Source: https://www.legislation.gov.au/Details/C2017B00229/Explanatory%20Memorandum/Text
Timestamp: 2017-11-23 22:17:22
Document Index: 670843070

Matched Legal Cases: ['art 2', 'art 3', 'art 3', 'art 3', 'art 1', 'art-1']

Details: C2017B00229
- C2017B00229
Introduced HR 19 Oct 2017
C2017B00229
Proposal announced: The Government announced the BEAR in the 2017-18 Budget as part of the A More Accountable and Competitive Banking System package of reforms.
The Budget also included $1.1 million in additional funding to Treasury to oversee the implementation of A More Accountable and Competitive Banking System, of which the BEAR is a part.
Compliance cost impact: The total change in average annual regulatory cost (from business as usual) is $11.5 million.
Section 52F sets out self‑incrimination provisions in relation to information given by a person.
• imposes a set of obligations to be met by ADIs and accountable persons;
• introduces a definition of ‘accountable person’ and requires their registration with APRA prior to commencement in an accountable person role;
• requires that ADIs give APRA accountability statements detailing the roles and responsibilities of each accountable person;
• requires that ADIs give APRA accountability maps allocating the roles and responsibilities of accountable persons across the ADI and its subsidiaries; and
• gives APRA new and stronger enforcement powers.
• comply with its accountability obligations, which cover the way an ADI should conduct itself and how it should engage with APRA (for more information see paragraphs 1.44 ‑ 1.55);
• meet its key personnel obligations, by ensuring all areas of an ADI’s operations and those of its group are attributed to accountable persons (for more information see paragraphs 1.56 – 1.70);
• give APRA accountability maps and statements, which explain who is responsible for all parts and aspects of the ADI (for more information see paragraphs 1.146 – 1.154); and
• defer the remuneration of accountable persons for a period of up to four years, have remuneration policies that allow for a reduction in remuneration in proportion to any failure to meet the BEAR obligations, and continue the deferral where there is a likely failure by an accountable person to meet the BEAR obligations (for more information see paragraphs1.71 – 1.88). [Schedule 1, item 1, section 37]
1.28 An ADI’s BEAR accountability obligations require it to conduct its business with honesty and integrity, deal openly with APRA and ensure that it takes reasonable steps to prevent matters impacting negatively on the prudential reputation or standing of the ADI. Accountability obligations are further explained below at paragraphs 1.41 – 1.52. [Schedule 1, item 1, section 37C]
1.41 The Minister has a power to exempt a class of ADIs from the application of the BEAR. To do this the Minister must make a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.204 and 1.206 below). [Schedule 1, item 1, subsection 37A(2)]
• conduct its business with honesty and integrity and with due skill, care and diligence [Schedule 1, item 1, paragraph 37C(a)];
• to deal with APRA in an open, constructive and co‑operative way [Schedule 1, item 1, paragraph 37C(b)]; and
• to prevent matters arising which affect the prudential reputation or standing of the ADI. [Schedule 1, item 1, paragraph 37C(c)].
1.55 The terms ‘honesty’, ‘integrity’, ‘due skill’ and ‘diligence’, ‘open, constructive and co‑operative’ are not defined terms in the Banking Act. The ordinary meanings of each of those terms are generally well understood, and are used in other laws and considered by established case law.
1.57 Generally, an ADI would – in complying with the BEAR – be expected to ensure that the accountable person is a Board member responsible for oversight or a senior executive responsible for management or control. However, because different business structures may be used, the ADI has the discretion to determine the most appropriate allocation of accountable persons to its business activities.
1.70 A person is also prohibited from being an accountable person if APRA has disqualified that person under the BEAR and an ADI commits an offence if it allows a disqualified person to be an accountable person. Disqualification under the BEAR is discussed below at paragraphs 1.163 – 1.171. [Schedule 1, item 1, paragraph 37DA(1)(b) and section 37JC]
1.82 The Government intends that – at the outset – the legislative instrument will provide that:
• a small ADI would have less than or equal to $10 billion on a three year average of total resident assets.
• a medium ADI would have between $10 billion and $100 billion on a three year average of total resident assets.
• a large ADI would be any ADI with greater than or equal to $100 billion on a three year average of total resident assets.
• all amounts, once finalised, will be indexed.
1.88 A shorter deferral time is not intended to let a person avoid the consequences of breaches of BEAR obligations. It would be based on a situation where the ADI had satisfied itself and APRA that there were no emerging issues that would indicate a potential breach of BEAR in connection with that person which would result in reduction of deferred variable remuneration. As such, APRA may not agree to approve the shorter time period for deferral and approval decisions will be made on a case‑by‑case basis or, where appropriate, on a class basis by a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 - 1.206 below). [Schedule 1, item 1, subsection 37EC(3)]
Senior executive responsibility for the management of the anti‑money laundering function of the ADI.
