Treasury has released a Consultation Paper on the details of the proposed Banking Executive Accountability Regime (BEAR) announced in the 2017-18 Budget. Background.

The intention of BEAR is to enhance the responsibility and accountability of ADIs and their directors and senior executives.

This paper considers stronger powers for APRA. The ASIC Enforcement Review is separately examining the adequacy of ASIC’s regulatory tools and powers.

Institutions covered

It is proposed that the scope of the BEAR will cover all Authorised Deposit Taking Institutions and all entities within a group with an ADI parent. This will include subsidiaries of ADIs, including those that provide non-banking services and those that are foreign subsidiaries. Where an ADI exists within a group with a non-ADI or overseas parent company, the scope of the BEAR is intended to apply only to the subgroup of entities for which the ADI is the parent.

ADIs and their directors and senior executives will be responsible and accountable for taking reasonable steps to ensure that the expectations of the BEAR are applied and met throughout groups or subgroups with an ADI parent.
This scope of the individuals to be covered by the BEAR, could include the directors and senior executives of the subsidiaries within a group or subgroup with an ADI parent, including those subsidiaries that are not APRA-regulated.

The proposed scope would mean that the BEAR would apply in relation to a business (such as an insurer) that is part of an ADI group or subgroup, but not to its competitor that is not part of an ADI group or subgroup.

Individuals covered

The BEAR will apply to directors and senior executives of ADIs (referred to as ‘accountable persons’) who carry out prescribed functions or satisfy certain principles.

Prescribed functions could include both oversight functions (such as Chair, Chair of the Risk Committee, Chair of the Audit Committee, and Chair of the Remuneration Committee) and executive functions (such as Chief Executive, Chief Finance, Chief Risk, Chief Information and Head of Internal Audit).

The principles-based element of the definition is intended to capture other individuals who have significant influence over conduct and behaviour, and whose actions could pose risks to the business and its customers.

An accountable person would be expected to:

• act with integrity, due skill, care and diligence and be open and co-operative with APRA; and
• take reasonable steps to ensure that:
  – the activities or business of the ADI for which they are responsible are controlled effectively;
  – the activities or business of the ADI for which they are responsible comply with relevant regulatory requirements and standards;
  – any delegations of responsibilities are to an appropriate person and those delegated responsibilities are discharged effectively; and
  – these expectations and accountabilities of the BEAR are applied and met in the activities or business of the ADI group or subgroup for which they are responsible.

Executive Remuneration

A minimum of 40 per cent of an ADI executive’s variable remuneration — and 60 per cent of all CEOs of ADIs — will be deferred for a minimum period of four years.

The remuneration elements of the BEAR will apply to accountable persons that perform executive functions only.

Variable remuneration could be defined to include that part of total remuneration that is discretionary and conditional upon performance and the delivery of results, including individual and business performance and results.

APRA will be given enhanced statutory powers to direct ADIs to review and adjust remuneration policies when APRA believes these policies are producing inappropriate outcomes. In particular, the enhanced power should apply so that the variable remuneration of an executive accountable person will be reduced where he or she does not meet the new expectations of the BEAR and is consequently removed and/or disqualified.

Registration of accountable persons

ADIs will be required to register accountable persons with APRA. This mechanism will operate by requiring ADIs, prior to appointing an individual as an accountable person, to advise APRA of the potential appointment and provide APRA with 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 that could affect the candidate’s suitability for the role. It is not intended that ADIs be able to consult the register themselves. In order to ensure that the register is internal to APRA it may be necessary to provide exceptions from information law regimes, such as the Freedom of Information Act and the Privacy Act.

Under this notification and registration system, ADIs will maintain responsibility for assessing suitability and appointing accountable persons. However, the prior notification requirement will enable APRA to advise ADIs of its concerns prior to an appointment being made.

An appropriate transition period will need to be provided for the registration of accountable persons.

Accountability mapping

ADIs will also be required to provide APRA with accountability statements to detail the roles and responsibilities of each accountable person. These individual accountability statements should also be consolidated into a clear and comprehensive accountability map to detail the allocation of roles and responsibilities across the ADI group or subgroup.

These accountability statements and maps should be provided at the time of registration of an individual and on an ongoing basis as roles and responsibilities of accountable persons change.

Removal and disqualification

APRA will be given enhanced powers to remove and disqualify senior executives and directors or auditor of an APRA-regulated institution or NOHC without applying to the Federal Court if it is satisfied the person is not a fit and proper person for the role, subject to appeal.

Civil penalties

A new civil penalty will apply to ADIs that fail to meet the new expectations of the BEAR, with a maximum penalty of $200 million for larger ADIs and $50 million for smaller ADIs. There will also be penalties for ADIs that do not appropriately monitor the suitability of accountable persons.

The threshold for defining large ADIs is total liabilities greater than $100 billion.

ADIs may be prevented from taking out insurance against civil penalties.