Banking Executive Accountability Regime (BEAR) legislation released

We covered the Federal Budget announcement in our May 2017 Financial Services Update and the subsequent consultation paper in our July 2017 Financial Services Update.

BEAR will raise substantially the risk to which authorised deposit-taking institutions (ADIs) and their most senior and influential directors and executives are exposed.  This is through the introduction of civil penalties with high monetary thresholds for ADIs and, for individuals, new powers for disqualification and loss of deferred remuneration.  All ADIs will be affected, including foreign ADIs with Australian branch operations.  BEAR's impact will extend beyond banking activities to other activities of the bank's corporate group, whether in Australia or elsewhere.

In our comprehensive report, we outline key elements of BEAR and issues that arise for banks and senior individuals.  Read the whole article for an overview of the regime, or click on a link below to go straight to an area of interest:

What is BEAR?

BEAR is the Government's attempt to improve the operating culture of ADIs and to increase transparency and accountability in the banking sector. It does this by setting out new accountability obligations in the Banking Act 1959 (Cth) (Banking Act). The regime will be administered by the Australian Prudential Regulation Authority (APRA) and includes a number of measures that are similar to the UK's Senior Manager Regime (SMR). BEAR will commence on 1 July 2018, other than for certain transitional arrangements for remuneration.

Who is affected – Australian incorporated ADIs and their subsidiaries

BEAR will apply to all Australian incorporated ADIs and each of their subsidiaries (including off-shore and non-ADI subsidiaries).

It will extend to the non-banking activities of ADI groups, capturing for example large insurance, superannuation or wealth management arms within vertically integrated business structures.  Competitors, which are not part of an ADI group, will not be subject to the regime.  Many who are affected by BEAR have objected to the competition distortions in the industry that this will introduce.

Who is affected – Australian branches of foreign ADIs

Australian branches of foreign ADIs are caught by the regime. This includes the non-banking operations of these branches.  Foreign branches are obliged to comply with BEAR only to the extent required by their operations and presence in Australia.

However, a foreign ADI's offshore operations, and locally incorporated non-ADI subsidiaries, are not subject to BEAR.  Nor are branches of subsidiaries of foreign ADIs that are not incorporated in Australia.

Who is affected – Accountable persons

BEAR imposes heightened obligations on individuals with significant influence over conduct and behaviour in an ADI, who are defined as 'accountable persons'.  An accountable person includes a Board member with oversight over the ADI or a senior executive with responsibility for management or control of significant or substantial parts or aspects of the ADI group's operations.  Accountable persons must be identified for the ADI itself and also be identified for significant or substantial subsidiaries.

More specifically, an accountable person is defined under BEAR by reference to a general principle and by reference to listed functions or responsibilities.

Principles based element

Under the principles based element, an individual will be an accountable person if have actual or effective senior executive responsibility for management or control of the ADI or a significant or substantial part of the ADI group's operations.

The Government has indicated that only the most senior individuals who have significant influence over conduct and behaviour, and not those who are simply in a management role, will be an 'accountable person'.  This is reflected in the use of the term 'senior executive', which denotes an ability to create a prudential impact as a result of the individual's decisions.  This could include the head of a significant or substantial business line within the ADI or a significant or substantial subsidiary or a major business activity in that subsidiary.

Note that contractors may be caught within the definition of an accountable person.

Prescribed element

An accountable person of an ADI is also defined with reference to the following list of particular responsibilities:

The focus of the prescribed list is on those most likely to have oversight or senior management responsibility for the ADI.  Depending on its size, business operations, customer base and presence in the Australian market, an ADI may not necessarily have a separate person corresponding to each of the functions listed in the above table.

Key obligations – ADIs

Under BEAR an ADI will be obliged 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 co-operative way;
• prevent matters from arising that would adversely affect the ADI's prudential standing or prudential reputation;
• ensure that each of its accountable persons meets his or her accountability obligations; and
• ensure that each of its subsidiaries that is not an ADI complies with the above obligations as if it were an ADI.

According to the Explanatory Memorandum for the Bill, in considering whether an ADI has met its accountability obligations, APRA will consider an ADI's actions and its behaviour from a prudential perspective.  Actions taken by an ADI that protect the ADI and its customers from a prudential standpoint are consistent with the accountability obligations. 

The ADI's obligation to deal with APRA in an open, constructive and co-operative way does not displace its legal professional privilege, to the extent permitted by law and the ADI acts in a way which is consistent with the maintenance of that privilege.

The Government has stated its intention that BEAR complement the existing regulatory framework.  This includes the Australian Securities and Investment Commission's (ASIC's) role in regulating market conduct, the duties placed on directors under the Corporations Act 2001 (Cth) (Corporations Act) and APRA's existing prudential framework and standards (including its Fit and Proper person framework).