• Chief Executive Officer – responsible for carrying out the management of all business activities of the ADI and its subsidiaries, including allocating responsibility for all parts or aspects of the ADI group to accountable persons and reporting directly to the Board of the ADI;
• Chief Financial Officer - responsible for management of the financial resources of the ADI;
• Chief Risk Officer - responsible for overall risk controls and risk management arrangement for the ADI;
• Chief Operations Officer – responsible for management of the ADI’s operations;
• Chief Information or Technology Officer - responsible for an ADI’s information management including information technology systems;
• Head of Internal Audit - responsible for management of the ADI’s internal audit function;
• Chief People Officer/Head of Human Resources - responsible for human resources functions;
• Head of Compliance/Chief Compliance Officer - responsible for management of the ADI’s compliance function; and
• Anti Money Laundering Officer – responsible for anti-money laundering obligations.
1.100 Regardless of specific role titles, the general principle, combined with the list of prescribed responsibilities provides a clear set of broad responsibilities that are covered by the BEAR. Changing role titles or breaking up functions will not avoid BEAR obligations. Recognising that there are different business structures and that businesses change over time, APRA has a power to include additional responsibilities in the prescribed list. APRA exercises this power by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 – 1.206 below). [Schedule 1, item 1, subsection 37BA(4)]
1.105 APRA can exclude specified responsibilities for a particular class of ADIs or subsidiaries so that persons with those responsibilities are not accountable persons. APRA exercises this power by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 – 1.206 below). [Schedule 1, item 1, paragraphs 37BB(1)(b) and section 37BB(3)]
1.107 As part of its accountability obligations (see paragraphs 1.44 ‑ 1.55) an ADI must take reasonable steps to ensure that each accountable person meets his or her accountability obligations. [Schedule 1, item 1, paragraph 37C(d)]
1.110 The accountability obligations make clear the behaviour and conduct expected of an accountable person – they relate to conduct or behaviour that is systemic and prudential in 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.
1.111 These obligations complement existing conduct and behaviour expectations which are already in place under APRA’s Prudential Standard CPS 520 Fit and Proper. APRA may update CPS 520 to reflect the new and strengthened BEAR expectations as appropriate.
• act with honesty and integrity and with due skill, care and diligence;
• deal with APRA in an open, constructive and co‑operative way (this does not displace legal professional privilege);
• take reasonable steps to prevent other matters which could affect the prudential reputation or standing of the ADI. [Schedule 1, item 1, section 37CA]
1.115 The terms ‘honesty’, ‘integrity’, ‘due skill’ and ‘diligence’, ‘open, constructive and co‑operative’ are not defined terms in the Banking Act. They are not defined because these terms have a well understood common usage and, in some cases, legal application.
1.124 Remuneration is a well understood concept.[1] This generally understood concept applies for the purposes of the BEAR. For example, it is based on the principle that remuneration is all of what is paid or payable to an accountable person for the performance of their duties in the course of their employment or their role as a director or senior executive officer.
1.127 APRA has a power allowing it to adjust ‘variable remuneration’ to account for new approaches to remuneration that may emerge. APRA exercises this power by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 – 1.206 below). [Schedule 1, item 1, subsection 37EA(4)]
1.131 APRA also has the power to determine how to value remuneration for a class of ADIs or class of subsidiaries. APRA exercises this power by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 – 1.206 below). [Schedule 1, item 1, paragraph 37EB(2)(a) and subsection 37EB(4)]
Accountable persons – registration requirements
1.139 The register is not a public document nor is it a legislative instrument. Information provided to APRA under the BEAR is subject to the confidentiality provisions in the 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. [Schedule 1, Part 2, items 2 – 6, section 56 of the APRA Act 1999]
1.145 APRA’s exercises its power to determine another period by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 – 1.206 below). [Schedule 1, item 1, subsection 37F(3)]
1.148 APRA can clarify and request other information for inclusion in an accountability statement by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 – 1.206 below). [Schedule 1, item 1, paragraph 37FA(1)(c) and subsection 37FA(2)]
1.149 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 the BEAR for an ADI to meet its obligation to provide an accountability statement to APRA. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 – 1.206 below). [Schedule 1, Part 3, item 17(2)]
1.153 APRA has the power to clarify and request other information for inclusion in an accountability statement by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 – 1.206 below). [Schedule 1, item 1, paragraph 37FB(1)(d) and subsection 37FB(2)]
1.154 Transitional provisions apply giving APRA the power to determine, by legislative instrument, the information that can be supplied to it during the first 18 months of the BEAR which lets an ADI meet its requirements to provide an accountability map to APRA. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 – 1.206 below). [Schedule 1, Part 3, item 17(3)]
• a direction power in section 11CA of the Banking Act which lets APRA compel a regulated entity to take specific action to address particular identified prudential issues;
• the making of prudential standards under section 11AF of the Banking Act, in which APRA can impose different requirements to be complied with;
• revoking a banking license under section 9 of the Banking Act;
• removing or disqualifying a director, senior manager or auditor under Division 3 of Part II of the Banking Act; and
• seeking an injunction and other orders from a court.
