APRA Chair Wayne Byres has outlined the Banking Executive Accountability Regime (BEAR) transition and implementation steps commencing on 1 July 2018. Background.
The new regime applies to the largest banks from 1 July 2018; other ADIs have until 1 July 2019 before they are subject to the BEAR. After BEAR applies to an ADI, it will then have three months to register their accountable persons and until 1 January 2020 to incorporate the remuneration requirements in pre-existing executive employment contracts.
UPDATE May 2018: The Banking Executive Accountability Regime (Size of an Authorised Deposit-taking Institution) Determination 2018 sets out the methodology to determine the size of an Authorised Deposit-taking Institution as small, medium or large for the purposes of the Banking Executive Accountability Regime. A Medium ADI will have assets between $10 billion and $100 billion. These amounts are subject to indexation.
The five main elements of BEAR are registration, obligations, accountabilities, remuneration and sanctions.
Registration
An ADIs ‘accountable persons’ are the ADIs directors and senior executives . The BEAR requires accountable persons to be registered with APRA before they can perform their duties.
Accountable persons are deemed registered 14 days after they have lodged their registration. While APRA will not be vetting all appointments, the pre-appointment registration does provide an opportunity for APRA, should it be aware of information that might make an appointee unsuitable, to discuss any concerns with the individual or the employing ADI.
Obligations
The new statutory obligations apply to both accountable persons and ADIs. These obligations require each to act with honesty and integrity, with due skill, care and diligence, and to deal with APRA in an open, constructive and cooperative way. In doing so, they must also take reasonable steps to prevent matters arising which would undermine the ADI’s prudential standing and prudential reputation.
Accountability maps and statements
Each accountable person needs to have an accountability statement, setting out the aspects of an ADI’s operations for which they are accountable. Each ADI must have an accountability map, showing how the statements complement each other to cover the totality of an ADI’s business and risks. Together, the map and accompanying statements establish clarity on the allocation of accountability across the executive team within an ADI. Clarity of individual accountability (as opposed to collective accountability) is a core feature of BEAR.
Remuneration requirements
The BEAR requires ADIs to defer a minimum proportion of an accountable person’s variable remuneration – generally 40 per cent for executives, or 60 per cent for the CEO, of a large bank – for a minimum of four years.
It also requires ADIs to have remuneration policies that provide for the reduction in variable remuneration should an accountable person fail to comply with their obligations, and to exercise the provision should circumstances warrant it.
As a result, the BEAR will require many ADIs to restructure their remuneration frameworks. Byres says that the BEAR’s ’40 per cent for four years’ formula is not necessarily the right mix for all.
Sanctions
Sanctions apply at two levels: the ADI and the individual. For ADIs, the BEAR provides a penalty regime in instances where the ADI has failed to meet its obligations under the legislation
For individuals, the financial sanctions for any failure to fulfil their obligations will be addressed through the ADI’s remuneration policy. APRA’s sanction is a disqualification power – the power to remove an accountable person from their role, and in the most extreme cases, prevent them for taking on any similar role in the industry in the future.
