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Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2017

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2016-2017

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

TReasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2017

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Treasurer, the Hon Scott Morrison MP)

 



Table of contents

Glossary.............................................................................................................. 5

General outline and financial impact............................................................ 7

Chapter 1               Banking Executive Accountability Regime...................... 9

Chapter 2               Regulation impact statement............................................ 45

Chapter 3               Statement of Compatibility with Human Rights............ 77

 



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

AD(JR) Act

Administrative Decisions (Judicial Review) Act 1977

ADI

Authorised deposit-taking institution

APRA

Australian Prudential Regulation Authority

APRA Act

Australian Prudential Regulation Authority Act 1998

ASIC

Australian Securities and Investments Commission

Banking Act

Banking Act 1959

BEAR

Banking Executive Accountability Regime

Bill

Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2017

Corporations Act

Corporations Act 2001



Banking Executive Accountability Regime

This Bill amends the Banking Act to establish the BEAR. The BEAR puts in place a strengthened responsibility and accountability framework for the most senior and influential directors and executives of ADIs and their subsidiaries.

To support the BEAR, the Bill gives APRA new and strengthened powers.

Date of effect : 1 July 2018

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 .

Financial impact:   The 2017-18 Budget included additional funding for APRA of $4.2 million over four years from 2017-18 to implement the BEAR. A further $1 million per year will be provided to APRA to enforce breaches.

The cost of the additional funding to APRA is offset by an increase in the APRA Financial Institutions Supervisory Levies of $8.2 million over four years from 2017-18.

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 .

Human rights implications :  This Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 3.

Compliance cost impact The total change in average annual regulatory cost (from business as usual) is $11.5 million.

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. See Regulation Impact Statement — Chapter 2.

 



Chapter 1          

Banking Executive Accountability Regime

Outline of chapter

1.1                   This Bill amends the Banking Act to establish the BEAR. The BEAR is a strengthened responsibility and accountability framework for the most senior and influential directors and executives in ADI groups.

1.2                   To support the BEAR, the Bill gives APRA new and strengthened powers.

Context of amendments

1.3                   The Australian financial system is the backbone of the economy and plays an essential role in promoting economic growth. For it to operate in an efficient, stable and fair way all participants must have trust in the system.

1.4                   ADIs must operate at the highest standards and meet the needs and expectations of Australian consumers and businesses. Participants need to be confident that financial firms will balance risk and reward appropriately and serve their interests.

1.5                   The House of Representatives Standing Committee on Economics undertakes an annual inquiry into the performance and conduct of Australia’s banks.

1.6                   In response to the first report from the Committee the Government announced in the 2017-18 Budget a comprehensive package of reforms to strengthen accountability and competition in the banking sector. In doing this, the Government announced that it would legislate the BEAR.

1.7                   A key objective of the BEAR is to improve the operating culture of ADIs and increase transparency and accountability across the banking sector. By setting out accountability obligations in the Banking Act and providing guidance about them, the Bill makes clear and enhances the obligations of ADIs and reinforces the standards of conduct expected of them by the community.

1.8                   The BEAR complements the existing regulatory framework. This includes ASIC’s role regulating market conduct, the duties placed on directors under the Corporations Act, and APRA’s existing prudential framework and standards.

Summary of new law

1.9                   The Bill amends the Banking Act to establish the BEAR: an enhanced accountability framework for ADIs and persons in director and senior executive roles.

1.10               The BEAR imposes a heightened accountability regime on ADIs and people with significant influence over conduct and behaviour in an ADI. It requires them to conduct themselves with honesty and integrity and to carry out the business activities for which they are responsible effectively.

1.11               It does this by creating a new definition of ‘accountable person’. An accountable person is a Board member with oversight over the ADI or a senior executive with responsibility for management or control of significant or substantial parts or aspects of the ADI group. ‘ADI group’ refers to the ADI or relevant group of bodies corporate which constitutes an ADI and its subsidiaries. Accountable persons must be located in the ADI and should be located in significant or substantial subsidiaries. Not all subsidiaries will have accountable persons located in them. Throughout an ADI group accountable persons must have clear lines of responsibility to cover all of the business activities of the group.

1.12               The general obligation placed on accountable persons is framed in the context of their particular responsibilities. These will be clearly defined in accountability statements for each accountable person and an accountability map for each ADI group. Each accountable person should be registered with APRA.

1.13               Accountability maps and statements are designed to give APRA greater visibility of lines of responsibility. The maps will provide a clear view of the allocation of responsibilities throughout the ADI group, to ensure that there is accountability for all parts or aspects of the group’s business.

1.14               An ADI must comply with its BEAR obligations. These include new accountability, remuneration, key personnel and notification obligations. An ADI must ensure that it has a remuneration policy consistent with the BEAR, its accountable person roles are filled and it has given accountability statements and maps to APRA.

1.15               ADIs must set remuneration policies deferring an accountable person’s variable remuneration to incentivise accountable persons not to engage in behaviours inconsistent with BEAR obligations.

1.16               APRA will have additional examination and disqualification powers to enhance its ability to enforce the BEAR.

1.17               If an ADI breaches its BEAR obligations, significant civil penalties may be imposed by a court.

1.18               If an accountable person breaches its BEAR obligations, that person may face disqualification or financial consequences through the reduction of variable remuneration.

1.19               Recognising there are different business models and group structures in the banking industry, the Bill uses both high level principles as well as prescribed detail. The BEAR will work with existing legislative and regulatory frameworks.

Comparison of key features of new law and current law

New law

Current law

Establishes the BEAR which places new obligations on an ADI, including for the conduct and operation of its subsidiaries.

No equivalent.

Accountable persons

The Banking Act defines an ‘accountable person’ with respect to the responsibilities undertaken in the ADI and, where relevant, the ADI group.

A list of prescribed responsibilities in ADIs is also included.

No equivalent.

Accountable person roles must be filled at all times and registered with APRA.

No equivalent.

Obligations under BEAR

Obligations with regards to the prudential conduct of an ADI group and ‘accountable persons’ under BEAR are prescribed in legislation.  

No equivalent.

ADIs must give APRA statements which detail the roles and responsibilities of each accountable person.

No equivalent.

ADIs must give APRA accountability maps which identify the lines of responsibility through the ADI group.

No equivalent.

Penalties under BEAR

APRA may seek civil penalties of up to 1 million penalty units where an ADI breaches the obligations under BEAR.

APRA may seek civil penalties in specified circumstances.

APRA may disqualify an ‘accountable person’ for breaching the obligations of BEAR.

APRA may apply to the Federal Court to have a director, senior manager or auditor disqualified from being or acting in that position.

Deferral of remuneration

An ADI must defer a proportion of the remuneration of an accountable person for a period of four years. The proportion to be deferred depends on the size of the ADI.

There are circumstances where APRA may allow an ADI to defer a person’s remuneration for a shorter period.

An ADI must have a remuneration policy which is consistent with the requirements under the BEAR.

No equivalent.

Insurance

An ADI must not take out insurance against the consequences of breaching the BEAR for itself or an accountable person. 

No equivalent.

Examination powers

Examination powers allow an APRA investigator to require a person to give information relevant to an investigation, set out how the person’s lawyer may participate during the examination and how examination records must be kept and shared.

Section 61 allows APRA to conduct an investigation and require an ADI to give certain information.

Statements and evidence are admissible during a proceeding unless the evidence would self-incriminate an individual or the other party to the proceedings has not had sufficient time to examine the material.

Section 52F is also expanded to apply to production of a book, account or document or signing of a record.

Section 52F sets out self-incrimination provisions in relation to information given by a person.

Detailed explanation of new law

1.20               The BEAR:

•        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.

1.21               The Bill imposes strengthened obligations on ADIs and accountable persons in, or maintaining control over, an ADI and its subsidiaries.

1.22               As a result of the accountability maps and statements ADIs will provide to APRA, APRA will know who is responsible for relevant business lines and activities in an ADI group. This is an important element of the BEAR. It ensures accountable persons cannot avoid responsibility for problems which happen under their watch.

1.23               The objects provision of the Banking Act will be updated to include reference to the BEAR. [Schedule 1, item 7, paragraph 2A(d)]

1.24               All references in this explanatory memorandum are to the Banking Act, unless otherwise stated.

An ADI’s obligations under the BEAR

1.25               As noted above at paragraph 1.21, the BEAR imposes strengthened obligations on both ADIs and their accountable persons. The obligations cover conduct that is systemic and prudential in nature. Breaches by an ADI or an accountable person are to be dealt with effectively and seriously.

1.26               APRA may apply to a court for the imposition of a civil pecuniary penalty when there is evidence of an ADI failing to comply with the BEAR relating to prudential matters. However, where there has been a minor breach, such as a failure to notify APRA of a change to an accountability map or statement (required under Division 5 of the BEAR), APRA may make a direction under section 11CA of the Banking Act. 

Obligations under the BEAR

1.27               In summary, the BEAR obliges an ADI to:

•        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]

1.29               An ADI’s key personnel obligations require it to ensure that responsibility for all parts or aspects of an ADI group are covered by accountable persons. This increases the transparency of responsibilities in ADIs so any breach of accountability obligations in an ADI group can be attributed to an accountable person. [Schedule 1, item 1, subsection 37D(1)]

1.30               Other key personnel obligations include ensuring that prohibited persons are not accountable persons and complying with APRA directions to reallocate responsibilities of accountable persons. [Schedule 1, item 1, paragraphs 37D(1)(b) and 37D(1)(c)]

1.31               An ADI must take reasonable steps to ensure its subsidiaries meet the accountability obligations, obligations relating to key personnel and notification obligations around the deferral of remuneration of accountable persons. [Schedule 1, item 1, paragraph 5, 37C(e), 37D(1)(d) and 37E(1)(d)]

Scope of obligations to an ADI’s activities

1.32               The BEAR recognises consumers often associate the wide range of financial services and activities provided by subsidiaries under an ADI’s brand. Poor behaviour in a subsidiary can have a negative effect on the ADI’s brand and public standing and has the potential to undermine confidence in the ADI itself.