• met its BEAR accountability obligations (see paragraphs 1.44 – 1.55);
• met its key personnel obligations including ensuring that each significant and substantial part or aspect of the ADI’s operations are covered by an accountable person (see paragraphs 1.56 – 1.70);
• met its obligation to register an accountable person and give APRA an accountability statement for that person (see paragraphs 1.132 – 1.138 and 1.140);
• met its obligation to give APRA an accountability map (see paragraphs 1.140 and 1.154); and
• met its remuneration obligations, including by deferring variable remuneration as required and having a remuneration policy that meets the BEAR requirements (see paragraphs 1.71 – 1.88). [Schedule 1, item 1, subsection 37G(1)]
Consequences of breaching the BEAR – an accountable person
• an ADI or in a subsidiary;
• a class or classes of ADIs or their subsidiaries. [Schedule 1, item 1, subsections 37J(1) and 37J(2)]
1.169 APRA must be in a position to justify a decision to disqualify an accountable person, including having regard to the seriousness of the non‑compliance. This approach is consistent with APRA’s 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. [Schedule 1, item 1, paragraph 37J(1)(b)]
1.176 APRA has examination powers in other regulatory Acts that let it examine individuals in those industries subject to APRA regulation (for example, sections 55 and 62C of the Insurance Act 1973, section 142 of the Life Insurance Act 1995 and sections 270 and 277 of the Superannuation Industry (Supervision) Act 1995).
• allowing an ADI to obtain insurance to cover financial loss as a result of a civil pecuniary penalty imposed on it; or
• allowing an accountable person to be indemnified for financial loss if an accountable person’s variable remuneration is reduced or for pecuniary penalty or criminal fine or if they lose their employment through disqualification.
• determine the threshold below which a person’s variable remuneration does not need to be deferred. [Schedule 1, item 1, paragraph 37ED(1)(a) and subsection 37ED(2)]
• determine what constitutes a small, medium or large ADI. [Schedule 1, item 1, subsection 37G(3)]
• exempt a class of ADIs from the application of the BEAR. [Schedule 1, item 1, subsection 37A(2)]
• determining circumstances where variable remuneration is deferred for a shorter period. [Schedule 1, item 1, subparagraph 37EC(4)(a)(ii) and subsection 37EC(6)]
• including additional responsibilities in the prescribed list of accountable person responsibilities. [Schedule 1, item 1, subsection 37BA(4)]
• excluding specified responsibilities for a particular class of ADIs or subsidiaries so that persons with those responsibilities are not accountable persons. [Schedule 1, item 1, paragraph 37BB(1)(b) and subsection 37BB(3)]
• adjusting the scope of ‘variable remuneration’ to account for new approaches to remuneration that may emerge. [Schedule 1, item 1, subsection 37EA(4)]
• determining the method to work out the value of variable remuneration. [Schedule 1, item 1, paragraph 37EB(2)(a) and subsection 37EB(4)]
• determining the timeframe in which an ADI must comply with its notification obligations. [Schedule 1, item 1, paragraph 37F(2)(b) and subsection 37F(3)]
• specifying additional information that must be included in an accountability statement or accountability map. [Schedule 1, item 1, paragraphs 37FA(1)(c) and 37FB(1)(d), and subsections 37FA(2) and 37FB(2)]
1.206 These instruments are of a legislative character and are scrutinised by the Parliament, including potential disallowance, under section 42 of the Legislation Act 2003. They are not decisions of an administrative character.
1.209 Transitional provisions apply to give APRA the power to determine, by legislative instrument, how an ADI may meet its requirement to provide an accountability map and statement during the first 18 months of the BEAR. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 – 1.206 above). [Schedule 1, Part 3, item 17]
2.5 Participants need to be confident that financial firms will balance risk and reward appropriately and serve their interests. As the Financial System Inquiry noted:[2]
2.6 The experience of other countries – especially during the global financial crisis – demonstrated the substantial harm that can be caused to individual financial institutions – and the financial system as a whole – when the incentives provided to – and accountability of – the directors and senior management of financial institutions is not aligned with the sustainable operations of the institution.
• The collapse of Lehman Brothers in September 2008 is often cited as the catalyst for the global financial crisis[3], with the compensation arrangements of senior executives a significant contributing factor to the collapse of the institution.
• The collapse of Baring Brothers in February 1995 reflected the “virtual total failure of risk management systems and controls, and managerial confusion, within the Barings Group”[4].
• A report on the US Savings and Loan scandal found that the “debacle ... was a consequence of the perverse incentives, permissive regulation and inadequate supervisions that had been built into the system.”[5]
2.7 Overseas experience shows that excessive risk-taking behaviour, and misconduct more generally, can have non-trivial consequences to the financial stability of an economy. An example of this is the global financial crisis, where excessive risk-taking behaviour led to financial institutions requiring bail-outs, and in some instances their collapse. As the Financial Stability Board has noted[6]:
2.8 The Bank for International Settlements (BIS) Basel Committee on Banking Supervision revised its Corporate Governance Principles for Banks to reflect key lessons from the global financial crisis. It states that[7]:
2.9 As has been well documented, the Australian banking system performed well during the global financial crisis.[8] However, it is prudent to learn the lessons from the experience in other countries. Although Australia’s experience in this regard has been different to that of other countries, the Government’s intention is to take a proactive approach in ensuring that the prudential regulation framework continues to be effective in protecting the financial well-being of the Australian community.