It will be necessary to construe terms used in the Bill, including by reference to other laws and case law where appropriate.  Rules, guidance and enforcement outcomes relating to similar terms used in the UK SMR and Hong Kong Manager-in-Charge regimes will potentially be of assistance.

What is clear is that the obligations are cast in very general terms, and these terms will commonly be applied by APRA with the benefit of hindsight following a significant event which may impact the operations, prudential standing or reputation of the bank.  It will be important for banks to be able to demonstrate the steps they took to evidence that the obligations have been discharged.

Key obligations – Accountable persons

Accountable persons are obliged under BEAR to:

• conduct the responsibilities of their position with honesty and integrity and with due skill, care and diligence;
• deal with APRA in an open, constructive and co-operative way; and
• take reasonable steps in conducting those responsibilities to prevent matters from arising that would adversely affect the prudential standing or reputation of the ADI.

In somewhat of an anomaly, the requirement on ADIs to take 'reasonable steps' to comply with their accountability obligations does not apply to the corresponding obligations of accountable persons.

The Government has indicated that the accountability obligations cover conduct or behaviour that is of a systemic or prudential nature, both because of the seniority of accountable persons and because the content of the obligations relates to prudential matters, such as integrity, professional conduct and governance arrangements.  However, there is a risk that the Bill as drafted could apply equally to one-off, non-systemic behaviour.

ADIs and accountable persons will need to consider their obligations under BEAR alongside APRA's Prudential Standard CPS 520 Fit and Proper.  APRA may update CPS 520 to reflect the new BEAR expectations.  ASIC will continue to regulate instances of poor conduct or behaviour.

As with the obligations imposed on banks, it will be important for accountable persons to be able to demonstrate the steps they took to evidence that their personal obligations have been discharged.

Key obligations – Reasonable steps

The Bill provides guidance about what constitutes reasonable steps in relation to a matter to meet the accountability obligations, and this includes having:

• appropriate governance, control and risk management in place;
• safeguards against in appropriate delegations of responsibility; and
• appropriate procedures for identifying and remediating problems that arise or may arise.

The Government considers that because of the seniority of the role of accountable persons, reasonable steps are systemic in nature.  Furthermore, the reasonable steps that an accountable person could take to meet their accountability obligations should be considered in terms of that person's functions or responsibilities.  Following appropriate consultation, APRA may issue further guidance on what factors it would consider in determining reasonable steps and the behaviour and conduct it expects will meet the accountability obligation.

Giving specific content to this guidance will be key.  We are able to assist our ADI clients to consider, for example, how they should design and support conduct governance to demonstrate that they are identifying, measuring and managing culture and conduct risk, including on a forward looking basis.  This includes demonstrating that effective front office supervisory mechanisms are in place.

The Bill does not explain what 'appropriate' means, either in relation to delegation or procedures for identifying and remediating problems..  The Government has stated that it could include having an effective process to determine whether a person has sufficient experience and judgement to undertake a particular responsibility.  In this context, it may be of assistance to consider the references to reasonable delegation and reliance on others in the Corporations Act and associated case law (although noting that the Government has deliberately refrained from aligning the Bill with sections 189, 190 and 198D of the Corporations Act).  It will also be helpful to reflect on the approach to delegation adopted under the UK SMR, which includes ensuring that those to whom matters are delegated have the competence, knowledge skill and time to deal with the issue, challenging explanations received from a delegate when necessary and taking action to resolve problems that arise (such as by reassigning the resolution internally or obtaining external advice or assistance).

Key personnel obligations – ADIs

ADIs will be required to ensure that the responsibilities of their accountable persons cover all parts or aspects of the ADI group's operations and each of the prescribed responsibilities referred to above.  Given that responsibility for an ADI's group operations will be concentrated in the hands of a number of senior accountable persons, clearly defined delegations of responsibilities to those further down the management chain will be particularly important.  APRA may direct an ADI or its subsidiary to reallocate these responsibilities if APRA has reason to believe that an allocation is likely to give rise to prudential risk.

ADIs must ensure that none of their accountable persons are prohibited under the Bill.  A person is prohibited from being an accountable person if they are not registered as such with APRA, or if they are disqualified.  Temporary vacancies may be filled for up to 28 days (or such other time as APRA permits) prior to registration (which means applications to register those filling temporary vacancies must be made within 14 days of appointment, because registrations take effect 14 days after the application is made to APRA).  A transitional provision also applies for individuals who hold a position that mean they are an accountable person on 1 July 2018.  An ADI has up to 90 days after that date to register a person as an accountable person before the person would become prohibited if they are not registered.

An ADI must take reasonable steps to ensure subsidiaries comply with the key personnel obligations as if the subsidiary were an ADI.