1.33               Therefore, an ADI is obliged to take reasonable steps to ensure that the subsidiaries within the ADI group meet the obligations under the BEAR. In addition, where the activities of a subsidiary are significant or substantial within the ADI group, at a minimum an accountable person located within the subsidiary should have responsibility for that subsidiary. This is not to suggest that all subsidiaries will have an accountable person located within them.

1.34               This is intended to capture, for example, significant or substantial insurance or wealth management subsidiaries within an ADI group. If an ADI’s wealth management arm acts in breach of BEAR obligations, then it may adversely affect the prudential reputation or standing of the ADI.

1.35               A foreign ADI is not subject to the BEAR for its offshore operations or for any locally incorporated non-ADI subsidiaries. However, its Australian branch operations are obliged to comply with the BEAR to the extent required by their operations and presence in Australia. [Schedule 1, item 1, paragraph 37(2)(b)]

1.36               If a foreign ADI has a significant presence in Australia then it may be required to list several accountable persons to ensure that the operations of the ADI group in Australia are appropriately covered. If a foreign ADI does not have a significant presence in Australia, fewer accountable persons would likely be necessary for the ADI to show it complies with the BEAR.

1.37               If an ADI has obligations and requirements under a corresponding foreign law, such as the United Kingdom’s Senior Manager Regime (SMR), and APRA is satisfied that compliance obligations under the BEAR would be inconsistent with the law of a foreign country, then APRA may give the ADI a written notice specifying its BEAR obligations to the extent of any inconsistency with the law of that country. The ADI is then not required to comply with the obligation as specified.   [Schedule 1, item 1, sections 37AA and 37BC]

1.38               To ensure that the BEAR can operate flexibly and is appropriately targeted the Minister has a power to exempt an ADI from the application of the BEAR. If the Minister decides to grant an exemption, he or she does this by giving the ADI a written notice. [Schedule 1, item 1, subsection 37A(1)]

1.39               A person adversely affected by the Minister’s decision to exempt or not exempt an ADI from the BEAR has the capacity to appeal the decision. That person or ADI may apply for judicial review by the Federal Court under the Administrative Decisions (Judicial Review) Act 1977 (AD(JR) Act). A legal challenge concerns the lawfulness of the Minister’s decision process, as required by the BEAR.

1.40               A ministerial decision to exempt, or not exempt, an ADI from the BEAR is not subject to merits review. Not having merits review is justified because permitting a potentially protracted merits review process in circumstances where the Minister did not exempt an ADI could undermine public and industry confidence in the prudential system and create uncertainty in financial markets. If requested the Minister must provide reasons for his or her decision, as required by section 13 of the AD(JR) Act.

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)]

1.42               This instrument-making power recognises the importance of having a flexible system which lets the Minister consider the variety of ADIs in the Australian financial system and allows the Minister to exempt a class or classes of ADI if he or she decides it is appropriate.

1.43               The Minister would use this power where it is not necessary to include the particular ADI or class of ADIs to achieve the objectives of the BEAR.

The accountability obligations of an ADI

1.44               A key objective of the BEAR is to improve the operating culture of ADIs and increase transparency and accountability across the banking sector. By setting out accountability obligations in the Banking Act and providing guidance about them, the Bill makes clear and enhances the obligations of ADIs and reinforces the standards of conduct expected of them by the community.

1.45               The accountability obligations of an ADI are to take reasonable steps to:

•        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)] .

1.46               The ADI’s obligation to deal with APRA in an open, constructive and co-operative way does not displace its legal professional privilege, to the extent permitted by law and the ADI acts in a way which is consistent with the maintenance of that privilege.

1.47               In considering whether an ADI has met its accountability obligations, APRA will consider an ADI’s actions and its behaviour from a prudential perspective. Actions taken by an ADI that protect the ADI and its customers from a prudential standpoint are consistent with the accountability obligations.

1.48               An ADI is responsible for its subsidiaries, and must take reasonable steps to ensure its subsidiaries meet the accountability obligations outlined at 1.42 and 1.46. [Schedule 1, item 1, paragraph 37C(e)]

1.49               An ADI is responsible for each accountable person it nominates, including those in a subsidiary or a parent company. The ADI must take reasonable steps to ensure each of its accountable persons meet his or her accountability obligations. [Schedule 1, item 1, paragraph 37C(d)]

1.50               Unless the Minister has exempted an ADI, the ADI must meet its BEAR accountability obligations. [Schedule 1, item 1, paragraph 37(2)(a)]

1.51               The steps by which an ADI complies with the BEAR are described as ‘reasonable steps’ in section 37CB. [Schedule 1, item 1, section 37CB]

1.52                         The Bill provides guidance to an ADI about how it may take reasonable steps to meet its accountability obligations. It is important to note that section 37CB is not exhaustive in identifying what may be a ‘reasonable step’. [Schedule 1, item 1, section 37CB]

1.53               A reasonable step may be setting up appropriate governance arrangements. It could cover setting clear lines of responsibility for each of an ADI group’s business activities. It is complemented by the BEAR requirement for ADIs to give APRA accountability maps and statements. An ADI’s accountability map can show how it has fully considered the appropriate management structure for the ADI or broader ADI group and how it attributes effective responsibility for key business activities to accountable persons.

1.54               A reasonable step may also be delegating responsibilities for key functions to appropriate persons. It could cover actions like having an effective process to determine whether a person has sufficient experience and judgement to undertake a particular responsibility. A reasonable step also includes having appropriate procedures to identify and remediate problems.

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.

The key personnel obligations of an ADI

1.56               The BEAR imposes key personnel obligations to ensure that responsibility for all parts or elements of an ADI group are covered by an accountable person. The size and complexity of an ADI or an ADI group will affect the number of functions covered and the number of accountable persons nominated to cover those functions.

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.

1.58               It is the ADI’s responsibility to ensure responsibilities are allocated appropriately. If an ADI does not or cannot do this, APRA has the power to direct an ADI or subsidiary with respect to the allocation of responsibilities. APRA can use this power if it is concerned that the ADI’s allocation of responsibility (or failure to do so) is likely to give rise to a prudential risk. [Schedule 1, items 1 and 9, section 37DB and subsection 5(1)]

1.59               This reflects the key BEAR obligation on an ADI to ensure it assigns all management and control responsibilities within an ADI group (the ADI and subsidiaries) to accountable persons. [Schedule 1, item 1, section 37D]

1.60               Section 11CG is amended so that an ADI commits an offence and is liable to a criminal penalty of a maximum of 50 penalty units (currently $10,500) if it fails to follow a direction from APRA with regards to the allocation of responsibilities. [Schedule 1, item 12, paragraph 11CG(1)(b)]

1.61               Similarly, section 11CG is amended so that an officer of an ADI commits an offence and is liable a criminal penalty of a maximum of 50 penalty units (currently $10,500) if the officer’s duties include making sure that an ADI follows a direction from APRA and the officer has not taken reasonable steps to ensure that the ADI complies with a direction from APRA with regards to the allocation of responsibilities. [Schedule 1, items 12 and 13, paragraph 11CG(2)(a) and subsection 11CG(2A)]

1.62               The combination of key personnel obligations and the accountability maps will operate to let an ADI satisfy itself and show APRA that it has allocated all key personnel obligations to accountable persons and that those accountable persons can discharge their obligations under the BEAR. This will demonstrate full coverage of the ADI group by accountable persons without the need to have an accountable person individually responsible for every single subsidiary, for example.

1.63               An ADI must also ensure that persons who are prohibited from being an accountable person are not placed into an accountable person role. [Schedule 1, item 1, paragraph 37D(1)(b)]

1.64               A person is prohibited from being an accountable person if they are not registered as an accountable person. The ADI should register the person as an accountable person with APRA to overcome this restriction. [Schedule 1, item 1, paragraph 37DA(1)(a)]

1.65               A person would not be prohibited from occupying an accountable person role without registration for 28 days where the person has unexpectedly become an accountable person to fill an unforeseen vacancy or is temporarily filling a vacancy. [Schedule 1, item 1, subsection 37DA(2)]

1.66               For example, a person may unexpectedly become an accountable person where the incumbent goes on sick leave or may fill a role temporarily when the accountable person goes on leave of sufficient duration to effectively vacate the accountable person role.

1.67               This means that the person could be in an accountable person role for up to 14 days before the ADI submits an application to APRA to have the person registered. As discussed at paragraph 1.136, registrations take effect 14 days after the application is made to APRA.

1.68               APRA has the power to determine another period of time that the person may be temporarily or unexpectedly in an accountable person role before they are prohibited. APRA can exercise this power by giving a written notice to the relevant ADI or by making a legislative instrument. [Schedule 1, item 1, paragraph 37DA(2)(b) and subsections 37DA(3) and 37DA(4)]

1.69               A transitional provision also applies for a person who holds a position that means the person is an accountable person on 1 July 2018. An ADI has up to 90 days after that date to register a person as an accountable person before the person would become prohibited if they are not registered. [Schedule 1, Part 3, item 15]

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]

Deferred remuneration obligations of an ADI

1.71               The BEAR imposes a statutory obligation on an ADI (including in respect of its subsidiaries) to defer a percentage of an accountable person’s variable remuneration. It ensures that accountable persons have clear incentives to make decisions which account for longer term effects. It also ensures that accountable persons are properly held to account for those decisions that have negative future consequences. [Schedule 1, item 1, section 37E]

1.72               If an accountable person engages in behaviour in breach of their BEAR obligations then the ADI is obliged to withhold all or part of the accountable person’s variable remuneration that is deferred under the BEAR. The amount withheld is to be proportionate to the severity and consequences of the breach. This is given effect through requiring an ADI’s remuneration policy to be updated to reflect these requirements.   [Schedule 1, item 1, paragraph 37E(1)(b)]

1.73               Deferring variable remuneration is a common practice in many ADIs and other companies. It rewards executives for actions which increase profitability or grow the business over time. However, when those actions negatively affect the business, or harm the community, the BEAR makes clear that deferred variable remuneration should not be paid.