2.10 Moreover, a series of incidents over recent years involving the misconduct of financial institutions associated with the major banks raised the question of whether systemic issues were emerging within the Australian financial system – and the banks in particular – that were not being adequately addressed through existing prudential standards. Instances of these behaviours and misconduct included, but are not limited to:
• alleged mishandling of insurance claims;
• alleged manipulation of interest rate benchmarks;
• the collapse of Storm Financial Limited;
• alleged breaches of anti-money laundering laws; and
• poor bank practices and possible unconscionable conduct in relation to small business lending.
2.11 The major banks have been accused of a number of cultural failings in recent years. When this occurs, consumers are usually required to take action against ADIs, and in some instances are required to bear the legal costs. This can have a material impact on their financial livelihoods. This is occurring on a non-trivial scale – for example, in 2015-16 alone, ASIC has calculated that over $200 million in compensation or remediation costs has been paid out by the financial sector[9].
• the performance and strength of Australia’s banking and financial system;
• how broader economic, financial, and regulatory developments are affecting that system; and
• how the major banks balance the needs of borrowers, savers, shareholders and the wider community.
2.14 On 24 November 2016 the House of Representatives Standing Committee on Economics Review of the four major banks tabled its first report (the Coleman Report), recommending – among other things – a new regime for executive accountability.
• the provision of poor financial advice at NAB;
• the mishandling of life insurance claims at CommInsure;
• NAB’s failure to pay 62,000 wealth management customers the amount that they were owed;
• the poor administration of hardship support at CBA;
• ANZ’s OnePath improperly collecting millions of dollars in fees from hundreds of thousands of customers; and
• ANZ improperly collecting fees from 390,000 accounts that had not been properly disclosed.
2.16 The Coleman Report noted that:[11]
2.17 The Coleman Report identified that there were systemic issues within the major banks reflecting – notwithstanding existing prudential requirements – a lack of accountability within the major banks at the senior executive level.
• Lack of clarity on the responsibilities
• Lack of clarity on the expectations
• Lack of timely and appropriate consequences to the person from breaches of expectations in fulfilling their responsibilities.
2.22 The Basel Committee on Banking Supervision’s Corporate Governance Principles for Banks highlight the importance of the Board and senior management of banks having arrangements in place to[12]:
2.23 The BIS guidelines state that[13]:
• the mis-selling of financial products to retail and business clients;
• the violation of national and international rules (tax rules, anti-money laundering rules, anti-terrorism rules, economic sanctions, etc); and
• the manipulation of financial markets – for instance, the manipulation of Libor rates and foreign exchange rates.
2.24 The Financial Stability Board’s Guidance on Supervisory Interaction with Financial Institutions on Risk Culture notes the particular importance of having rules in place to ensure that appropriate compensation practices are in place in banks[14]:
2.25 Among the key lessons from the Report of the Board of Banking Supervision Inquiry into the Circumstances of the Collapse of Barings was the importance of establishing clearly the responsibility for each business activity and ensuring this is communicated to all relevant parties.[15]
• clarity on the responsibilities of the person;
• clarity on the expectations of the person; and
• timely and appropriate consequences to the person from breaches of expectations in fulfilling their responsibilities.
2.27 Key elements of APRA’s current requirements are based on principles developed by the Financial Stability Board and the Basel Committee on Banking Supervision.[16] Reflecting the importance of participants having confidence and trust in the Australian financial system, APRA has put in place prudential measures covering:
• culture: Prudential Standard CPS 220 Risk Management (CPS 220) requires the Board of a bank to form a view on the ADI’s risk culture and the extent to which that culture supports the ability of the ADI to operate consistently within its risk appetite, and ensure that the ADI takes steps to make desirable changes to its risk culture;
• remuneration: Prudential Standard CPS 510 Governance (CPS 510) requires the ADI to establish a Board Remuneration Committee and maintain a Remuneration Policy that aligns remuneration and risk taking;
• governance: CPS 510 sets out minimum standards for good governance of an ADI to ensure that it is managed soundly and prudently by a competent Board;
• risk management: CPS 220 requires an ADI to maintain a risk management framework that is appropriate to its size, business mix, and complexity. Moreover, Prudential Standard CPS 232 Business Continuity Management requires an ADI to maintain a business continuity management policy that ensures it is able to meet its financial and service obligations to its depositors, policyholders and other stakeholders; and
• fit and proper: Prudential Standard CPS 520 Fit and Proper sets out criteria for determining the fitness and propriety of responsible persons. APRA may direct an ADI to remove directors or senior managers who lack the requisite fitness and propriety.
2.29 Developments over recent years point to the need to strengthen the existing prudential standards – particularly in relation to directors and senior executives – to clarify responsibilities and expectations of these roles.
The importance of meaningful consequences to accountability
2.34 Former APRA Chair John Laker noted – in the aftermath of the global financial crisis that:[17]
2.35 In the absence of Government action there would not necessarily be timely and appropriate consequences to the person from breaches of expectations in fulfilling their responsibilities – which is a concern, given the potential prudential consequences of the decisions of the senior executives and directors of banks. As John Laker noted:[18]
2.39 There is international precedent for this view, with deferred remuneration arrangements in place in other jurisdictions in response to the global financial crisis – most notably the Senior Manager Regime in the United Kingdom.
