Banking Executive Accountability Regime (BEAR)
Post-Exposure Draft release
BEAR was announced by Government in May 2017, and will apply to all Authorised Deposit-taking Institutions, their subsidiaries, and Australian branches of foreign ADIs.
APRA will be responsible for overseeing BEAR and its expectations on banks and other ADIs, as well as senior individuals, to deliver good prudential outcomes, and improve standards of behaviour and accountability.
On 22 September, Treasury released the Exposure Draft of the BEAR legislation, and an Explanatory Memorandum with a very tight 7 day turnaround for comment.
You can get copies of these documents here: https://treasury.gov.au/consultation/c2017-t222462/. There are some significant differences compared to the Consultation Paper therefore we recommend care when reviewing as it is difficult to know which is authoritative.
Here’s what you need to know:
- BEAR is slated to start on 1 July 2018
There are some transitional arrangements for remuneration, but otherwise banks seem likely to be facing a very short implementation period
To put it into context, financial institutions impacted by the Senior Manager Regime in the UK had 12 months to comply, which the industry regarded as very tight
This may change in the next draft, which will no doubt be introduced to Parliament, but this is a red flag that banks need to commence work on the BEAR implementation now.
- The accountability obligations have changed
Gone are the requirements to maintain a culture that support adherence to the letter and spirit of APRA’s Prudential Standards, or to control the ADI’s operations effectively. Many of these requirements are now reflected in what can constitute reasonable steps.
In their place, ADIs and Accountable Persons will have to act honestly, be constructive with APRA, and take reasonable steps to prevent matters from arising that would adversely affect the ADI’s prudential standing or reputation
The meaning of these requirements is unclear – for example:
- How is an ADI and an executive meant to understand and implement reasonable steps to protect the ADI’s reputation, particularly in an environment rife with volatility?
- How is ‘prudential standing’ to be defined and understood?
- Would any adverse impact on the expenses or capital of the ADI fall within consideration of ‘prudential standing’?
- Which takes precedent where an action may simultaneously preserve prudential standing and potentially undermine reputation? Defining ‘reasonable steps’?
The draft has provided some (non-exhaustive) guidance on what amounts to reasonable steps in relation to a matter:
- There is appropriate governance, control and risk management in relation to that matter;
- Any delegations of responsibility in relation to that matter are appropriate; and
- There are appropriate procedures for identifying and remediating problems that arise or may arise in relation to that matter.
Are the current structures for governance, risk management and delegations supportive of dealing with matters of bank reputation?
- NEDs are in
All ADI Directors are going to be caught by BEAR, not just the Chairs of the Board and certain Committees. This is in contrast to the UK, where many NEDS were pulled out of the regime.
- Chief Compliance, HR and AML Officers are in, too
Not content with the list of responsibilities in the consultation draft, if you are overseeing compliance, HR or AML at your bank, welcome to BEAR.
- Four years deferral for remuneration
The ADI must ensure that the payment of a portion of each Accountable Person’s variable remuneration is deferred for a minimum period. The portion of the Accountable Person’s total remuneration that is conditional on the achievement of objectives, or is a retention bonus. The amount deferred depends on a combination of the Accountable Person’s role, the size of the ADI, and the amount of their variable and annual remuneration for the relevant financial year.
APRA can determine that remuneration of a particular kind is or is not variable remuneration, either for a specific ADI or subsidiary, or generally.
- ADIs will have to clawback remuneration
ADIs are going to have to ensure they have Remuneration policies that allow them to clawback deferred remuneration from Accountable Persons because it is going to be their job to do so, not APRA’s. ADIs don’t just need to clawback the money from the year in which BEAR was breached – it can come from any of the deferred remuneration held back by the ADI.
We recommend that banks look closely at the remuneration provisions in the Exposure Drafts – some of these may not work in practice. Also start looking at your executive contracts now – some transitional relief may be possible if you act quickly.
- Insurers are safe – for now
Despite the lobbying to extend BEAR to other APRA-regulated entities, this hasn’t happened. However, APRA has already flagged that it’s going to consider whether the concepts in BEAR have broader application , so it may just be a matter of time.
- APRA and the Minister will have a lot of exemption and other powers
APRA is going to be able to disqualify accountable persons, summons witnesses for examination under oath, and tweak some of the bits of BEAR that are bound not to work due to the compressed timetable and stressed consultation period.
We will release more detailed materials on the Exposure Drafts soon.
In the meantime, it’s time to get on with your BEAR projects; we can support you, so please call us if you would like to discuss how Deloitte can assist you.
The impact of BEAR on your organisation will be of particular interest to:
- Directors and senior executives
- Legal, risk and compliance practitioners; and
- Human resource professionals.