Remuneration obligations – ADIs

The Bill imposes a statutory obligation on an ADI (including in respect of its subsidiaries) to defer a proportion of an accountable person's variable remuneration granted on or after 1 January 2019 (or for payments made under existing contracts, on or after 1 January 2020).  The proportion that must be deferred will vary depending on the size of institution and the individual's level of seniority.  By way of example, CEOs at large ADIs must have deferred, as a minimum, the lesser of 60% of their variable remuneration or 40% of their total remuneration for the relevant financial year.  Other accountable persons at large ADIs and their subsidiaries must have deferred, as a minimum, the lesser of 40% of their variable remuneration or 20% of their total remuneration for the relevant financial year.  Variable remuneration will be deferred for four years, unless APRA approves a shorter period.

APRA has the power to determine how variable remuneration should be valued in respect of one or more accountable persons of a particular ADI or subsidiary of an ADI, or for a class of ADIs or class of subsidiaries.

ADIs must have a remuneration policy in place by 1 July 2018 that provides for an accountable person's relevant variable remuneration to be deferred and reduced by an amount that is proportionate to any failure by that person to comply with their accountability obligations.  ADIs must take reasonable steps to ensure that their subsidiaries comply with the deferred remuneration obligations as if the subsidiary were an ADI.

Notification obligations – ADIs

ADIs are required to provide APRA with:

• an accountability statement for each accountable person comprehensively detailing their responsibilities and the business to which they relate; and
• an accountability map including the names of all accountable persons of the ADI or subsidiary, their responsibilities and details regarding reporting lines.

Accountability maps and statements should show the governance and management controls in an ADI and show the organisation's lines of accountability.  They are not intended by the Government to be viewed as compliance documents, but rather tools of good governance which illustrate that the ADI has appropriate accountability checks and balances in place and accountable persons roles are allocated appropriately according to the size, complexity and customer base of the ADI.

APRA must be notified of:

• changes to the accountability statement or accountability map;
• a person ceasing to be an accountable person;
• the ADI becoming aware that it has breached its accountability obligations, or an accountable person has breached his or her accountability obligations;
• the dismissal or suspension of an accountable person because the person has failed  to comply with his or her accountability obligations; and
• the reduction of the variable remuneration of an accountable person of the ADI or its  subsidiary.

Unless APRA determines another period by legislative instrument, an ADI has 14 days to meet its notification obligations.

APRA will establish and keep a register of accountable persons which will include details of (among other things), any disqualification of the person by APRA and any direction APRA has given in relation to the person (if they are a director or senior manager) to remove them from office or to ensure that they do not take part in the management or conduct of the business of the ADI or a subsidiary except as permitted by APRA.

APRA's register of accountable persons is not a public document or a legislative instrument.  Information provided to APRA under BEAR is subject to confidentiality provisions in the Australian Prudential and Regulation Authority Act 1998 (Cth) (APRA Act).  This means that APRA can disclose the information to an ADI, to the accountable person to whom the information relates and APRA may make any other disclosures permitted by the APRA Act, including where it has disqualified a person under BEAR.

Transitional provisions apply which give APRA the power to determine, by legislative instrument, the information that can be supplied during the first 18 months of BEAR for an ADI to meet its obligations to provide an accountability map and accountability statements to APRA.

Inconsistent foreign laws – ADI's

If an ADI has obligations and requirements under a corresponding foreign law, such as the UK SMR, and APRA is satisfied that compliance obligations under BEAR would be inconsistent with the law of a foreign country, then APRA may give the ADI a written notice specifying its BEAR obligations to the extent of any inconsistency with the law of that country.  The ADI is then not required to comply with the obligation as specified.

Penalties – ADIs and subsidiaries

If ADIs breach any of their obligations under the BEAR Act, and the contravention relates to a prudential matter, they may be liable to a pecuniary civil penalty.

The maximum amount of this penalty will differ depending on the size of the ADI, ranging from a maximum of $210 million for large ADIs to $10.5 million for small ADIs. The Government has indicated an intention to determine what constitutes a small, medium or large ADI by legislative instrument such that, on a three year average, large ADIs will have $100 billion or more in total resident assets, medium ADI's would have between $10 billion and $100 billion in total resident assets and small ADIs would have $10 billion or less in total resident assets.

The Government expects that APRA would only seek a civil pecuniary penalty for significant breaches of BEAR.  A civil pecuniary penalty must be imposed by a court.  The court will determine the amount of the penalty with regard to the seriousness of the failure, which the Government considers will include consideration of the potential harm to consumers and other financial market participants, the damage to public confidence in the financial system resulting from the failure, (such as maintaining fundamental standards of honesty and integrity, which result in prudential and systemic harm).  APRA has six years from the date of the misconduct to start court proceedings for a breach of the BEAR.