The ADI’s obligations concerning remuneration policy

1.74               An ADI must implement a remuneration policy that is consistent with the ADI’s BEAR obligations. This updated remuneration policy will be required to be in effect by 1 July 2018. [Schedule 1, item 1, paragraphs 37E(1)(b) and 37E(1)(c)]

1.75               The ADI should defer the variable remuneration of accountable persons for all accountable persons for the minimum period. The minimum period is defined as four years or a shorter period approved by APRA. The period starts on the day after the day on which the ADI made the decision that the person was granted variable remuneration. [Schedule 1, item 1, paragraph 37E(1)(a) and section 37EC]

1.76               An ADI may defer the variable remuneration beyond the minimum period if an ADI has reason to believe that the accountable person is likely to have failed to comply with his or her BEAR obligations. For example, the ADI may be undertaking an investigation at the time that the deferred remuneration would have been payable. Once the ADI has determined whether the person has or has not complied with the obligations, the deferred remuneration will be paid or withheld.  [Schedule 1, item 1, section 37EC(2)]

1.77               The amount of an accountable person’s remuneration to be deferred by an ADI will depend on the size of the ADI. [Schedule 1, item 1, section 37EB]

Table 1.1 Minimum amounts of remuneration to be deferred

If the accountable person is …

the amount is …

The CEO of a large ADI.

The lesser of 60 per cent of the CEO’s variable remuneration for the financial year or 40 per cent of the CEO’s 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 per cent of the person’s variable remuneration for the financial year or 20 per cent of the person’s 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 per cent of the person’s variable remuneration for the financial year or 20 per cent of the person’s total remuneration for the financial year.

An accountable person of a small ADI, or of a subsidiary of an ADI.

The lesser of 40 per cent of the person’s variable remuneration for the financial year or 10 per cent of the person’s total remuneration for the financial year.

 

1.78               If the minimum amount of remuneration to be deferred, as calculated in accordance with Table 1.1 is less than the amount determined by the Minister the ADI is not required to defer the variable remuneration. If no minimum amount is determined by the Minister, then the amount is $50,000. [Schedule 1, item 1, section 37ED]

1.79               The Minister has the power to determine a minimum threshold amount by 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, paragraph 37ED(1)(a) and subsection 37ED(2)]

1.80               The Government expects this power to be used to maintain the currency of the minimum threshold over time.

1.81               The Minister has the power to determine what constitutes a small, medium or large ADI by legislative instrument. The Minister will make this instrument based on advice from APRA. 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 37G(3)]

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.

1.83               The Government will consult on the legislative instrument before it is made.

1.84               An ADI may apply to APRA to seek APRA’s agreement to defer the variable remuneration of a specific accountable person for a period of time less than four years. APRA has discretion to approve this shorter deferral period. [Schedule 1, item 1, paragraph 37EC(1)(b)]

1.85               APRA may approve a shorter period of time if APRA is satisfied that the person is no longer an accountable person of the ADI or subsidiary because the person has died, is seriously incapacitated, disabled or seriously ill. APRA must also be satisfied that the ADI has satisfied itself that the relevant accountable person has complied with his or her BEAR obligations based on information that is available to the ADI at the time of applying to APRA for a shorter deferral period, and that it is unlikely that further such information will become known. [Schedule 1, item 1, paragraphs 37EC(4)(a)(i) and 37EC(4)(b)]

1.86               To give full flexibility, APRA can determine other circumstances where a shorter deferral period will apply. APRA may determine these circumstances for a particular ADI or its subsidiaries by issuing a written notice. This administrative decision is judicially reviewable under the AD(JR) Act and there is no merits review available for the same reasons set out in paragraph 1.40. APRA also has the power to determine these circumstances for a class of ADIs or subsidiaries 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, subparagraph 37EC(4)(a)(ii) and subsections 37EC(5) and 37EC(6)]  

1.87               The Government expects that APRA may use this power in circumstances where an accountable person has changed employers and the new ADI employer buys-out the deferred variable remuneration from the previous ADI employer. APRA could provide that deferral by the new ADI employer should be for the same period as the previous employer deferred the variable remuneration to comply with the BEAR obligations.

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)]

Who is an accountable person?

1.89               A key objective of the BEAR is to ensure that an ADI allocates responsibilities to accountable persons across the ADI group. This can include its parent entity or subsidiaries so, where an issue arises, APRA can identify the responsible accountable person.

1.90               The Bill inserts the term ‘accountable person’ into the Banking Act. ‘Accountable person’ is defined by reference to a general principle and by reference to listed functions or responsibilities. [Schedule 1, item 1, section 37BA]

1.91               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. [Schedule 1, item 8, subsection 5(1)]

1.92               Under the general principle, a person is an accountable person if the person is in a senior executive position with actual or effective management or control of the ADI, or the management or control a substantial part of the ADI group’s operations. As noted above, the ADI group includes the ADI and its subsidiaries. [Schedule 1, item 1, subsection 37BA(1)]

1.93               It is not the Government’s intention that simply being in a management role in a subsidiary means the person is an accountable person. This intention is reflected in the use of the term ‘senior executive responsibility’ for each of the responsibilities identified in subsection 37BA(3). Use of senior executive is to reflect seniority in ADIs and subsidiaries, consistent with their ability to create a prudential impact as a result of their decisions.

1.94               Under the general principle, a person having significant influence over the conduct and behaviour of the ADI group where that person’s behaviour or conduct could pose risks to the ADIs business and its customers will be an accountable person. Individuals exercising management or control for significant or substantial parts or elements of the ADI group should be identified in the ADI and, where relevant, in the subsidiaries or the parent of the ADI. This could include the head of a significant or substantial business line within the ADI. Similarly, an accountable person could also be a senior executive responsible for a significant or substantial subsidiary or a major business activity in that subsidiary.

1.95               A Senior Officer Outside Australia may be considered an accountable person under the general principle. However, simply being in this role will not automatically mean the person is an accountable person. In order to be considered an accountable person, a person in the role of Senior Officer Outside Australia would need to have significant influence over the conduct and behaviour of the entity, such that the person’s behaviour or conduct could pose risks to the business and its customers.

1.96               An accountable person is also defined by reference to a list of particular responsibilities. A person in an ADI will be an accountable person where the person is in a position that undertakes a particular responsibility as listed in the Banking Act. [Schedule 1, item 1, subsections 37BA(2) and 37BA(3)].

1.97                         An ADI may not necessarily have a separate person corresponding to each of the functions listed in the table at section 37BA. In particular, a small ADI could raise its proposed approach with APRA, before the ADI determines the appropriate representation for their size, business operations, customer base and presence in the Australian market.

 

Table 1.2 Particular responsibilities covered by the BEAR

Particular responsibility

Responsibility for oversight of the ADI as a member of the Board of the ADI.

Senior executive responsibility for management or control of the business activities of the ADI, including allocating to accountable persons responsibility for all parts or aspects of the ADI group and reporting directly to the Board of the ADI.

Senior executive responsibility for the management of the ADI’s financial resources.

Senior executive responsibility for the overall management of the risk controls and/or risk management arrangements of the ADI.

Senior executive responsibility for the management of the operations of the ADI.

Senior executive responsibility for the information management, including information technology systems in the ADI.

Senior executive responsibility for the management of the internal audit function of the ADI.

Senior executive responsibility for the management of the compliance function of the ADI.

Senior executive responsibility for the management of the human resources function of the ADI.

Senior executive responsibility for the management of the anti-money laundering function of the ADI.

1.98               Non-executive directors for the ADI will be accountable persons, but their obligations under BEAR will reflect their oversight role for the ADI and its group. They will not be required to perform day-to-day executive and management functions to meet the obligations of the BEAR. Executive directors’ BEAR obligations would cover both their oversight roles and their executive and management functions.

1.99               Some organisations will provide the occupants of senior executive and management roles with different titles, but the business practice for the prescribed responsibilities above is reasonably standard.  Typically, people with the following role titles would be in scope of the BEAR, subject to individual business circumstances:

•        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)]

1.101           Where a contractor performs a role which is either captured under the general principle or in the prescribed list, the contractor would be an accountable person and would be subject to the accountability obligations.

1.102           An individual is an accountable person if the person has senior executive responsibility for the conduct of all the activities of an Australian branch of a foreign ADI. [Schedule 1, item 1, subsection 37BA(6)]

1.103           APRA also has a power to exclude responsibilities performed in a specific ADI or its subsidiaries from the prescribed list of responsibilities by issuing a written notice to the ADI or its subsidiaries. Where APRA issues a notice anyone in that ADI or its subsidiaries conducting those responsibilities is not considered an accountable person. This administrative decision is judicially reviewable under the AD(JR) Act and there is no merits review available for the same reasons set out in paragraph 1.40. [Schedule 1, item 1, paragraph 37BB(1)(a) and subsection 37BB(2)]

1.104           This power ensures APRA can respond flexibly to changes in business practices. It also recognises that there may be specific circumstances in particular ADIs may justify a different approach to defining accountable responsibilities.

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)]

1.106           In exercising this power, APRA must take into account whether including these responsibilities is necessary to achieve the objectives of BEAR.

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)]

1.108           An ADI must ensure that responsibility for all parts or elements of the ADI and its subsidiaries is allocated to an accountable person or persons. [Schedule 1, item 1, section 37D]

The accountability obligations of accountable persons

1.109           Unless an accountable person works in an ADI or class of ADIs that the Minister has exempted from the BEAR, an accountable person must meet his or her accountability obligations under BEAR. [Schedule 1, item 1, sections 37B and 37CA]

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.

1.112           ASIC will continue to regulate instances of poor conduct or behaviour. APRA and ASIC currently work together to oversee and regulate the financial sector and this is unchanged by the BEAR.

1.113           The accountability obligations of an accountable person are similar to those of an ADI. The accountable person has met these obligations if they can show APRA he or she has taken reasonable steps. The obligation to have integrity and honesty and be open with APRA is absolute. [Schedule 1, item 1, paragraphs 37CA(1)(c) and 37CB]

1.114           Accountable person obligations, in an ADI or its subsidiary, include that the accountable person must, in conducting his or her responsibilities:

•        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.

