The BEAR has arrived

On 19 October 2017, the Treasurer introduced the Banking Executive Accountability Regime (BEAR) into Parliament. The BEAR imposes heightened accountability obligations on accountable persons at Authorised Deposit-taking Institutions (ADIs).

In the Second Reading Speech the Treasurer said,

“Banking executives share responsibility for the stewardship of the Australian economy and they make decisions that impact upon the lives of ordinary Australians who have no choice other than to engage with the system they help run. As a consequence, the community reasonably expects higher standards of accountability and integrity of banking directors and executives.

“The (Banking Executives Accountability Regime) ensures that where… community expectations are not met, appropriate consequences will follow. It makes clear individual accountabilities so that it is clear where the buck stops in decision making and responsibility.”

The Bill has been referred to the Senate Economics Legislation Committee, which is due to report on 24 November.

Impacts and consequences

The proposed BEAR legislation is the most significant legislative change to executive remuneration and governance since the introduction of the two strikes rule in 2009, and signifies a departure from previous government’s reluctance to prescribe how executives are paid. Therefore, by prescribing aspects of executive remuneration, it abrogates an important director governance accountability.

As it stands, the BEAR applies to Australian Deposit-taking Institutions (ADIs).This is something that even APRA contends will not likely last. In its submission to the Senate Standing Committee on Economics (see HERE), APRA indicated that it will most likely resort to its prudential standard setting powers to bring other prudentially regulated industries into line with BEAR. For example, APRA also stated that “there are aspects of the accountability regime that could be applied over the longer term to other APRA-regulated industries. For example, the concept of accountability maps and statements may enhance an APRA-regulated entity’s governance and risk management by establishing a clearer view of accountabilities.”

APRA has an existing framework for determining the fitness and propriety of individuals holding positions of responsibility in APRA-regulated institutions, found in CPS 520. This is a wider group of individuals than will be covered by the BEAR. APRA stated in its submission to the Senate Committee that it will be assessing the existing requirements with a view to streamlining requirements and avoiding duplication. APRA expects that, at the least, it will align the APRA notification process.

Executives of ADIs and their subsidiaries will be very concerned to ensure they understand their responsibilities and accountabilities and, in particular, have the authority to manage so they can meet their accountability obligations.

The potential for reputational damage and loss of career will weigh heavily on the minds of executives being recruited, as well as those who are soon to be registered with APRA as accountable persons.

An outcome may be a significant stratification of remuneration in ADIs – those who are accountable persons are likely to seek more compensation for considerably more scrutiny and exposure to risk of disqualification.

The details

There was a brief consultation period following the release of the exposure draft of the bill. While there was heavy criticism of the government for the rushed approach, it did not extend the period for submissions. The BEAR Bill includes the following key features.

  • The definition of an accountable person of an ADI or a subsidiary of an ADI includes a range of prescribed executive positions as well as executives who have actual or effective responsibility for management or control of the ADI or a significant part of its operations.
  • The BEAR extends to subsidiaries of an ADI to the extent that an executive has actual or effective senior executive responsibility for a substantial part or aspect of the operations of the relevant group of bodies corporate that is constituted by the ADI and its subsidiaries. This means that the ADI will have to determine whether the subsidiary is a significant or substantial part of the group’s operations.
  • An ADI has accountability obligations under the BEAR. The ADI is obligated to take reasonable steps to:
  • Conduct its business with honesty and integrity, and with due skill, care and diligence; and
  • Deal with APRA in an open, constructive and cooperative way; and
  • Prevent matters arising that will adversely affect the ADI’s prudential standing or prudential reputation; and
  • Ensure that each accountable person meets their own accountability obligations; and
  • Ensure that its subsidiaries meet these same obligations.
  • An accountable person has the same accountability obligations in respect of their position.
  • ADIs will be required to register their accountable persons with APRA and lodge accountability statements and accountability maps that set out the responsibilities attaching to each accountable person. This is intended to enable APRA to understand who in the business is responsible for the particular operations so that if there is a failing, that executive can be held accountable under the BEAR. Readers will recognise this to be a response to the concerns of the Coleman enquiry that no executive in the big four banks lost their job when there were significant failings. APRA noted in its submission to the Senate Committee that the proposed legislation does not give APRA the authority to veto appointments or refuse registration in the normal course. Interestingly, given our prior views about APRA assuming the role of the Board, it notes that accountability remains the role and responsibility of Boards and senior management to ensure they recruit appropriate individuals. “If APRA did take a more active role in judging the merit of appointments, this would risk reducing accountability by virtue of ADIs relying on APRA’s vetting rather than their own decision-making processes,” APRA stated. The registration process is focussed on APRA raising concerns prior to an accountable person assuming a role.
  • APRA can exempt an ADI from the BEAR if compliance would lead to the ADI contravening a foreign country’s law.
  • An accountability statement is a statement about the part of the operations the executive is responsible for and includes details of the responsibilities of the executive. APRA can also specify matters to be included in the accountability statement.
  • An accountability map must contain the names of accountable persons, their reporting lines and responsibilities and sufficient information to enable APRA to determine who is responsible for specific parts of the business. APRA can also specify other information to be included.
  • Our previous article (see HERE) set out the extent to which ADIs will be required to defer minimum amounts of their accountable persons’ variable remuneration for a period of four years. The amount to be deferred will vary with the size of the ADI. This has not changed.
  • The Bill adopts the approach of a ‘cash equivalence’ for determining the value of variable remuneration for the purpose of calculating the deferral amounts. However, APRA has the power to specify how a particular ADI is to work out the value and can also do so by legislative instrument for accountable persons of an ADI in a specified class of ADIs.
  • While APRA will be able to disqualify an accountable person directly, without needing to apply to the Federal Court, unlike the exposure draft, the Bill now provides for accountable persons to have the right to a full merits review by the Administrative Appeals Tribunal. This is probably the most significant change from the consultation as the previous absence of this right was of great concern. The Treasurer said “These new powers will ensure APRA can more easily respond where an accountable person has failed to comply with their accountability obligations, while ensuring appropriate external oversight.”
  • If passed, the BEAR will apply from 1 July 2018. Some transitional provisions apply. For example, ADIs have 90 days to register accountable persons in place on 1 July 2018. While remuneration policies are expected to comply with the BEAR deferred remuneration provisions from 1 July 2018, the remuneration requirements regarding variable remuneration apply to decisions to grant variable remuneration that are made on or after 1 January 2019. Where employment contracts are in place when the Bill receives Royal Assent, the ADI should update those contracts by 1 January 2020.
© Guerdon Associates 2024
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