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Preparing for the BEAR

Monday 17 July 2017

The Treasury has released a consultation draft for the Banking Executive Accountability Regime (BEAR), which will focus on authorised deposit-taking institutions (ADIs).

The recently-released consultation paper stated that ADIs enjoy the privileged position of trust in the Australian financial system. However, the consultation paper also highlighted the Coleman Report’s findings that the major banks have not been up-to-scratch with their compliance frameworks and have repeatedly come up short.

“In the 2017-18 Budget, the Government brought forward a comprehensive package of reforms to address the recommendations of the Coleman Report and to strengthen accountability and competition in the banking system. This includes existing prudential standards that organisations should already have an understanding of, and should have—or should be working towards—ensuring these are comprehensively implemented into their GRC framework.”
  • 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.

The significant changes under the proposed BEAR are:
  • Registration: prior to the appointment of directors and senior executives, ADIs must register these individuals with the Australian Prudential Regulation Authority (APRA) and provide maps of their roles and responsibilities. 
  • New powers and penalties: APRA will have stronger powers to remove directors and senior executives from APRA-regulated institutions, subject to review; expectations of ADIs and their directors and senior executives will be established; where ADIs do not meet these expectations, there will be civil penalties; and APRA will have power to impose penalties on ADIs not appropriately monitoring the suitability of executives. 
  • Remuneration: variable remuneration for ADI senior executives will be deferred for at least four years; and APRA will have stronger powers to require ADIs to review and adjust remuneration policies.
Some of the major influences for the new regime comes from the United Kingdom, which has introduced the Senior Managers Regime (SMR), and from Hong Kong, which has introduced the Managers-in-Charge (MIC) measures.

The regulation is intended to follow the Goldilocks principle--that is, neither not too hot nor too cold. It is hoped this will ensure those at the senior level cannot defer responsibility of their actions to others.

The BEAR will also apply any subsidiaries under the ADIs—this will include the non-banking services under the ADI, even if they are not regulated by APRA.
The consultation paper notes that it will be taking the principles-based approach. It will not cognisant of differing business structures.
Take note that the consultation period closes on 3 August, 2017