1.116           When an accountable person can show he or she has taken reasonable steps to meet his or her accountability obligations then he or she would not be in breach of those obligations. Section 37CB is not exhaustive in identifying what is a ‘reasonable step’.

1.117           Given the seniority of the role of accountable persons, reasonable steps are systemic in nature. An accountable person has taken reasonable steps where appropriate governance, control and risk management and policies and systems are in place; delegations are appropriate given the scope of responsibilities; and there are mechanisms for dealing with problems that arise or might arise.

1.118           The reasonable steps that a person could take to meet their accountability obligations should be considered in terms of that person’s functions or responsibilities. For example, a non-executive director in an oversight role may be expected to take different actions to an executive director in order to prevent matters arising that would adversely affect the prudential reputation or prudential standing of the ADI.

1.119           Following appropriate consultation, APRA may issue further guidance on what factors it would consider in determining reasonable steps and the behaviour and conduct it expects will meet the accountability obligations.

1.120           Where accountable persons share responsibilities, all of those people are equally responsible for meeting the accountability obligations. This is designed to prevent accountable persons from shifting blame between accountable persons. Each person responsible for a function listed in an accountability statement and map given to APRA, will be held as an accountable person for that responsibility. [Schedule 1, item 1, subsection 37CA(2)]

1.121           If an accountable person of an ADI or a subsidiary may be placed in a position where compliance with the BEAR could place them in breach of a corresponding foreign law (such as the Manager in Charge regime in Hong Kong), and APRA is satisfied that this contravention could occur, APRA can give the accountable person a written notice specifying the obligation for the accountable person. This will ensure that accountable persons, as with ADIs, are not placed in a position where they breach a foreign law through complying with BEAR. This administrative decision is judicially reviewable under the AD(JR) Act and there is no merits review available for the same reasons set out in paragraph 1.40.   [Schedule 1, item 1, section 37BC]

1.122           Such a notice from APRA to an accountable person may contain conditions on which the notice is subject. [Schedule 1, item 1, paragraph  37BC(1)(b)]

Remuneration

1.123           The Bill inserts definitions of ‘remuneration’ and ‘variable remuneration’ into the Banking Act. [Schedule 1, item 1, subsection 37E(3) and section 37EA]

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.

1.125           Variable remuneration is so much of an accountable person’s total remuneration that is not guaranteed because it is conditional on the achievement of pre-determined objectives and can be forfeited if these objectives are not met. [Schedule 1, item 1, subsection 37EA(1)]

1.126           The amount of deferred variable remuneration is apportioned according to the extent it relates to an accountable person role. If the person occupies an accountable person role for only 50 per cent of their time and spends 50 per cent of their time working in a non-ADI parent company for example, then only half of their variable remuneration must be subject to the deferral rules. [Schedule 1, item 1, paragraphs 37E(3)(a)(ii) and 37E(3)(b)(ii)]

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)]

1.128           APRA also has the power to adjust the scope of variable remuneration in respect of one or more accountable persons of a particular ADI or subsidiary. APRA exercises this power by giving the ADI or subsidiary a written notice. This administrative decision is judicially reviewable under the AD(JR) Act and there is no merits review available for the same reasons set out in paragraph 1.40.   [Schedule 1, item 1, subsection 37EA(3)]

1.129           As a general rule, variable remuneration is valued at face value, rather than fair value for the purposes of calculating an amount to be deferred. [Schedule 1, item 1, paragraph 37EB(2)(b)]

1.130           APRA also has the power to determine how variable remuneration should be valued in respect of one or more accountable persons of a particular ADI or subsidiary of an ADI. APRA exercises this power by issuing a written notice. This administrative decision is judicially reviewable under the AD(JR) Act and there is no merits review available for the same reasons set out in paragraph 1.40.   [Schedule 1, item 1, paragraph 37EB(2)(a) and subsection 37EB(3)]

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

1.132           An ADI must register an accountable person with APRA prior to the person being appointed to the position. An application must be in writing in a form approved by APRA and include all information required by APRA as a part of the registration process. [Schedule 1, item 1, subsections 37HA(1) and 37HA(2)]

1.133           The ADI must ensure a registration is accompanied by a signed declaration that the ADI is satisfied the person is suitable to be an accountable person. [Schedule 1, item 1, paragraph 37HA(2)(c)]

1.134           At the same time, the ADI should also give APRA an accountability statement in respect of the person, as required by section 37F. [Schedule 1, item 1, paragraph 37HA(2)(d)]

1.135           APRA must maintain a register of ‘accountable persons’. [Schedule 1, item 1, section 37H]

1.136           A person’s registration will take effect 14 days after APRA is notified, unless the ADI withdraws the registration beforehand. [Schedule 1, item 1, subsections 37HA(4) and 37HA(5)]

1.137           While it is the responsibility of an ADI to determine the suitability of an accountable person, the period between the time an ADI applies to register a person and that registration taking effect gives APRA the opportunity to discuss with the ADI relevant information held by APRA including on the register. This information could include whether the person has previously been removed or disqualified as an accountable person, senior manager, director or auditor of an ADI.

1.138           Where a person registered as an accountable person changes employment to work for another ADI, he or she must be registered as an accountable person of their new employer.

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]

Notification obligations

1.140           The BEAR obliges an ADI to give APRA accountability statements and an accountability map. These documents show the governance and management controls in an ADI and show the organisation’s lines of accountability. The accountability maps and statements are not intended to be viewed as compliance documents, but rather tools of good governance which illustrate that the ADI has appropriate accountability checks and balances and accountable person roles are allocated appropriately according to the size, complexity and customer base of the ADI. [Schedule 1, item 1, sections 37F, 37FA and 37FB]

1.141           ADIs must notify APRA if a person ceases to be an accountable person. This includes situations where the person ceases in that role because he or she has been dismissed or suspended because of a failure to comply with accountability obligations under BEAR. [Schedule 1, item 1, paragraphs 37FC(a) and 37FC(b)]

1.142           An ADI must notify APRA if the variable remuneration of an accountable person has been reduced as a result of that accountable person failing their accountable person obligations. [Schedule 1, item 1, paragraph 37FC(c)]

1.143           An ADI must also notify APRA when the ADI becomes aware that it has breached its accountability obligations, or an accountable person has breached his or her accountability obligations. [Schedule 1, item 1, paragraph 37FC(d)]

1.144           Unless APRA determines another period, an ADI has 14 days to meet its notification obligations. [Schedule 1, item 1, subsections 37F(2) and 37F(3)]

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)]

Accountability statements

1.146           An ADI’s accountability statement is a description of the areas of responsibility attributable to each accountable person. Each accountable person must have an accountability statement that outlines the areas over which he or she has effective management or control. [Schedule 1, item 1, section 37FA]

1.147           Accountability statements include a comprehensive description of that part of the ADI or its subsidiaries operations over which the accountable person has actual or effective management or control, as well as other information as requested by APRA. An accountability statement should align with the accountable person’s functions and responsibilities. [Schedule 1, item 1, subsection 37FA(1)]

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)]

Accountability maps

1.150           All ADIs must complete accountability maps which accurately show lines of reporting and responsibility in the ADI. The accountability map is a governance document. Many ADIs would already have some form of accountability map, in the form of an organisational structure and position descriptions.

1.151           Accountability maps will help APRA identify accountable persons where an issue arises in a particular area of an ADI or its subsidiary. They will also ensure that there are no gaps in accountable person functions across the ADI and that appropriate governance controls are in place. The accountability maps could also assist an ADI to show the reasonable steps it has taken to avoid any breach of its BEAR obligations.

1.152           The accountability map of an ADI should contain the names of all accountable persons of the ADI and its subsidiaries. This is not taken to mean that each subsidiary must have an accountable person. Rather, within the ADI group or relevant group of bodies corporate as is constituted by the ADI and its subsidiaries, all parts or aspects of the ADIs business should be accounted for. An accountable person may be responsible for the management of a number of subsidiaries, depending on the subsidiaries business and its role in relation to the ADI. [Schedule 1, item 1, paragraph 37FB(1)(a)]

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)]

 Consequences of breaching the BEAR

1.155           APRA has an established approach to prudential supervision which is set out in the APRA Supervision Blueprint and is supported by enforcement powers under the Banking Act and laws concerning insurance and superannuation.

1.156           These existing powers include:

•        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.

1.157           APRA can continue to use its informal and formal powers in implementing the BEAR. Existing section 11AF is amended to let APRA determine a standard for the purposes of BEAR. APRA also has administrative authority to issue guidance for ADIs in complying with the BEAR. [Schedule 1, item 11, subsection 11AF(1AC)]

1.158           The Government expects that APRA would only seek a civil pecuniary penalty for significant breaches of the BEAR.

1.159           The Bill does not create a cause of action against an ADI or an accountable person of an ADI in addition to any cause of action a person had prior to the commencement of BEAR. [Schedule 1, item 1, subsection 37KB]

Consequences of breaching the BEAR for an ADI

1.160           APRA may seek pecuniary penalties where an ADI has not:

•         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)]

1.161           A civil pecuniary penalty must be imposed by a court. The maximum penalty available will depend on the size of the ADI. For large ADIs the maximum civil pecuniary 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). [Schedule 1, item 1, subsection 37G(2)]

1.162           The amount of the civil pecuniary penalty must be determined by a court, and would be set with regard to the seriousness of the breach. The maximum penalties represent the seriousness of these breaches, reflecting the potential harm to consumers and other financial market participants. The maximum penalties also reflect the damage to public confidence in the financial system resulting from a failure by an ADI and its senior officers to meet its BEAR obligations, such as maintaining fundamental standards of honesty and integrity, which result in prudential and systemic harm.