Option 2 – amend prudential standards – an enhanced governance/risk management/‘Fit and Proper’ regime
• timely and appropriate consequences on the person from breaches of expectations in fulfilling their responsibilities.
• the expectations of APRA-regulated institutions in conducting business affairs, including monitoring the performance of persons holding positions of responsibility; and
• the expectations of responsible persons in APRA-regulated institutions, including the manner in which these individuals perform their duties.
2.45 However, there would be no changes to the consequences to directors or senior executives for breaching expectations in fulfilling their responsibilities ‑ as with Option 1, existing sanctions would continue to apply.
Option 3 – introduce a Banking Executive Accountability Regime
• clarify heightened expectations of behaviour or accountability obligations for both ADIs and their senior executives and directors,
• clarify the allocation of responsibility of senior executives within ADI groups, and
• impose more significant consequences for not meeting these accountability obligations.
2.49 The focus of the BEAR would be on a narrower group of people than existing prudential standards – the directors and senior executives who set the policies, procedures and systems that influence the overall conduct and culture of ADI groups (accountable persons).
• The obligations of an ADI would be 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 cooperative way; and prevent matters from arising that would adversely affect the ADI’s prudential reputation or standing. An ADI would also be required to take reasonable steps to ensure obligations are met throughout the ADI group and by accountable persons within the ADI group.
• The obligations of an accountable person would be similar to the obligations of an ADI but would be framed in the context of the responsibilities of the accountable person’s position.
– Accountable persons would be defined on both a principles basis, as someone who holds a senior executive position in an ADI group that has management or control of a significant part or aspect of the ADI group, and also in reference to a prescribed list of responsibilities in an ADI.
• ADIs would be required to register accountable persons with APRA prior to appointment. This would involve notifying APRA of the potential appointment and providing information regarding the candidate’s suitability.
– Upon notification, APRA would consult its register of accountable persons and advise the ADI if the candidate has previously been removed or disqualified by APRA, or if APRA is aware of any other issues that could affect the candidate’s suitability for the role.
Allocation of responsibility ‑ accountability statements and mapping
• ADIs would be required to provide APRA with accountability statements to detail the roles and responsibilities of each accountable person. ADIs would also be required to consolidate its individual accountability statements into an accountability map showing the allocation of roles and responsibilities across the ADI group.
• Civil penalties: APRA would be able to seek civil penalties of up to 1,000,000 penalty units for large ADIs, up to 250,000 penalty units for medium ADIs, and up to 50,000 penalty units for small ADIs where an ADI contravenes its accountability obligations, with the Minister to set the threshold for large, medium and small ADIs.
• Disqualification: APRA’s powers would be enhanced to allow it to disqualify accountable persons that contravene their accountability obligations.
– In particular, APRA’s powers would be enhanced to permit it to disqualify accountable persons directly without applying to the Federal Court.
– Individuals disqualified under these powers would have a right of judicial review by the Federal Court, and merits review by the Administrative Appeals Tribunal (AAT).
• Remuneration: A minimum percentage of an accountable person’s variable remuneration, depending on the size of the ADI, would be required to be deferred for a minimum period of 4 years, and ADIs would be required to have remuneration policies that provide financial consequences for accountable persons that contravene accountability obligations.
• No change in regulatory burden: ADIs and their accountable persons would not incur the regulatory costs of complying with heightened expectations.
• Accountability gaps would remain: The systemic issues within the major banks identified in the Coleman Report reflecting – notwithstanding existing prudential requirements – a lack of accountability within the major banks at the senior executive level would remain, reflecting:
– a lack of clarity on the allocation of responsibilities of ADI group senior executives;
– a lack of clarity on the expectations of ADI group senior executives; and
– a lack of timely and appropriate consequences to the person from breaches of expectations in fulfilling their responsibilities.
• Continued erosion of confidence and trust in the financial system: ADIs would not have the incentive to improve their practices in the absence of increased regulatory requirements and so inappropriate behaviour would likely continue, contrary to community expectations.
– Accountability gaps and misalignment of incentives can result in substantial harm to both individual ADIs – and the financial system as a whole – reflecting its corrosive influence on confidence and trust which underpins an efficient financial system.
– There will be continued costs to customers in pursuing outcomes with ADIs relating to matters of a systemic and prudential nature.
• Clearer guidance for ADIs and senior executives: ADIs and their directors and senior executives would have greater understanding of their responsibilities and the expectations of behaviour in that role.
• Builds on the existing flexible prudential standards framework: This approach would build upon existing prudential standards, which are understood by APRA-regulated entities.
• Accountability gaps would remain in the absence of meaningful consequences for breaches: There would be no additional consequences for behaviour that contravenes the expectations. ADIs who do not meet the heightened standards would potentially face minimal consequences and individuals would potentially remain in their positions as responsible persons.
