On 22 September 2017, the Government released the Exposure Draft and Explanatory Memorandum for the Banking Executive Accountability Regime (BEAR). A summary of the key features of the BEAR is set out further below.
With an implementation period of less than nine months (i.e. by 1 July 2018), organisations will need to act promptly to ensure compliance with the BEAR. Certain transitional provisions apply in relation to employment contracts (to be updated by 1 July 2020) and decisions to grant variable remuneration (to capture those made on or after 1 January 2019, subject to certain exceptions).
We are pleased to see that the Exposure Draft addresses certain issues put forward in our submission to Treasury (which can be accessed here) in response to its Consultation Paper released in July 2017, including that:
- “accountable persons” of an authorised deposit-taking institution (ADI) or subsidiary is now defined with reference to individuals who have actual or effective responsibility for management or control of an ADI or subsidiary, or a significant or substantial part or aspect of the operations of an ADI or subsidiary. This definition is narrower than the formulation proposed in the Consultation Paper, which referred to ‘individuals who have significant influence over conduct and behaviour, and whose actions could pose risks to the business and its customers’; and
- “accountable persons” against whom a breach is alleged will now have access to insurance funds to enable them to defend such allegations. The Consultation Paper had previously proposed that the BEAR may impose a blanket prohibition on insurance arrangements in relation to contraventions of the BEAR provisions, including legal fees.
However, there are a number of issues raised in our submission to Treasury which have not been addressed. Realistically, the scope to influence the final form of the legislation itself appears limited, though there are a few critical issues that we expect will be the focus of many submissions. This includes how far down the organisation the ‘accountable person’ test is intended to apply, recognising the draft legislation and Explanatory Memorandum are misaligned on this aspect.
Given the legislation will have far-reaching and significant impacts on the regulation of the Board and senior executives of ADIs and their subsidiaries, it is important that appropriate guidance is given by the Minister and/or APRA on several key aspects of the proposed BEAR regime. We set out further below where such guidance will be of particular utility.
KEY FEATURES OF THE BEAR REGIME
The key features of the BEAR regime are as follows:
The BEAR will apply to ADIs and their subsidiaries and ‘accountable persons’ of such entities. A person is an ‘accountable person’ if he or she has actual or effective responsibility for management or control of the whole of, or a significant or substantial part or aspect of, an ADI or subsidiary.A person who performs one of the specified functions/responsibilities of an ADI set out in the BEAR (which covers responsibilities of the Board and those normally given to the CEO, CFO, CRO, COO, CIO, CCO, Group Head of HR, Head of Internal Audit and Head of AML) will be captured.
|Overview of obligations||ADIs must comply with accountability, key personnel, deferred remuneration and notification obligations. Accountable persons must also comply with accountability obligations.|
|Accountability obligations||An ADI must conduct its business, and an accountable person must fulfil his or her responsibilities, with honesty, integrity, due skill, care and diligence. An ADI or accountable person must deal with APRA in an open, constructive and cooperative way. They must also take reasonable steps to prevent matters that would adversely affect the ADI’s prudential standing or reputation. Further, an ADI must take reasonable steps to ensure that each of its accountable persons meets his or her accountability requirements, and that each of its subsidiaries complies with these obligations|
|Key personnel obligations||An ADI must ensure that each significant or substantial part or aspect of its operations and each of the responsibilities specified in the BEAR are covered by its accountable persons. It must also ensure that its accountable persons are not prohibited from being an accountable person, comply with directions given by APRA to reallocate responsibilities, and take reasonable steps to ensure that its subsidiaries comply with these obligations.|
|Deferred remuneration obligations||An ADI must defer a portion of the variable remuneration payable to its accountable persons for four years and have a remuneration policy that requires that, where an accountable person has failed or is likely to have failed to comply with their accountability obligations, their variable remuneration is to be reduced by an amount proportionate to the failure or likely failure. The deferred amount depends on the size of the ADI and the position of the accountable person. Variable remuneration is defined as remuneration which is conditional on the achievement of objectives or which is a retention bonus.|
An ADI must give APRA accountability statements which contain a comprehensive statement of the part/aspect of the ADI’s or subsidiary’s operations for which each accountable person has effective management and control, and the responsibilities of each accountable person. An ADI must also give APRA an accountability map which contains details of all the accountable persons of the ADI or subsidiary, their responsibilities, the reporting lines and lines of responsibility of accountable persons and sufficient information to identify an accountable person for each of the responsibilities specified in the BEAR.Any changes to these documents, or the occurrence of certain events specified in the legislation (including dismissal/suspension of an accountable person for a failure to comply with their accountability obligations, a reduction in their variable remuneration as per the above, or where an ADI becomes aware of a breach by it or an accountable person of their accountability obligations) must be notified to APRA within 14 days of the change(s).
|Consequences of non-compliance||An ADI which contravenes the BEAR in relation to ‘prudential matters’ faces a civil penalty ranging from $10.5 million to $210 million depending on the size of the ADI. Accountable persons who contravene the BEAR do not face personal liability for civil penalties. However, they may be disqualified from acting as accountable persons by APRA of a particular ADI or subsidiary, a class of ADI or subsidiaries, or any ADI or subsidiary.|
Whilst the Exposure Draft addresses HSF’s submission in relation to the definition of accountable persons, further guidance is required to ensure that the definition of accountable persons is not too far reaching. For example, the draft legislation applies generally to directors and executives of subsidiaries of an ADI without considering that subsidiary’s significance to the ADI’s business. This definition may capture a broader range of subsidiary directors and executives than the intention expressed in the Consultation Paper and Explanatory Memorandum.