1.163           As noted above, the Minister will determine by legislative instrument the kinds of ADIs which will be considered as small, medium or large. 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 37G(3)]

1.164           When considering whether to impose a civil pecuniary penalty, the Federal Court must consider the impact a potential penalty would have on the ongoing viability of the ADI. Existing Schedule 2 to the Banking Act also includes factors that the Federal Court must consider. This includes the seriousness of the contravention and the harm caused by that contravention to the community. [Schedule 1, item 1, subsections 37G(4) and 37G(5)]

1.165           Existing Schedule 2 to the Banking Act also sets out the timeframe in which APRA may start court proceedings. Consistent with the current law APRA will have six years from the date of the misconduct to start court proceedings for a breach of the BEAR.

Consequences of breaching the BEAR - an accountable person

1.166           If an accountable person breaches BEAR, APRA may disqualify an accountable person from acting as an accountable person of:

•        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)]

1.167           APRA may make this disqualification for a period that APRA considers appropriate.

1.168           The BEAR is designed so that APRA has sufficient information from the ADI’s accountability map and statements  upon which to make a decision about the accountability of an individual for a breach of that individual’s accountability obligations. For example, before taking an action concerning an accountable person, APRA would consider the person’s accountability statement and the ADI’s accountability map to confirm whether responsibility points to the accountable person in question.

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)]

1.170           APRA must give written notice of a disqualification to the person and the ADI. The written notice must specify the day the disqualification takes effect; this must not be earlier than 7 days after it is signed.

1.171           An accountable person has protections and rights to procedural fairness under BEAR. Before APRA makes its final decision to disqualify a person, the person and the relevant ADI must be given a written notice and an opportunity to respond to the matter. APRA must take into account anything provided by the person or ADI. [Schedule 1, item 1, subsection 37J(5)]

1.172           APRA can administer the disqualification provisions with flexibility. It can vary or revoke a disqualification. [Schedule 1, item 1, section 37JA]

1.173           For the avoidance of doubt, section 52F(2) does not apply to a person disqualified under BEAR. [Schedule 1, item 1, section 37JB]

1.174           Amendments to the APRA Act let APRA publicly disclose information about a decision it has taken to disqualify a person, or the reasons for such a decision. However, APRA is not obliged to release information about disqualifications under the BEAR. [Schedule 1, item 5, subsection 56(7F) of the APRA Act 1999 ]

1.175           APRA’s powers concerning disqualification, including to vary or revoke a disqualification, are subject to merits review. An affected person is able to request that APRA reconsider its decision. Where a person remains dissatisfied with APRA’s decision the affected person is able to seek a review by the Administrative Appeals Tribunal. Providing merits review ensures transparency around the decision making process. [Schedule 1, item 1, subsections 37J(8) and 37JA(4)] .

Examination powers

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 ).

1.177           The Bill gives APRA additional examination powers to investigate potential breaches of the BEAR and extends these powers to all of APRA’s supervisory functions under the Banking Act. Applying these powers to the banking sector would mean it was regulated consistently with other industry sectors regulated by APRA. [Schedule 2, items 7, 8, and 9, sections 61A to 61Q]

1.178           The examination powers allow APRA to require a person to appear before an investigator, set out who can be present at an examination and how a person’s lawyer may participate during an examination. They empower an investigator to require a person to produce books, accounts or documents that are may be relevant to an investigator. [Schedule 2, item 9, sections 61A, 61C, 61D and 61E]

1.179           APRA can require a person to appear before an investigator where the investigator reasonably believes the person has information relevant to an investigation. The person must either swear or affirm that the information they give APRA is true and must answer questions relevant to the investigation.

1.180           A person commits a criminal offence and will be liable to a penalty of a maximum of 30 penalty units (currently $6,300) if the person fails to appear before the investigator, fails to participate as required, was not permitted to be present during an examination but attended, fails to act as required under the examination provisions or fails to produce relevant documents. [Schedule 2, item 9, sections 61A, 61D, 61E, 61F and 61G]

1.181           Amendments to existing section 52F mean that in addition to complying with a requirement to give information, a person must also comply with a requirement to produce a book, account or document, or sign a record despite the material potentially incriminating the person. [Schedule 2, items 2, 3, 4, 5 and 6, section 52F]

1.182           However, under existing subsection 52F(2) information given by an individual (a natural person rather than a body corporate) is not admissible as evidence against the individual in criminal proceedings or in proceedings for the imposition of a penalty, other than proceedings in respect of the falsity of the information or a disqualification under section  21 of the Banking Act. This is expanded to also include where a book, account or document, or signed record are not admissible. [Schedule 2, item 3, 4, 5 and 6, subsection 52F(2), paragraphs 52F(2)(a) and 52F(2)(b)]

1.183           The book, account or documents, or the signed record can be used to gather other evidence against that person or against a third party, for example an employer, partner or alleged accomplice of the person. With regard to Chapter 9 of the Attorney-General’s Department’s Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, it is appropriate to not limit the use of the information, book, account or documents provided or signed record beyond the individual because doing so would significantly limit APRA’s ability to regulate the Banking Act and address matters related to prudential risk.

1.184           Where a person knowingly destroys or in some other way alters a document which is relevant to an investigation the person is liable to a maximum term of 2 years imprisonment. [Schedule 2, item 9, section 61B]

1.185           Where a person’s lawyer participates in the examination, the APRA investigator may determine when the person’s lawyer may speak to the investigator and when the person may be examined by his or her lawyer. An investigator may stop an examination or line of enquiry if the investigator believes the person’s lawyer is obstructing the examination. [Schedule 2, item 4, section 61E]

1.186           Records must be made of an examination and provided to the person who was examined. Conditions may be imposed on the record including limiting who it can be shared with. A person who breaches these conditions is liable to a maximum term of 6 months imprisonment. [Schedule 2, item 4, section 61F]

1.187           Under existing provisions in the APRA Act, APRA can share records from an investigation subject to the conditions in section 56 of the APRA Act.

1.188           New provisions set out when statements made during an examination or other documents, including a report made by an investigator of an investigation, may be admitted and used as evidence during a legal proceeding. [Schedule 2, item 9, sections 61H, 61J, 61M and 61N]

1.189           The weight placed on a statement, where the statement is submitted instead of the person who made the statement appearing at the proceedings, is affected by several factors, including any time that has elapsed between the making of the statement and its potential use. [Schedule 2, item 9, section 61K]

1.190           A person must be given notice of a statement or a report which the other party intends to submit as evidence. The person has an opportunity to object, in writing, to the statement being submitted as evidence. A person cannot object to a report being submitted as evidence but the report is inadmissible if the court or tribunal is not satisfied that the person, or the person’s lawyer, has had sufficient opportunity to examine the report or cross examine the persons who prepared the report. [Schedule 2, item 9, sections 61L and 61P]

1.191           A statement made during an examination is not admissible if it discloses a matter subject to legal professional privilege. Similarly, a lawyer may refuse to comply with a requirement to give information or provide certain documents if the information or documents contain privileged communication, made by or on behalf of the lawyer in his or her capacity as a lawyer. [Schedule 2, item 9 and item 10, subsection 61H(5) and section 62A]

1.192           If evidence would have been admissible except for the amendments made by this Bill, the evidence is still taken to be admissible. [Schedule 2, item 9, section 61Q]

1.193           The investigator may require the person under examination to read the record, or have it read to them, and sign it. It is a criminal offence for a person not to comply with these requirements, with a criminal penalty of a maximum of 30 penalty units (currently $6,300). [Schedule 2, item 9, section 61G]

1.194           The investigator must give a copy of the record to the person, without charge. However, the investigator may impose conditions on the record. For example, the investigator may impose a condition limiting the capacity of the person to share the record with other persons. If the person fails to comply with the conditions the person has committed a criminal offence and is liable to a maximum term of 6 months imprisonment. [Schedule 2, item 9, section 61F]

1.195           If APRA or the investigator are satisfied that a person has failed to comply with a part of the Banking Act, APRA or the investigator may write to the Federal Court. The Federal Court may order the person to comply. [Schedule 2, item 10, section 62B]

Indemnification of ADIs and accountable persons

1.196           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. [Schedule 1, item 1, section 37KA]

1.197           The prohibition against indemnification for loss associated with breaching the BEAR does not cover any insurance obtained with respect to legal costs that may be incurred in a BEAR-related legal action. [Schedule 1, item 1, subsection 37KA(3)]

1.198           The purpose of the BEAR would be undermined by:

•        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.

Review of the BEAR

1.199           Three-years after the BEAR comes into effect, the Minister must initiate a review of the operation of the regime. The review must be completed within six months. [Schedule 1, item 1, subsections 37KC(1) and 37KC(2)]

1.200           A written report will be produced and tabled in Parliament 15 sitting days after the Minister has received a copy of the report. [Schedule 1, item 1, subsections 37KC(3) and 37KC(4)]

1.201           The provision requiring that a review be undertaken will be automatically repealed on 1 July 2023, as the review will be complete by that date and there will be no need to retain the provision in the Banking Act. [Schedule 1, item 14, section 37KC]

Other amendments

1.202           The Banking Act is amended to include new definitions in section 5(1) of the Act. [Schedule 1, items 8 and 10, subsection 5(1); Schedule 2, item 1, subsection 5(1)]

1.203           APRA is provided with the general administration of Part IIAA of the Banking Act. General administration provisions reinforce the principle that an administrator or regulator is authorised to do whatever may be fairly regarded as incidental to, or consequential upon, the things that the they are authorised to do by the law. [Schedule 1, item 1, section 37K]

Scrutiny of legislative instruments

1.204           The Minister has powers to do the following by making a legislative instrument:

•        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)]

1.205           APRA has several legislative instrument making powers designed to allow the BEAR to operate with flexibility. These are:

•        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.

Application and transitional provisions

1.207           The BEAR provisions will apply from 1 July 2018.

Registering an accountable person

1.208           Transitional provisions apply so that an ADI will have 90 days to register an accountable person who was in place on 1 July 2018. [Schedule 1, Part 3, item 15]

Providing accountability statements and maps

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]

1.210           The Government expects this power to be used to provide for an increasing level of detail in accountability maps and statements over time as ADIs put in place processes to implement the regime. The exercise of APRA’s power is subject to Parliamentary scrutiny through the disallowance process.

