The BEAR – draft legislation muddies director accountabilty
09/10/2017
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Draft legislation to implement APRA’s the Banking Executive Accountability Regime was released for comment on 22 September. Missed it? Sorry, the deadline for responding ended on Friday 29 September.

The consultation period of only a week has been heavily criticised, with submissions likely to have only touched the surface of points stakeholders wanted to raise.

Nevertheless, Guerdon Associates has completed a submission to Treasury on the Exposure Draft (ED), with key points below.

Accountable Person Definition

The definition of accountable person builds on existing concepts of accountability and responsibility, such as ‘responsible person’, ‘director’ and ‘senior manager’ which are defined in APRA’s existing prudential standards and the Banking Act.

Under the definition, a person having significant influence over the conduct and behaviour of the entity and whose behaviour or conduct could pose risks to the business and its customers will be an accountable person.

The definition applies to ADIs and wealth management and insurance subsidiaries of ADIs unless the ADI is foreign owned – it appears that brand damage could be significant from non-bank subsidiaries, which infers a run on the banks deposits.

The definition stretches outside ADIs to executives working for non-ADI parent entities with ADI subsidiaries and reaches beyond executives to encompass mid-level managers who might manage small subsidiaries.

Non-executive directors will be “accountable persons” in regard to their oversight functions. One wonders if the oversight functions now subsumed by the BEAR (e.g. recruitment and selection and pay of senior executives) will be assessed by APRA, and if found wanting, could they sack themselves? One could question whether after having their appointment decisions approved by APRA directors could be found in breach of their obligations at all.

According to the legislation, the accountability obligations relate to conduct or behaviour that is systemic and prudential in nature with the obligations of accountable persons being a function of their role, the systemic nature of reasonable steps, and relating to prudential matters.

It is questionable, however, whether the managers accountable for outdated definitions of certain medical conditions from insurance policies could be considered as prudential apart from the effect of the resulting scandal on the bank’s reputation. This exemplifies the limits of the legislation.

Deferral of Variable Remuneration

A proportion of variable remuneration must be deferred for up to 4 years. This proportion can apply to the lesser of:

  • a set proportion of incentive remuneration; or
  • a lower set proportion of “total remuneration”

(In the original proposal, there was no choice – the deferral was to be a proportion of variable remuneration. The change takes note of an initial Guerdon Associates BEAR submission see HERE)

The proportion of remuneration to be deferred also varies by role and size of ADI, as outlined in the following table:

If the accountable person is … … the amount is
The CEO of a large ADI. The lessor of 60% of variable remuneration for the financial year or 40% of total remuneration for the financial year.
An accountable person (other than the CEO) of a large ADI, or of a subsidiary of a large ADI. The lesser of 40% of variable remuneration for the financial year or 20% of total remuneration for the financial year.
An accountable person of a medium ADI, or of a subsidiary of a medium ADI. The lesser of 40% variable remuneration for the financial year or 20% of total remuneration for the financial year.
An accountable person of a small ADI, or of a subsidiary of an ADI. The lesser of 40% of variable remuneration for the financial year or 10% of total remuneration for the financial year. If the minimum amount of remuneration to be deferred, as calculated under the above table, is less than $50,000 a year, the ADI is not required to defer the remuneration.

Issues regarding the deferral requirements include:

  • There is no capacity to calculate the deferral percentage for those ADIs that determine their variable remuneration on a profit share basis (e.g. Macquarie Bank). Such ADIs are unable to determine the total remuneration or the variable remuneration for an individual at the beginning of the financial year.
  • The draft does not provide for the scenario where the executive’s variable remuneration is subject to shareholder approval and that approval is not received (and there is no cash alternative). For example, an executive’s total remuneration opportunity may be offered at the beginning of the financial year with the equity components conditional on subsequent shareholder approval. If shareholder approval is not received, the cash component of any variable remuneration is all that remains available for deferral. This would seem to be outside the intention of the ED.
  • It is not clear whether the reference to ‘granting’ is the time at the beginning of the financial year when an executive is advised of the opportunity to be subsequently awarded variable remuneration when objectives have been achieved [1], OR the time when the award is actually granted (typically within 3-4 months after the end of the financial year. The times at which the equity component of a deferred short term incentive and a long term incentive for the financial year is ‘granted’ can be two different dates and may be up to 18 months apart. However, the executive may be offered the short-term incentive and the long-term incentive opportunities for the financial year at the same time (i.e. at the start of the financial year).
  • There is no provision for the reduction of variable remuneration or repayment of variable remuneration in circumstances when a person who was accountable at the time a prudential failing occurred is not an accountable person when the issue surfaces. If that person has left the company, their deferred remuneration may have been forfeited, so that there is no option to withhold that remuneration. If the person left the organisation to join another, they may have even received a sign-on grant to compensate them for the loss of the deferred remuneration, which would not be covered by the legislation. If the new company was a non-ADI, APRA’s new powers to disqualify the executive would also not be applicable. APRA does have existing powers to disqualify an individual from holding prudentially significant roles within APRA regulated entities, but they are not applicable for the same gamut of roles as the new powers.

Exemptions

APRA can agree to defer the remuneration of a specific accountable person for less than four years, discretion the government expects to be employed following death, incapacitation, disablement or illness. This is a major intrusion in the discretionary powers exercised by a board on remuneration matters. Perhaps the remuneration committee directors could just invite APRA to the meeting, vacate the room, and come back after APRA has managed this part of the business for them.

Unexpectedly, a Minister can exempt an ADI from the obligations under the legislation, rather than APRA exercising its judgement as an independent statutory body. This in effect makes exemptions a political rather than a prudential judgement.

Penalties

The maximum penalty available will depend on the size of the ADI. For large ADIs the maximum penalty will be 1 million penalty units, (currently $210 million), for medium ADIs the maximum penalty will be 250,000 penalty units (currently $52.5 million) and for small ADIs the maximum penalty available will be 50,000 penalty units (currently $10.5 million).

To ensure that breaches of the BEAR have meaningful consequences on ADIs and accountable persons, indemnification against the financial consequences of breaching the BEAR is prohibited. That is, directors’ professional indemnity insurance will not cover breaches.

[1] This is the generally accepted basis for accounting expense accrual purposes

© Guerdon Associates 2020
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