Detailed analysis of the regulatory costs of the UK Senior Manager Regime was canvassed in an independent cost-benefit report (the UK cost benefit analysis).[19] The UK cost benefit analysis noted the importance of meaningful consequences to an effective accountability regime.
• Additional regulatory costs: ADIs would face additional regulatory costs.
• These costs are expected to arise primarily as upfront costs to understand the new requirements, update systems, policies and procedures, and train staff.
Table 2.1Table 1: Regulatory burden estimate (RBE) table (see Appendix B for further detail)
• making clear the responsibilities and expectations of accountable persons;
• putting in place the requirement for ADIs to provide APRA with accountability statements to detail the roles and responsibilities of each accountable person;
• putting in place the requirement for ADIs to consolidate its individual accountability statements into an accountability map showing the allocation of roles and responsibilities across the ADI group;
• putting in place heightened expectations of behaviour for ADIs and accountable persons in the context of their particular roles and responsibilities; and
• greater powers for APRA to disqualify or provide for financial consequences for accountable persons, or seek civil penalties against ADIs that breach their expectations.
2.65 Whilst ADIs will incur costs in complying with the obligations, it is expected that the heightened expectations and more significant consequences would result in beneficial behavioural changes that would reduce the incidence of misconduct, promoting trust and stability in the financial system. Detailed analysis of the regulatory costs of the UK Senior Manager Regime was canvassed in the UK cost benefit analysis.[20]
• Deterring poor conduct and encouraging prudent management: The consequences for contravening the accountability obligations are intended to have the effect of deterring poor conduct and incentivising improved behaviour by ADIs and their accountable persons.
• Increased confidence and trust in the Australian financial system: The meaningful consequences that would follow to both ADIs and their directors and senior executives would provide participants in the Australian financial system with assurance that ADIs have effective accountability arrangements in place – which is an essential underpinning to confidence and trust that is at the heart of an efficient financial system.
– The UK cost benefit analysis noted the importance of meaningful consequences to an effective accountability regime.[21]
• Clearer guidance for ADIs and senior executives: ADIs and their directors and senior executives would have greater understanding of what their responsibilities were and the expectations of behaviour in that role.
• Better alignment of senior executive remuneration with sustainable operations: Mandating minimum deferral of part of variable remuneration should allow a sufficient period of time for contraventions of the accountability obligations to emerge before accountable persons receive their bonuses. This will help ensure that the incentives of accountable persons are aligned with the sustainable operations of the ADI, and the financial system, rather than on short‑term gains with hidden long-term costs.
• Shift to fixed remuneration: The requirement to defer a minimum proportion of variable remuneration may result in a shift from variable to fixed remuneration. However, it is not clear whether or not this shift would occur, or if it is problematic. For example, a shift to fixed remuneration may be positive if it reduces the extent of short-term excessive risk-taking.
• Potential confusion on regulatory roles: Since the establishment of APRA and ASIC following the Wallis Inquiry, there has been a clear distinction between their roles: with APRA focusing on prudential matters, and ASIC having responsibility for matters of corporate conduct (the ‘twin peaks’ model). There is a risk that APRA making rules around the conduct of senior executives of ADIs could blur the lines of responsibility between the regulators.
– This has been mitigated by the BEAR having a focus on prudential matters, which are defined to include conducting the affairs of ADI with “integrity, prudence and professional skill” – matters which the APRA Chair has noted are clearly within APRA’s existing mandate:[22]
• Potential knowledge gaps occurring as a result of disqualification: Due to the nature of the role senior executives have, there is a risk that knowledge gaps may arise if they are disqualified under the BEAR. This is a risk that already exists, for example through unanticipated vacancies. Given it is an existing risk, arguably made more likely to materialise, ADIs are likely to have put in place appropriate contingency arrangements.
• Potential adverse impact on the market for executives: There is a risk that the BEAR will make senior executive positions within ADIs unattractive, due to the additional obligations and associated penalties or consequences.
– However, the obligations under this option are not intended to be punitive in nature; rather, they are simply good governance practices. If ADIs are requiring directors and senior executives to perform their roles consistent with best practice in good governance principles, then there should be not be an adverse impact on the attractiveness of these roles under this option. However, for those ADIs not currently following best practice principles, the enhanced accountability under BEAR could make their roles less attractive to some individuals.
• These costs are expected to arise primarily as upfront costs to understand the new requirements, update systems, policies and procedures, and train staff, with a small ongoing cost owing to the requirements to provide documentation to APRA on a regular basis.
• Overall, the regulatory costs of the BEAR would be largest for ADIs who have the largest accountability gap. As the UK Financial Conduct Authority has noted – in the context of the Senior Manager Regime[23]:
2.69 The regulatory costs of Option 3 are not expected to be significantly different to Option 2 – the principle difference being that more meaningful consequences would follow from a breach of accountability obligations. As the APRA Chair has noted:[24]
2.72 The cost-benefit analysis of the UK Senior Manager Regime noted that:[25]
2.73 The UK report – while acknowledging that estimates were indicative only – presented an estimate of the harm caused as a result of the lack of an adequate accountability regime, and applied a percentage reduction in similar, future harm as a result of the SMR. In the UK, the benefits in the form of reduced harm ranged from £40 million to £600 million per annum.