1.211           An ADI which provides more detail and information in an accountability statement and map during the transitional period is also taken to have met its obligations. [Schedule 1, Part 3, item 17(4)]

Remuneration obligations

1.212           An ADI must update its remuneration policies to comply with the BEAR deferred remuneration provisions from 1 July 2018. [Item 2 of the table in subsection 2(1) of the Bill]

1.213           The BEAR remuneration requirements apply to the variable remuneration of an accountable person if the decision to grant the variable remuneration to that person was made on or after 1 January 2019. [Schedule 1, Part 3, item 16(1)]

1.214           If an employment contract is in place on Royal Assent, the ADI should update that contract to reflect the ADI’s BEAR compliant remuneration policy and the BEAR’s deferred remuneration requirements by 1 January 2020. [Schedule 1, Part 3, item 16(2)]

1.215           To the extent that updating a contract existing on the date of Royal Assent of this Bill is found by a court to be an acquisition of property on other than just terms in breach of section 51(xxxi) of the Constitution, the BEAR’s requirement for that contract to be compliant by 1 January 2020 will not apply. [Schedule 1, Part 3, item 16(3)]

Other amendments

1.216           The Bill includes consequential amendments of an editorial nature. [Schedule 1, item 6, paragraph 56(12)(a) of the APRA Act, item 13, Schedule 2, item 7 and item 8, Part VII, and Schedule 2, item 11, Part IX]

1.217           The Bill includes a provision to repeal that part of the Bill requiring the Minister to undertake a review. The repealing provision commences on 1 July 2023 and will operate to ensure that the Banking Act maintains its currency over time. [Schedule 1, item 14, section 37KC]



Chapter 2          

Regulation impact statement

Background

Authorised deposit-taking institutions (ADIs)

2.1                   Under section 9 of the Banking Act, a body corporate that wishes to carry on ‘banking business’ in Australia may only do so if the APRA has granted an authority to the body corporate for the purpose of carrying on that business. Banking business is ordinarily understood to mean the mixture of deposit-taking and lending. Once authorised by APRA to undertake banking business, the body corporate is an authorised ADI and is subject to APRA’s prudential requirements and ongoing supervision.

2017-18 Budget announcement

2.2                   In the 2017-18 Budget, the Government brought forward a comprehensive package of reforms to strengthen accountability and competition in the banking system. As part of this package, the Government announced that it will legislate to introduce a new BEAR.

The problem

2.3                   Financial stability is very important to economic performance and the wellbeing of Australian households and businesses. The Australian financial system is the backbone of the economy and plays an essential role in promoting economic growth. In order for it to operate in an efficient, stable and fair way, it is imperative that participants have trust in the system. It must operate at the highest standards and meet the needs and expectations of Australian consumers and businesses.

2.4                   Banks, as ADIs, play a critical role in the financial system, including through their deposit-taking, payments and lending activities. ADIs enjoy a privileged position of trust, with prudential regulation designed to provide consumers with confidence in the safety of their deposits.

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]

Without a culture supporting appropriate risk-taking and the fair treatment of consumers, financial firms will continue to fall short of community expectations.

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] :

Weaknesses in risk culture are often considered a root cause of the global financial crisis, headline risk and compliance events. A financial institution’s risk culture plays an important role in influencing the actions and decisions taken by individuals within the institution and in shaping the institution’s attitude toward its stakeholders, including its supervisors.

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] :

Effective corporate governance is critical to the proper functioning of the banking sector and the economy as a whole. Banks perform a crucial role in the economy by intermediating funds from savers and depositors to activities that support enterprise and help drive economic growth. Banks’ safety and soundness are key to financial stability, and the manner in which they conduct their business, therefore, is central to economic health. Governance weaknesses at banks that play a significant role in the financial system can result in the transmission of problems across the banking sector and the economy as a whole.

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] .

2.12               The Government requested the House of Representatives Standing Committee on Economics to undertake an at least annual inquiry into:

•        t he 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.

2.13               In announcing this request, the Treasurer stated that: [10]

This new process represents an important opportunity for the banks to explain how they deal fairly with their customers and, in turn, build confidence in their institutions.

Banks operate under a social licence and have responsibilities to the Australian public. We expect them to have high standards.

It is important Australians have confidence in their financial institutions. It is therefore critical that the major banks are regularly held accountable to all Australians through their Parliamentary representatives.

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.

2.15               The Coleman Report referred to a number of instances where participants in the financial sector have been treated inappropriately by banks and other related financial institutions:

•        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]

‘The FSI concluded that the interests of financial firms and consumers are not always aligned. The major banks’ appearance before the committee confirmed it.’

‘The major banks have a ‘poor compliance culture’ and have repeatedly failed to protect the interests of consumers. This is a culture that senior executives have created. It is a culture that they need to be accountable for.’

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.

2.18               In particular, the Coleman Report lacked confidence that Australia’s major banks had in place all the components of an effective accountability regime for directors and senior executives, with a:

•        Lack of clarity on the responsibilities

Sanctioning those that are responsible for misconduct is difficult if individual responsibilities are not clearly defined.

In regards to ANZ’s improper collection of fees, the bank did not believe that any staff members were responsible for the breach because:

The issue existed for a number of years...and there have been a number of organisational and staffing changes through that period.

•        Lack of clarity on the expectations

NAB also argued that more severe consequences for executives were not appropriate because they were not directly responsible for the misconduct.

•        Lack of timely and appropriate consequences to the person from breaches of expectations in fulfilling their responsibilities.

The Coleman Report found that no directors or senior executives had their employment terminated as a result of the recent inappropriate behaviour, and the impact on the remuneration of directors or senior executives was not clearly specified:

“There are certainly individuals...who have had some consequences relating to remuneration...we have not had individuals terminated” Mr Ian Narev, CEO of the Commonwealth Bank on the mishandling of claims in CommInsure

2.19               Despite these developments, APRA has not disqualified a bank senior executive as not being a fit and proper person since it has been required to apply to the Federal Court to do so.

2.20               In addition, despite the potential harm of poor governance, risk management and behaviour by bank directors and senior executives, no separate civil penalty provision applies to a bank’s failure to meet APRA’s prudential standards in this area.

Case for government action/objective of reform

2.21               It is well established that effective prudential regulation is essential to maintaining financial stability.

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] :

align corporate culture, corporate activities and behaviour with the expectation that the bank will operate in a safe and sound manner, with integrity and in compliance with applicable laws and regulations

2.23               The BIS guidelines state that [13] :

Among their other responsibilities, Board members and senior management are expected to define conduct risk based on the context of the bank’s business. Cases of misconduct have been identified as stemming from:

•        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.

The Board should set the “tone at the top” and oversee management’s role in fostering and maintaining a sound corporate and risk culture. Management should develop a written code of ethics or a code of conduct. Either code is intended to foster a culture of honesty and accountability to protect the interest of its customers and shareholders.

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] :

The FSB Principles and Standards for Compensation Practices aim to ensure effective governance of compensation, alignment of compensation with prudent risk-taking and effective supervisory oversight and stakeholder engagement in compensation. An employee’s compensation should take account of the risks that the employee takes on behalf of the financial institution and the employee’s performance in meeting the institution’s risk, compliance, and other important policies. Compensation should take into consideration prospective risks as well as risk outcomes that are already realised.

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]

2.26               The essential components of an effective accountability regime are:

•        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.

2.28               Notwithstanding these requirements, the Coleman Report identified that there was a lack of accountability within the major banks at the senior executive level.

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.

T he importance of meaningful consequences to accountability

2.30               More broadly, there is concern that without meaningful consequences for the bank, directors and senior executives, these standards are not likely to achieve their objectives.

2.31               One of the barriers to achieving an effective accountability regime in financial institutions, and banks in particular, is that there can often be a significant difference between the timing of the benefits of decisions and the crystallisation of associated risks.

2.32               Regulators do not have the legislative authority to impose the stricter requirements needed to address the above-mentioned market and regulatory failure to hold ADIs and individuals within them to account in accordance with community expectations, and to protect the integrity of the financial system.

2.33               Furthermore, experience to date has shown that individual accountability imposed via Boards and shareholders has not been adequate to address these issues, especially when Board members themselves are often not held to account. As such, Government action is needed to ensure a fit-for-purpose accountability regime is put into place, which has appropriate consequences associated with misconduct.

2.34               Former APRA Chair John Laker noted - in the aftermath of the global financial crisis that: [17]

The fallout from the global financial crisis is replete with examples of shareholders of major global financial institutions — particularly institutional shareholders — being seduced by short-term profit figures and share price gains, and failing to exercise the vigorous scrutiny and persistence expected of owners. As the recent Walker Review of corporate governance in UK banking institutions has lamented, major institutional investors were slow to act as issues of concern were raised, but quick to ‘cut and run’. Similarly, the OECD has noted that shareholders of major global financial institutions have tended to be reactive rather than proactive and seldom challenged Boards in sufficient number to make a difference.

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]

Although the global financial crisis shone an immediate spotlight on liquidity and credit risks, it is now clear that agency or conflict-of-interest risk was a pervasive influence on risk-taking and leverage.  This risk manifested itself in a number of ways:

remuneration arrangements in some major financial institutions that paid insufficient regard to longer-term risks and encouraged executives to ‘roll the dice’ on leverage, volume growth and risk controls.

2.36               In particular, there is a need for a heightened accountability framework to ensure that, where there is inappropriate behaviour, more of the cost of that behaviour is felt within ADIs rather than solely by the community. Internalising more of the cost of inappropriate behaviour in this way should provide greater incentives for improved behaviour within the sector.

2.37               The banking sector has not implemented sufficient accountability measures of its own accord to meet community expectations. Similarly, neither the market nor the regulatory regime has imposed consequences in accordance with these expectations. As a result, the cost of inappropriate behaviour has been felt largely by the community rather than within the banking sector.

2.38               This is particularly problematic in relation to the banking sector because banks, as ADIs, play a critical role in the financial system, including through deposit-taking, payments and lending activity. ADIs remain at the centre of some of the most critical decisions in life, including buying a first home, starting a business, and saving and investing for retirement. It is imperative that, in providing these functions, ADIs maintain community confidence that they will balance risk and reward appropriately and serve the interests of consumers and businesses. If this confidence is undermined, ADIs will not be able to operate in an efficient, stable and fair way.

