence of clear end-to-end accountability for product management. Recommendation 1.17 recommended that APRA, under the BEAR, determine a responsibility within each ADI for all steps in the design, delivery and maintenance of all products offered to customers and any necessary remediation for customers in respect of any of those products. APRA has commenced this work (with the release of a consultation letter in 2019) and the work and outcomes of the consultation will be subsumed into the FAR.
The Treasury consultation proposes product responsibility as a prescribed activity under which a person may be an accountable person. The extent of this obligation and its application to a person will be a matter for industry and Government to carefully assess.
Product governance is a strong theme for 2020
Financial product issuers, their boards and executives are being subject to heightened regulatory requirements, including the product design and distribution obligation, ASIC's product intervention power and active regulatory bodies.
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.