APRA’s BEAR – hope that it hibernates a bit longer

In our Special Alert following the Budget we explained how the federal government has proposed APRA become the banks’ HR manager with the ability to in effect hire and fire bank executives and directors and mandate their pay.

Okay, if you think that may be a bit over the top, read on.

This article canvasses in more detail the potential implications of the Banking Executive Accountability Regime (BEAR, or the Regime) for the purpose of holding the banks, other Authorised Deposit-taking Institutions (ADIs). The Regime appears to echo the Senior Manager and Certification Regime (SM&CR) in the UK, which came into force last year. We explain below each of the proposals and highlight the matters ADIs will need to start consideration of.

There are over 140 ADIs in Australia, 42% of which are mutuals (credit unions or building societies) and 35% are foreign banks. This means the Regime is likely to have a far greater commercial impact on ADIs other than the big banks.

There are three significant components of the regime that herald an extension of the regulation of executive remuneration:

  • Registration: prior to appointing senior executives and directors, ADIs will need to advise APRA. Once appointed, these people must be registered with APRA and a map of the role and responsibilities of the senior executive must be provided to APRA.
  • New powers and penalties: APRA will have powers to deregister and disqualify senior executives and directors that have been found not to have met the new expectations. To facilitate this, APRA will require “conduct standards” for executives and directors – covering matters such as acting with integrity, due skill, care and diligence and acting in a prudent manner. New requirements will be established for the way in which banks, other ADIs and their executives conduct their business consistent with good prudential outcomes. There will be a new civil penalty enforced by APRA for ADIs that fail to meet these requirements. APRA will also be able to impose penalties if ADIs do not appropriately monitor the suitability of their executives to hold senior positions.
  • Remuneration: ADI’s will be required to defer a minimum of 40% of an executive’s variable pay – and 60% for certain executives such as the CEO – for a minimum period of four years. APRA is to be given stronger powers to require ADIs to review and adjust their remuneration policies when APRA believes such policies are producing inappropriate outcomes.

An optimist may think that the banks would have less HR overheads given that APRA will take on the functions of hiring, firing, setting and supervising performance standards, establishing pay policy and outcomes. Golly, even the board remuneration committee could take a well earned rest. Unfortunately, we have not encountered any bank optimists since the announcement.

What are the issues and implications?

Some of the issues and potential implications for consideration by the ADIs include:

  • In the short term, the introduction of the bank levy as part of the BEAR will impact the ability of executives to meet incentive targets. This will create headaches as banks seek to ensure executives maintain focus on board priorities. Does the board remuneration committee adjust targets, and incur the wrath of proxy advisers and investors for moving the goal posts? Or does it apply positive discretion to vest more reward? Or does it re-interpret the underlying earnings measure definition, that in any case few external stakeholders have taken time to understand, and if so, how to explain this?
  • In order to be competitive for attraction and retention, banks may move over time to reduce incentive pay and increase fixed pay. A variable cost such as incentives assists insulate banks against cyclical pressures and significant downturns. It encourages executives to control for volatility in earnings (something that some proxy advisers and institutional investors have failed to grasp). So regulation that reduces the extent of variable pay would be an unintended and unwelcome outcome.
  • The cost of talent may increase as affected executives seek compensation for the heightened scrutiny and regulator oversight, including the potential for career limitation.
  • If APRA becomes more prescriptive, following its European cousins, remuneration may become more homogenous, reducing competition.
  • Internal relativities will be difficult to manage when some executives are subject to BEAR oversight and others within the group are not, albeit the role and responsibilities may be closely aligned.
  • The personal accountability of the individuals who are subject to the Regime is likely to increase but may not follow organisational accountability e.g. you may have an executive under the BEAR reporting to their superior who is not subject to the Regime. Such structural misalignment may lead to greater risks and dysfunction for the ADI. Matrix structures and reporting are quite common and not likely to fit easily within the Regime.
  • The mapping and documentation of positions and people subject to the Regime, as well as the compliance reporting, will be a significant administrative cost and slow innovation and responsiveness just when disruptive technologies require otherwise.
  • As noted in our Budget Special Alert, those most impacted are likely to be the smaller ADIs where total pay and variable pay (STI and LTI) is much less than in the larger companies. Variable pay as a proportion of total pay in those organisations may come down to nothing or, conversely, increase.
  • APRA’s proposed power to remove and disqualify senior executives from APRA-regulated organisations is unprecedented and raises  questions around employment rights and protections.


The most likely response of mutuals will be to either to significantly increase their current modest variable pay arrangements in order to defer a significant proportion of it, or, to roll variable pay back into fixed pay and have no performance-related pay at all. These are probably not what the government intended and neither appear to be in the best interests of members.

It is unclear how the changes will impact foreign ADIs. We await the release of the draft legislation to see which executives will be subject to the regulation. For example, is the local CEO of a foreign bank subject to the CEO deferral requirement, or the broader executive requirement?

The proposed prescriptions will be a marked departure from decades of government that has tended to set principle-based rules for governance by owners and their representatives, but not actually prescribe how companies should be run. To date APRA has consistently shied away from being prescriptive. Given that they have charge of drafting the law, it will be interesting to see what they come up with.

It is not clear on what basis APRA will be able to reach a view that an organisation’s remuneration policies are not appropriate. It is widely acknowledged that remuneration-setting is considered an art, and board directors spend much time, effort and money seeking to get it right. Given the skill sets and knowledge are currently rare, it is difficult to see APRA acquiring or developing such expertise in the near future. Likewise, establishing and supervising conduct standards with the accompanying reward framework is incredibly complex, and is a science that only now behavioural economists and psychologists are only beginning to get to grips with.

Beyond the short term, it is difficult to not see similar regulation extending beyond ADIs to insurers and other APRA regulated entities.

The budget papers can be found HERE.

© Guerdon Associates 2024
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