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.

Policy options

Option 1 - status quo

2.40               Under Option 1, no changes would be made to the accountability requirements of ADIs and their directors and senior executives.

2.41               ADIs and their directors and senior executives would remain subject to ARPA’s existing prudential framework, which includes Prudential Standard CPS520 Fit and Proper (CPS520). CPS 520 sets out minimum requirements for APRA-regulated institutions in determining the fitness and propriety of individuals to hold positions of responsibility.  (See Appendix A for further details.) ADIs and their directors and senior executives would also remain subject to existing sanctions by APRA and ASIC for misconduct.

Option 2 - amend prudential standards - an enhanced governance/risk management/‘Fit and Proper’ regime

2.42               Option 2 would involve APRA making revisions to its existing prudential standards to provide greater clarity on the allocation of responsibilities of senior executives within ADI groups and the expectations of those undertaking these roles.

2.43               The essential components of an effective accountability regime are:

•        clarity on the responsibilities of the person;

•        clarity on the expectations of the person; and

•        timely and appropriate consequences on the person from breaches of expectations in fulfilling their responsibilities.

2.44               This option would involve action to improve the first two components of an effective accountability regime.  Revisions to prudential standards would include:

•        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

2.46               Under Option 3 a new BEAR would be introduced to make ADIs and their directors and senior executives more accountable.

2.47               This option would involve action to improve all three components of an effective accountability regime.

2.48               The BEAR would:

•        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).

2.50               As part of this option, legislation and prudential standards would be introduced to implement an accountability regime with the following key elements:

Accountability obligations

•        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.

Consequences

2.51               The key difference between Option 2 and Option 3 is in the consequences for banks, directors and senior executives for not meeting their responsibilities.

•        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.

  Cost benefit analysis of each option/Impact analysis

Option 1

2.52               The problem of poor conduct in ADIs will not be addressed. There will be no additional requirements imposed on industry.

2.53               The advantages of maintaining the status quo:

•        No change in regulatory burden : ADIs and their accountable persons would not incur the regulatory costs of complying with heightened expectations.

2.54               The disadvantages and risks of maintaining the status quo:

•        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.

2.55               As this option would maintain the status quo and therefore require no regulatory or legislative changes there are no regulatory costs associated with this option.

Option 2

2.56               The problem of poor conduct in ADIs could be partially addressed through APRA making revisions to its existing prudential standards to provide greater clarity on the allocation of responsibilities of senior executives within ADI groups and the expectations of those undertaking these roles.

2.57               The advantages of enhancing the existing prudential standards framework under Option 2 are:

•        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.

2.58               The disadvantages of Option 2 are:

•        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.

Firm-level non-compliance can be difficult to deter if the sanctions given are not sufficient to deter such behaviour.

•        Additional regulatory costs : ADIs would face additional regulatory costs.

Regulatory costs

2.59               Should the Government implement Option 2, additional regulatory costs would be imposed on ADIs.

•        These costs are expected to arise primarily as upfront costs to understand the new requirements, update systems, policies and procedures, and train staff.

2.60               The following costs are not considered regulatory costs for the purpose of this document: the cost to ADIs of defending civil penalty cases, the cost of any civil penalty, and the cost of challenging the removal or disqualification of an accountable person or a reduction in variable remuneration.

2.61               Using the regulatory burden measurement framework, it has been estimated that Option 2 would increase compliance costs by $10.2 million per year. A regulatory offset has not been identified. However, Treasury is seeking to pursue net reductions in compliance costs and will work with affected stakeholders and across Government to identify regulatory burden reductions where appropriate.

 

Table 2.1 Table 1: Regulatory burden estimate (RBE) table (see Appendix B for further detail)

Average annual regulatory costs (from business as usual)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in costs

Total, by sector

10.2

-

-

10.2

Option 3

2.62               The problem of poor conduct in ADIs will be addressed through clarification of the allocation of responsibility of senior executives and directors within ADI groups, heightened expectations of behaviour or accountability obligations for both ADIs and their senior executives and directors, and the imposition of more significant consequences for not meeting these accountability obligations.

2.63               The BEAR would achieve the essential components of an effective accountability regime through the following measures in legislation:

•        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.

2.64               The key difference between option 2 and option 3 is in the consequences for banks, directors and senior executives for not meeting their responsibilities.

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]

2.66               The advantages of Option 3 are expected to be substantially greater than Option 2, as there would be enhanced consequences for contraventions of the heightened expectation of behaviour:

•        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]

Firm-level non-compliance can be difficult to deter if the sanctions given are not sufficient to deter such behaviour. Evidence presented in the Parliamentary Commission on Banking Standards report shows that firms can include regulatory fines as a cost of business. Even total failure may not be a sufficient deterrent if the losses are diluted through public bailouts. More importantly, the sanctions are not often directed at those responsible for making the non-compliant decisions in the first place. Isolating individual responsibility ensures that those directly responsible for problems are sanctioned.

•        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.

2.67               The disadvantages of Option 3 are:

•        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]

The BEAR can be seen as a strengthening of the existing prudential framework. Although there are a range of new elements, it is not new territory.

•        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.

Regulatory costs

2.68               Should the Government implement Option 3, additional regulatory costs would be imposed on ADIs. The magnitude of regulatory costs to a financial institution reflect, in essence, the extent to which their current accountability frameworks falls short of international best practice.

•        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] :

The Regime is a formal expression of the common sense, good governance practice that any organisation should adhere to. It was created against the backdrop of a clear and shared understanding that a culture of personal responsibility must be embedded at the heart of financial services.

 

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]

There have been questions raised about whether aspects of the new accountability regime will change the nature of APRA supervision. While our supervisory approach is always evolving, we intend to remain a supervision-led regulator, working to prevent problems rather than simply wait for them to happen and find fault after the event.

If we are successful in that approach, the new powers granted to APRA should only need to be used rarely. That should not be interpreted as saying we would be reluctant to use them. But the goal must be that, with clear boundaries and obligations set out by the regulatory framework, 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.

My 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.

2.70               The following costs are not considered regulatory costs for the purpose of this document: the cost to ADIs of defending civil penalty cases, the cost of any civil penalty, and the cost of challenging the removal or disqualification of an accountable person or a reduction in variable remuneration.

2.71               Using the regulatory burden measurement framework, it has been estimated that Option 3 would increase compliance costs by $11.5 million per year. A regulatory offset has not been identified. However, Treasury is seeking to pursue net reductions in compliance costs and will work with affected stakeholders and across Government to identify regulatory burden reductions where appropriate.

2.72               The cost-benefit analysis of the UK Senior Manager Regime noted that: [25]

Quantifying the benefits of the policies is not straightforward, given uncertainty around the extent to which the policies will in fact change behaviour and the lack of clear evidence of the results of other, similar policy changes.

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 2.2 Table 2: Regulatory burden estimate (RBE) table (see Appendix B for further detail)

Average annual regulatory costs (from business as usual)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in costs

Total, by sector

11.5

-

-

11.5

Consultation plan

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.

2.78               On 13 July 2017 the Government released a consultation paper which outlined:

•        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.

2.79               The paper also included 17 questions for consultation, targeted at the points of detail where views of stakeholders were particularly sought.

2.80               Shortly after the release of the consultation paper, Treasury conducted round table discussions with industry bodies and technical experts, and had meetings with several major ADIs, including the four major banks.

2.81               Submissions to the consultation paper closed on 3 August 2017. A total of 48 submissions (37 public and 11 confidential) were received from a wide range of respondents, including banks, industry groups, consumer bodies and law firms, with many submissions providing detailed responses to the questions for consultation.

2.82               Key issues raised by stakeholders in the consultation on the discussion paper included:

•        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.

2.83               The draft legislation was also developed taking into account suggestions from stakeholders that flexibility would be needed in the regime. The obligations imposed on individuals by the BEAR were developed to reflect how ADIs operate in practice. Further, the draft legislation provides for exceptions in certain circumstances (for example to the 4 year deferred remuneration rule) and gives APRA the power to flexibly administer the BEAR (for example, by legislative instrument).

2.84               While the scope of the BEAR was considered to be appropriate (given that the problems of accountability identified had mainly occurred within ADIs) and was therefore left unchanged, stakeholders’ remaining concerns were addressed in the draft legislation by:

•        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.

2.85               The draft legislation was released for consultation on 22 September 2017 to seek views on the legislative design, to minimise the risk of unintended consequences, and to ensure the BEAR meets the policy objectives in an efficient manner. Submissions closed on 28 September 2017.

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).

Option selection/Conclusion

2.87               Given the importance of community confidence and trust in banks, and consistent with the Budget announcement, Option 3 is preferable and should be implemented as soon as it is practicable in order to address accountability gaps in the banking sector.  It represents a credible new regime that will result in a substantial strengthening of bank accountability, with meaningful consequences where banks and their directors and senior executives fall short of prudential requirements, consistent with the community’s reasonable expectations.

2.88               Although Option 2 provides greater clarity on the allocation of responsibilities of senior executives within ADI groups and the expectations of those undertaking these roles, it does not address all key components of an effective accountability regime - which Option 3 does via the consequences for banks, directors and senior executives for not meeting their responsibilities.

2.89               Another issue raised as part of the consultation was that the focus on ADIs would put them at a competitive disadvantage. ADIs argued that the BEAR should cover all APRA-regulated entities, on the basis that its application to ADI groups but not their competitors would place them at a competitive disadvantage. On the other hand, other submissions argued that the focus on banks was appropriate, given that was where the accountability gaps had been identified. This question can be revisited in due course once the BEAR legislation is in place.

Implementation

2.90               The BEAR will be implemented through amendments to the Banking Act and prudential standards. The BEAR will commence on 1 July 2018. This will enable accountability gaps in the banking sector to be addressed as soon as practicable.