An ADI or a subsidiary of an ADI will also be held liable for an offence under BEAR if they allow a disqualified person to be appointed as an accountable person. This is the only matter under the Bill for which subsidiaries may be financially liable for penalties.  If a subsidiary fails to comply with the other obligations under the regime, and the ADI has failed to take reasonable steps to ensure the subsidiary's compliance, the ADI could be financially held to account.

Consequences for accountable persons

A breach of the accountability obligations by an accountable person could result in either:

• a decrease in that person's variable remuneration; or
• disqualification by APRA for a period that APRA considers to be appropriate.

These consequences are not limited to breaches which relate to 'prudential matters', as is the case for civil penalties for ADI breaches of the BEAR Act.

APRA may disqualify an accountable person if it is satisfied that the disqualification is justified, including having regard to the seriousness of the non-compliance.  The term 'justified' is not defined.  However, the Government may by legislative instrument determine the matters to which APRA may have regard when determining whether to exercise its disqualification power.

The Government has indicated that APRA's disqualification power under BEAR is consistent with its approach to the disqualification of senior managers, directors or auditors under the Banking Act.  Minor breaches or incursions would be unlikely to result in a disqualification.

APRA will be required to give written notice to the accountable person and the ADI regarding details of the alleged breach, the evidence relied on by APRA and the proposed period of disqualification and take into account anything provided by the person or the ADI.

Under BEAR, APRA's decisions to disqualify accountable persons, including to vary or revoke a disqualification, are subject to a merits review the Administrative Appeals Tribunal under Part VI of the Banking Act.

Amendments to the APRA Act allow APRA to publicly disclose information about a decision it has taken to disqualify a person, or the reasons for such a decision.  However, APRA is not obliged to release this information.

Civil claims

The Bill specifically states that it will not have the effect of creating a cause of action that would not have existed if it had not been enacted, closing off the possibility of civil actions, including large class actions, against ADIs or accountable persons for breaches of the obligations under BEAR.

APRA's enhanced examination powers

APRA will have enhanced examination powers to investigate potential breaches of BEAR.  These powers are extended to all of APRA's supervisory functions under the Banking Act.  APRA will be entitled to require a person to provide APRA with all reasonable assistance, including attending examinations before APRA, if APRA reasonably believes or suspects that a person can give information which is relevant to an investigation.

The examination powers allow APRA to require a person to appear before an investigator where the investigator reasonably believes the person has information relevant to an investigation, set out who can be present at an examination and how a person's lawyer may participate during an examination.  They empower an investigator to require a person to produce books, accounts or documents that may be relevant to an investigator.  The requirement to provide this information to APRA applies despite the material potentially incriminating the person.  However, if it has this effect, it will not be admissible as evidence against the individual in criminal proceedings or in proceedings for the imposition of a civil penalty, other than in proceedings in respect of the falsity of the information or a disqualification under section 21 of the Banking Act.  Similarly, a statement made during an examination is not admissible if it discloses a matter subject to legal professional privilege.

Books, accounts or document, or a signed record of an examination, can be used to gather evidence against the person under investigation or against a third party (for example, an employer, partner or alleged accomplice of the person).  Under existing provisions in the APRA Act, APRA can share records from an investigation subject to certain conditions in section 56 of the APRA Act.

Additional funding for BEAR

The 2017-2018 budget included additional funding for APRA of $4.2 million over four years from 2017-18 to implement the BEAR.  A further $1 million per year will be provided to APRA to enforce breaches.

Review of BEAR

The Minister will review the operation of BEAR in the second half of 2021.

How we can help you

Given the short implementation period for the regime, our ADI clients will need to clarify quickly how this legislation affects them and commence work on the BEAR implementation to ensure they are ready for the commencement of the obligations on 1 July 2018.  As mentioned above, it will be important for ADIs and their accountable persons to ensure they are able to demonstrate the steps they have taken to discharge their obligations under BEAR.  This requires there to be clear and effective governance structures and information flows in place.

We have significant depth advising banks in Australia on their regulatory obligations and requirements.  We also have extensive experience on the implementation of the UK SMR and Hong Kong Manager-in-Charge regimes, which have shaped the architecture of BEAR and will be instrumental in its interpretation and application.

We would be happy to assist our ADI clients and their senior directives and executives in implementing BEAR.  This includes:

• identifying accountable persons and preparing accountability statements and maps;
• advising on recommended changes to corporate governance structures and arrangements, to demonstrate compliance with the BEAR expectations, in line with allocated responsibilities;

• designing the required policies, procedures, training, reporting structures and management information access and flow protocols;

• briefing executives and other accountable persons on their potential liability under BEAR and other implications of the regime;
• advising on all employment, including remuneration, implications of the BEAR; and
• reviewing insurance arrangements (for ADIs and accountable persons).