• Adopting the same methodology as the UK report, the benefits of the BEAR (Option 3) in the form of reduced harm are estimated to range between $20 million to $300 million per annum. As with the UK estimates, these are indicative only and subject to a high degree of uncertainty.
Table 2.2Table 2: Regulatory burden estimate (RBE) table (see Appendix B for further detail)
2.74 The BEAR formed part of the Government’s response to the Coleman report – in effect, taking into account the evidence provided by the four major banks to the House of Representatives Economics Committee.
2.75 The Government undertook targeted consultation prior to the 2017-18 Budget announcement. The Government consulted Australian regulators –­ in particular APRA – in developing potential options to address accountability gaps in ADIs in response to the Coleman report. This consultation continued after the Budget announcement. The Government also met with regulators in the UK to discuss the experience to date of the Senior Managers Regime – with follow-up discussions following the Budget announcement. Options to address accountability gaps were also canvassed in discussions with the Chairs of the major ADIs in February 2017.
2.76 While the 2017‑18 Budget set out the broad parameters of the BEAR, it was envisaged that there would a number of points of detail that would require further development in consultation with relevant stakeholders. At the same time, the Government was concerned to ensure that the BEAR was enacted by the end of 2017, in order to address the identified accountability gap as soon as possible – constraining the total amount of time for consultation.
2.77 The Government’s consultation put the emphasis on seeking stakeholders’ input on the policy design of the BEAR – acknowledging that this would be likely to compress the amount of time available for input on exposure draft legislation.
• The policy context and rationale for the BEAR;
• Key features of existing accountability frameworks;
• Institutions to be covered by the BEAR;
• Individuals to be covered by the BEAR;
• Expectations of ADIs and accountable persons under the BEAR;
• Remuneration; and
• Implementation and transitional issues.
• the application of the BEAR to ADI groups but not their competitors (e.g. insurers) would place ADIs at a competitive disadvantage (though some stakeholders argued limiting the BEAR to ADIs was appropriate);
• significant time would be required to implement the requirements of the BEAR – and accordingly, commencement should be deferred;
• including only some non-executive directors (NEDs) would undermine the Board of the ADI’s collective responsibility and blur the distinction between a Board’s oversight function and the responsibilities of executive management;
• the BEAR was ‘one-size-fits-all’ and would disproportionately impact smaller ADIs, potentially undermining competition;
• the BEAR would limit the ability of ADIs to attract people to key positions;
• a lack of merits review for APRA’s decision to disqualify directors; and
• the BEAR would extend APRA’s mandate beyond prudential matters and create confusion in relation to ASIC and APRA’s roles.
• providing transitional periods for some requirements (particularly in relation to remuneration);
• extending the BEAR to all NEDs and EDs on the Board – making clear that obligations imposed on NEDs would be consistent with their oversight role; and
• ensuring requirements and penalties would be proportionate to an ADI’s size;
• focusing the obligations under the BEAR on best practice governance principles – rather than imposing a punitive regime; and
• clarifying that the focus of BEAR is systematic and prudential behaviour.
2.86 There was significant public criticism about the short consultation period on the draft legislation. In addition, some stakeholders reiterated their policy positions set out in submissions to the consultation paper. A total of 31 submissions were received on the draft legislation (26 public and 5 confidential) – nearly all from banks, their advisers, or industry bodies. Submissions made a number of technical suggestions that improve the operation of the draft legislation and are consistent with the Government’s policy intent. The draft legislation was also changed to ensure that the disqualification of accountable persons is reviewable by both the Federal Court (as judicial review) and the AAT (as merits review).
Appendix A – Fit and Proper
• maintain a Fit and Proper Policy that meets the requirements of this Prudential Standard;
• ensure that the fitness and propriety of a responsible person generally be assessed prior to initial appointment and then re‑assessed annually;
• take all prudent steps to ensure that a person is not appointed to, or does not continue to hold, a responsible person position for which they are not fit and proper;
• ensure that additional requirements be met for certain auditors and Appointed and Reviewing Actuaries; and
• ensure that certain information be provided to APRA regarding responsible persons and the APRA-regulated institution’s and Head of a group’s assessment of their fitness and propriety.
Appendix B – Costing assumptions
Option 2 - Amend prudential standards – an enhanced governance/risk management/‘Fit and Proper’ regime
• the imposition of strict liability for an offence;
• the right against self-incrimination under article 14(3)(g) of the International Covenant on Civil and Political Rights (ICCPR); and
• the right to protection from arbitrary or unlawful interference with privacy under article 17 of the ICCPR.
3.5 Practice Note 2: Offence provisions, civil penalties and human rights[12] observes that civil penalty provisions may engage criminal process rights under Articles 14 and 15 of the International Covenant on Civil and Political Rights (ICCPR), regardless of the distinction between criminal and civil penalties in domestic law. This is because the word ‘criminal’ has an autonomous meaning in international human rights law. When a provision imposes a civil penalty, an assessment is therefore required as to whether it amounts to a ‘criminal’ penalty for the purposes of the Articles 14 and 15 of the ICCPR.