2.91               Recognising the implementation steps that ADIs will need to undertake to comply with the BEAR, commencement of individual requirements will be in stages. This will include APRA outlining through prudential standards the implementation and transitional details of ADIs identifying and registering accountable persons, and providing accountability statements and maps.

2.92               Furthermore, a transitional period will be provided for the remuneration requirements, in order to give ADIs a period of time in which to change remuneration policies and renegotiate contracts with accountable persons.

Evaluation/review

2.93               The BEAR is a significant change to the regulatory framework. The legislation includes a requirement to conduct a post-implementation review three years following commencement of the BEAR. The terms of reference/scope of the review will be decided closer to the date, to allow consideration for issues that may arise during the operation of the BEAR.

Appendix A - Fit and Proper

2.94               Prudential Standard CPS 520 Fit and Proper sets out minimum requirements for APRA-regulated institutions in determining the fitness and propriety of individuals to hold positions of responsibility. Its objective is to ensure that an institution prudently manages the risks that persons acting in responsible person positions who are not fit and proper pose to the institution’s business and financial standing.

2.95               The ultimate responsibility for ensuring the fitness and propriety of the responsible persons of an APRA-regulated institution rests with its Board of directors (or equivalent).

2.96               Persons who are responsible for the management and oversight of an APRA-regulated institution, and persons employed by a member of the group whose activities may materially affect the business or financial standing of the group, need to have appropriate skills, experience and knowledge, and act with honesty and integrity. These skills and qualities strengthen the protection afforded to depositors, policyholders and other stakeholders. To this end, institutions need to prudently manage the risk that persons in positions of responsibility might not be fit and proper.

2.97               The key requirements of this Prudential Standard are that an APRA-regulated institution and a Head of a group must:

•        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

Average annual regulatory costs (from business as usual)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in costs

Total, by sector

10.2

-

-

10.2

General Assumptions

Details

Estimate

Number of large ADIs

4

Number of medium ADIs

20

Number of small ADIs

125

Number of accountable persons (total)

2,535

Regulatory Costs

Task

Frequency

Initial costs to update IT systems

Upfront

Initial costs to understand the changes to legislation, update documentation, policies and procedures, and develop and implement training.

Upfront

Internal reviews of remuneration policies and procedures and updating to meet new requirements

Upfront

Education of accountable persons on new requirements

Upfront

 

Option 3 - Introduce a Banking Executive Accountability Regime

Average annual regulatory costs (from business as usual)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in costs

Total, by sector

11.5

-

-

11.5

General Assumptions

Details

Estimate

Number of large ADIs

4

Number of medium ADIs

20

Number of small ADIs

125

Number of accountable persons (total)

2,535

Regulatory Costs

Task

Frequency

Initial costs to update IT systems

Upfront

Initial costs to understand the changes to legislation, update documentation, policies and procedures, and develop and implement training.

Upfront

Internal reviews of remuneration policies and procedures and updating to meet new requirements

Upfront

Initial registration of existing accountable persons

Upfront

On-going requirements to register accountable persons, including notifications

On-going

Initial provision of accountability maps and statements

Upfront

On-going requirements to update accountability maps and statements

On-going

Education of accountable persons on new requirements

Upfront

 

 



Chapter 3          

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2017

3.1                   This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

3.2                   This Bill amends the Banking Act to establish the BEAR. The BEAR is a strengthened responsibility and accountability framework for the most senior and influential directors and executives in ADI groups.

3.3                   To support the BEAR, the Bill gives APRA new and strengthened powers.

Human rights implications

3.4                   This Bill engages the following human rights and freedoms:

•        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.

Assessment of civil penalties

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.

3.6                   The civil penalty provisions in the Bill (which are in new section 37G) should not be considered ‘criminal’ for the purposes of international human rights law.

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.

Strict liability offences

3.8                   The Bill imposes a strict liability offence where an ADI appoints a person disqualified under the BEAR into an accountable person role, including on a temporary basis.

3.9                   By providing for a strict liability offence, the Bill provides that it will not be necessary for the prosecution to prove fault as part of the offence. This approach is appropriate as there is no ambiguity as to whether a person is disqualified or not. To allow a disqualified person to act or be an accountable person will not protect depositors’ interests in an ADI.

3.10               The penalty for the offence complies with the requirements of the Government’s Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Power s 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.

Right against self-incrimination under article 14(3)(g) of the ICCPR

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.

3.13               However, the Bill balances APRA’s need to access information with a natural person’s right against self-incrimination by limiting the use of incriminating material supplied by the individual.

3.14               Incriminating information or documents provided (and identified as such) cannot be used against the individual in criminal proceedings or in proceedings where the person may be liable to a criminal penalty. The protection does not apply to proceedings concerning the falsity of the information or documents provided. This is consistent with sections 137.1 and 137.2 of the Criminal Code which creates offences for providing false or misleading information.

3.15               Incriminating evidence supplied by an individual can be used to investigate unlawful conduct by that person and a third party and can be used in subsequent proceedings against a third party.

3.16               Engaging the right against self-incrimination in this way is necessary and justified as the public benefit in removing the liberty outweighs the loss to the individual. The information which would be obtained by APRA is critical in it performing its regulatory functions, specifically protecting depositors in an ADI, ensuring the stability of Australia’s financial system including through investigating prudential matters.

3.17               The material and evidence necessary for APRA to perform its regulatory function is likely to only be available from certain individuals in an entity.

3.18               The new information gathering powers in the Bill are therefore consistent with the right against self-incrimination under article 14(3)(g) of the ICCPR.

Right to protection from unlawful or arbitrary interference with an individual’s privacy

3.19               Article 17 of the International Covenant on Civil and Political Rights (ICCPR) prohibits unlawful or arbitrary interferences with a person’s privacy, family, home or correspondence. It also provides that everyone has the right to the protection of the law against such interference or attacks.

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]

3.21               Privacy is a concept which is broad in scope and includes a right to information privacy. The Bill directly engages the right to privacy under Article 17 of the ICCPR because it requires the provision of information by an ADI in respect of an accountable person in its employ.

3.22               Specifically, the Bill provides that an ADI must give APRA information on those performing the functions of an accountable person, which would include personal information, a statement on the roles and responsibilities of each accountable person and a map which demonstrates how an accountable person is responsible for functions across the ADI and its subsidiaries.

3.23               The circumstances in which information may be collected and used are clearly defined by the Bill and are therefore a lawful interference with the right to privacy.

3.24               Amendments to the APRA Act limit when the information collected by APRA can be shared. The circumstances are limited to a request from the individual to whom the information relates and an ADI who has applied to register a person as an accountable person and APRA is aware of a reason why the person would not be suitable as an accountable person. Otherwise the information collected by APRA will not be public.

3.25               Moreover, as it would not be possible to achieve the objectives of the Bill, namely giving APRA the ability to identify who to hold responsible where an issue arises in an ADI without collecting some information about identifiable individuals, these limitations on the right to privacy are reasonable in the circumstances. The provisions do not interfere with the right to privacy of those individuals more than is necessary to achieve the objective.

3.26               The provisions in the Bill relating to the collecting of information are therefore consistent with the right to the protection against arbitrary or unlawful interference with privacy under article 17 of the ICCPR as they are explicitly provided for in the Bill in appropriate circumstances.

Conclusion

3.27               The Bill is compatible with human rights because:

•        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.

3.28               This Bill is compatible with human rights because to the extent that it may limit human rights, those limitations are reasonable, necessary and proportionate.

 



 




[1] See for example the Remuneration and Allowances Act 1990 which sets the remuneration of holders of judicial offices, secretaries of Commonwealth departments and Senators and Members of the House of Representatives without defining the term ‘remuneration’.

[2]     Financial System Inquiry Final Report, p.7, http://fsi.gov.au/files/2014/12/FSI_Final_Report_Consolidated20141210.pdf .

[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

[6]     Financial Stability Board, 2014, Guidance on Supervisory Interaction with Financial Institutions on Risk Culture: A Framework for Assessing Risk Culture, April 2014.

      http://www.fsb.org/wp-content/uploads/140407.pdf?page_moved=1

[7]     Basel Committee on Banking Supervision, 2015, Guidelines: Corporate Governance Principles for Banks , July 2015, Bank for International Settlements.

      https://www.bis.org/bcbs/publ/d328.pdf

[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/

[9]     ASIC 2015-16 Annual Report.

[10]    The Hon Scott Morrison, 2016, Government follows through on bank accountability . http://sjm.ministers.treasury.gov.au/media-release/100-2016/

[11]     House of Representatives Standing Committee on Economics Review of the four major banks (first report), p.14. http://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/Four_Major_Banks_Review/Report

[12]    Basel Committee on Banking Supervision, 2015, Guidelines: Corporate Governance Principles for Banks , July 2015, Bank for International Settlements.

      https://www.bis.org/bcbs/publ/d328.pdf

[13]    Ibid.

[14]    Financial Stability Board, 2014, Guidance on Supervisory Interaction with Financial Institutions on Risk Culture: A Framework for Assessing Risk Culture, April 2014.

      http://www.fsb.org/wp-content/uploads/140407.pdf?page_moved=1

[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.

      https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/235622/0673.pdf

[16]    APRA, 2014, Regulation Impact Statement: Harmonising cross-industry risk management requirements.

      http://www.apra.gov.au/CrossIndustry/Documents/Final-Regulatory-Impact-Statement-Risk-Management-RIS-(January-2014).pdf

[17]    John Laker, 2009, ‘The Global Financial Crisis — Lessons for the Australian Financial System’, Address to the Australian Economic Forum, 19 August 2009.               http://www.apra.gov.au/Speeches/Documents/03-Aust-Economic-Forum-Opening-Remarks-19-Aug-09.pdf

[18]    Ibid.

[19]    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

[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 .

[21]    Ibid, p.59.

[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

[25]    Cost Benefit Analysis of the new Regime for Individual Accountability and Remuneration, p.89, http://www.bankofengland.co.uk/pra/Documents/publications/cp/2014/cp1414annex10.pdf

[26]    General comment No. 16: Article 17 (Right to privacy), Thirty-second session (1988) at [3]-[4].