APRA chairman Wayne Byers has indicated in a recent speech that the BEAR should hold no fears for Australian banks and their investors.
APRA has a history of establishing appropriate accountability frameworks for regulated institutions. The Banking Act 1959 already provides APRA with tools to promote this (such as the ability to remove and/or disqualify individuals from their roles) as do the APRA’s own prudential standards (which outline requirements in relation to governance, remuneration and the fitness and propriety of individuals).
Therefore, according to Mr Byers, the BEAR can be seen as a strengthening of the existing prudential framework. Although there is a range of new elements, it is not new territory.
Given the legislation is still being drafted, it is difficult to be precise about how the new regime will work. But, argues APRA, the core objective – establishing clearer accountabilities for, and expected standards of behaviour by, senior executives within banks – is difficult to argue against. And since he also stated that APRA’s regime was “limited” in comparison its international counterparts, it seems unlikely that the current proposals will be significantly softened before implementation.
Changes to the Banking Act will set out the overarching framework, to ensure that it achieves the government’s objective that the BEAR has ‘teeth’, but it will then be up to APRA to implement the framework through its supervision process.
Interestingly, Mr Byers inferred that changes may be made to supporting prudential standards in response to BEAR.
While it is clear that standards are in constant evolution as requirements and expectations change, it is a little concerning that the change is not coming from the independent regulator itself, but will rather be forced by the government via legislation. This could be said to place the independence of the watchdog into question and invites scrutiny that any additional standards are truly advancements on the current regime.
Byers noted that there have been questions raised about whether aspects of the new accountability regime will change the nature of APRA supervision, as APRA will be both supervisor and enforcer.
The answer, according to Mr Byers, is no. APRA intends to remain a supervision-led regulator, working to prevent problems rather than waiting for them to happen and placing blame after the event.
The idea is that the regulatory framework enables Boards and executives conduct their affairs in such a manner that intervention by APRA is not needed. It is a much better outcome, for example, that boards hold their executives to account for poor outcomes than have to rely on the regulator to do it for them.
If this approach succeeds, APRA’s powers should only need to be used rarely. Mr Byer’s observation is that this has been the experience in the UK, where a similar regime is already in place. Although there are strong powers for regulators if and when needed, the industry has responded by adjusting the way it operates so that the need for regulatory intervention has been quite limited.
It’s worth mentioning, however, that APRA is unlikely to remain the the only regulator with additional powers. A consultation paper has been released by Treasury on the ASIC’s ability to ban senior officials in the financial sector. It proposes that ASIC’s powers be extended from being able to ban individuals providing financial services to also being able to ban managers in financial services companies from being able to conduct any role within a financial services business.
This will have a broader application to the BEAR, being applicable to financial services businesses and holders of an AFSL.
Mr Byers’ full speech can be found HERE.
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