3.7 While the civil penalty provisions included in the Bill are intended to deter people from non-compliance with the obligations imposed by the BEAR, none of the civil penalty provisions carry a penalty of imprisonment and there is no sanction of imprisonment for non‑payment of any penalty. The statement of compatibility therefore proceeds on the basis that the civil penalty provisions in the Bill do not create criminal offences for the purposes of Articles 14 and 15 of the ICCPR.
3.10 The penalty for the offence complies with the requirements of the Government’s Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers as:
• the offence is not punishable by imprisonment;
• the maximum penalty is at the maximum allowable for strict liability offences (60 penalty units for individuals (currently $12,600)); and
• the harm to depositors and financial stability is so significant that fault should not be an element of the offence.
3.11 The Bill includes new examination powers. They empower an investigator appointed by APRA to require a person to attend an examination and answer the questions put to the person. APRA can also require a lawyer to provide certain documents, books or accounts. A failure to act in a certain way or provide information required is punishable by a criminal penalty of up to 30 penalty units (currently $6,300).
3.12 The new examination powers engage the right against self‑incrimination under article 14(3)(g) of the ICCPR because they provide that a person cannot refuse to attend an examination and answer questions nor can the person refuse to provide accounts, books, documents or sign a record of an examination on the basis that doing so would incriminate the person.
3.20 The Human Rights Committee has interpreted the term ‘unlawful’ to mean that no interference can take place except in cases envisaged by law, which itself must comply with the provisions, aims and objectives of the ICCPR. The Human Rights Committee has also indicated that an interference will not be considered to be ‘arbitrary’ if it is provided for by law and is in accordance with the provisions, aims and objectives of the ICCPR and is reasonable in the particular circumstances.[26]
• the strict liability offences are appropriate and consistent with the requirements of the Government’s Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers;
• the information gathering powers are consistent with the right against self-incrimination under article 14(3)(g) of the ICCPR; and
• the information gathering powers are consistent with the right to privacy under article 17 of the ICCPR.
[3] See, for example, David Gruen, 2008, Opening Statement to the Senate Standing Committee on Economics https://static.treasury.gov.au/uploads/sites/1/2017/06/Opening_Statement.pdf
[4] Reserve Bank of Australia, 1995, “Implications of the Barings Collapse for Bank Supervisors”, RBA Bulletin, November, pp 1-5. https://www.rba.gov.au/publications/bulletin/1995/nov/pdf/bu-1195-1.pdf
[5] National Commission on Financial Institution Reform, Recovery and Enforcement, 1993, Origins and Causes of the S&L Debacle: A Blueprint for Reform – A Report to the President and Congress of the United States, Washington DC, July 1993. https://babel.hathitrust.org/cgi/pt?id=pur1.32754063100741;view=2up;seq=20;skin=mobile
[7] Basel Committee on Banking Supervision, 2015, Guidelines: Corporate Governance Principles for Banks, July 2015, Bank for International Settlements.
[8] See, for example, Tony McDonald and Steve Morling, 2011, “The Australian economy and the global downturn Part 1: Reasons for Resilience”, Economic Roundup, Issue 2. https://treasury.gov.au/publication/economic-roundup-issue-2-2011/economic-roundup-issue-2-2011/the-australian-economy-and-the-global-downturn-part-1-reasons-for-resilience/
[10] The Hon Scott Morrison, 2016, Government follows through on bank accountability. http://sjm.ministers.treasury.gov.au/media-release/100-2016/
[12] Basel Committee on Banking Supervision, 2015, Guidelines: Corporate Governance Principles for Banks, July 2015, Bank for International Settlements.
[15] Reserve Bank of Australia, 1995, “Implications of the Barings collapse for Bank Supervisors”, Reserve Bank Bulletin, November 1995, p1-5.
https://www.rba.gov.au/publications/bulletin/1995/nov/pdf/bu-1195-1.pdf, Board of Banking Supervision, 1995, Report of the Board of Banking Supervision Inquiry into the Circumstances of the Collapse of Barings.
[20] Cost Benefit Analysis of the new Regime for Individual Accountability and Remuneration, p.59, http://www.bankofengland.co.uk/pra/Documents/publications/cp/2014/cp1414annex10.pdf.
[22] Wayne Byres, 2017, Key Issues for the Year Ahead: Bank Capital and the Approaching Bear, ‘The Regulators’ Finsia Event, 8 September 2017. http://www.apra.gov.au/Speeches/Pages/Key-issues-for-the-year-ahead-Bank-Capital-and-the-approaching-BEAR.aspx.
[23] Financial Conduct Authority, Senior Managers Regime, https://www.fca.org.uk/publication/corporate/applying-smr-to-fca.pdf.
[24] Wayne Byres, 2017, Key Issues for the Year Ahead: Bank Capital and the Approaching Bear, ‘The Regulators’ Finsia Event, 8 September 2017. http://www.apra.gov.au/Speeches/Pages/Key-issues-for-the-year-ahead-Bank-Capital-and-the-approaching-BEAR.aspx
[26] General comment No. 16: Article 17 (Right to privacy), Thirty‑second session (1988) at [3]‑[4].