There remains a lack of certainty as to the content of the accountability obligations. The Explanatory Memorandum indicates that APRA may issue further guidance on the behaviour and conduct it expects will meet the accountability obligations.
The proposed obligation to deal with APRA in an open and cooperative way has been expanded into an obligation to do so in an ‘open, constructive and cooperative way’. The Explanatory Memorandum helpfully states that this obligation does not displace legal professional privilege, dealing with one of the concerns we had with the Consultation Paper. However, we continue to have concerns as to the potential scope of this obligation, including whether it is intended to expand on the self-reporting obligations that already apply to APRA-regulated entities, and if so, how. Further guidance from APRA on this issue would be welcome.
Our submission to Treasury that a standard of reasonableness be incorporated into all of the key new duties has not been adopted. The Explanatory Memorandum flags that APRA may issue guidance on what factors it would consider to be reasonable steps following ‘appropriate consultation’. What constitutes ‘reasonable steps’ will need to be considered both at an entity level having regard to the size and complexity of the operations of the ADI and its subsidiaries, and at an individual accountable person level having regard to their role and scope of accountability.
DISQUALIFICATION OF ACCOUNTABLE PERSONS
Given the far-reaching and significant impacts of the BEAR legislation on the directors and senior executives of ADIs and their subsidiaries, in our submission to Treasury, we contended that a court-based disqualification procedure best promotes an efficient, transparent and consistent banking sector, and that it is important that a disqualification regime be transparent and robust given the serious punitive effects that disqualification can have on the individual in question. That submission has not been adopted. APRA will have the power to disqualify individuals without going to Court.
The Explanatory Memorandum indicates that the Government’s expectation is that a decision by APRA to disqualify would only be justified in ‘serious cases’. However, that notion is not expressly reflected in the draft legislation. Further, merits review will not be available for an individual who is disqualified; he or she will be limited to judicial review (i.e. confined to arguments such as breach of the rules of natural justice, taking an irrelevant consideration into account, error of law, etc.).
In our view, this is one of the most problematic aspects of the BEAR regime. It is inconsistent with the position with respect to ASIC disqualification and banning orders, where merits review in the Administrative Appeals Tribunal is available (see s. 1317B Corporations Act). It also runs counter to the accepted wisdom (reflected in prior reports of parliamentary inquiries and the ALRC) that public accountability in respect to regulatory decisions is critical, and administration is improved as regulators learn from tribunal decisions.
In our submission to Treasury, we contended that a materiality threshold should be introduced (such as that contained in s. 1317 of the Corporations Act), which requires the relevant contravention to ‘materially prejudice’ the interests of the corporation, or the corporation’s ability to pay its creditors, or be ‘serious’. It is troubling that no such materiality threshold has been introduced. If the legislation is not amended, we hope that APRA will provide guidance as to the considerations or factors that it will have regard to when deciding to pursue a civil penalty.
It also remains unclear how ‘double jeopardy’ issues will be dealt with, e.g. where the same conduct falls under the purview of multiple regulators. Again, it is to be hoped that APRA will issue guidance on how it and other regulators will coordinate their enforcement approaches for activities potentially falling under BEAR and existing regulatory regimes.
HSF’s submission to Treasury in support of a longer implementation period has not been adopted. The majority of the BEAR provisions will take effect from 1 July 2018. However, there are certain transitional provisions which will apply. ADIs have until 1 January 2020 to update existing employment contracts to reflect their BEAR-compliant remuneration policies and the new deferred remuneration requirements. Additionally, the deferred remuneration provisions will only apply to decisions to grant variable remuneration made on or after 1 January 2019, subject to certain exceptions.
In light of the short implementation period, ADIs should initiate programs to ensure compliance with the BEAR regime as soon as possible. In this regard, we see that organisations will need to consider the following:
- consultation – early engagement with accountable persons to help them understand why and how they are caught by the regime and address any challenges;
- training - training accountable persons on their new obligations and how they sit with their existing obligations;
- employment contracts - amending employment contracts and job descriptions to accord with the BEAR and each accountable person’s respective accountability statement;
- workplace policies - considering what changes may be needed to existing workplace policies and procedures, including considering the remuneration policy required by the BEAR;
- legal advice - considering whether to provide (and pay for) access to legal advice for accountable persons; and
- insurance - assess the indemnity and insurance position in regards to accountable persons, including whether existing arrangements provide appropriate coverage of legal fees that may be incurred in future investigations.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020