Australia: Why Care About BEAR?: APRA's Information Paper Clarifies The Regulator's Expectations

On 17 October 2018, the Australian Prudential Regulation Authority (APRA) released its Information Paper to assist authorised deposit-taking institutions (ADIs) in their implementation of the Banking Executive Accountability Regime (BEAR). In this update, Partner Dean Carrigan, considers the "key takeaways" from APRA's newly released Information Paper and the impact that the BEAR may have on the insurance industry.

1. There's a BEAR in where?

The Banking Act 1959 (Cth) has recently been amended to include the BEAR, which enhances the obligations of ADIs and their most senior executives and directors and reinforces the standards of conduct expected of them by the community.

APRA administers BEAR and can disqualify an individual from being an accountable person or may apply to the Federal Court to seek a pecuniary penalty if an ADI breaches its obligations under the BEAR.

This update primarily focuses on the implementation component of BEAR as outlined in the APRA Information Paper. We will provide a further update once APRA releases its further guidance on the enforcement of the regime.

2. Identification of "Accountable Persons" - Who does what?

BEAR introduces the concept of an "accountable person" and requires accountable persons to be registered with APRA.

In its information paper, APRA emphasises that ADIs should undertake a qualitative assessment as to who is an "accountable person" rather than apply a generic box ticking exercise. There is no prescribed number of "accountable persons" and an ADI should give consideration to the functions of the organisation, as well as an individual's actual span of influence and control.

Interestingly, the legislation does not preclude an individual who is not employed by an ADI, or employed by a holding company or subsidiary of that ADI, from being registered as an "accountable person". A contractor could also be identified as an "accountable person".

In a recent speech, APRA Chairman Wayne Byres acknowledged that BEAR drew its inspiration from the Senior Management Regime (SMR) in the UK. However, unlike the SMR, there is no scope for regulatory approval of appointments, with BEAR deliberately ensuring that accountability and assessment of suitability for senior appointments rests with the Boards and senior executive teams.

APRA has flagged that the process of identifying "accountable persons" presents ADIs with an opportunity to strengthen accountability and review end to end business processes within an ADI to identify any gaps, overlay and areas for potential improvement.

3. Accountability Statements and Maps - Clarity of accountability

The legislation requires ADIs to provide APRA an accountability statement for each of its accountable persons describing the areas of responsibility attributed to that person. ADIs are also required to provide accountability maps which show lines of reporting and responsibility within the organisation.

To assist, APRA has provided a template that may be used for accountability statements. APRA has declined to provide a suggested template for an accountability map and instead encourages organisations to consider constructing their map in a way which best assists them in clarifying their organisational structure and accountability within the organisation.

APRA expects accountable persons to have been closely involved in the development of their own accountability statement and to have read, understood and accepted the areas of accountability as drafted. Whilst accountability statements do not expire, an ADI is required to keep the accountability statements current and notify APRA within 14 days of changes to accountabilities.

4. Remuneration Structure - Aligning remuneration with risk management

Executive remuneration has received lots of media coverage recently, arising from community concern that remuneration of senior executives does not match delivered outcomes.

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. The purpose of this amendment, according to APRA Chairman Mr Byres, is to ensure "accountable persons have more skin in the game for a longer period of time". Mr Byres expects that when adverse prudential outcomes occur, this should be factored into remuneration outcomes.

In its information statement, APRA says that it expects an ADI to not just focus on meeting the minimum remuneration deferral requirement, but to establish performance based incentive structures that align remuneration outcomes with good risk management and the long-term soundness of the organisation.

5. BEAR and the Insurance Industry

Whilst most insurers will not be covered by BEAR, insurers should be mindful that BEAR applies to all entities within a group with an ADI parent. Where a group has a non-ADI parent, but ADI subsidiaries, BEAR will also apply to any subgroup(s) under the control of the ADI(s). Accordingly, some insurers will need to comply with BEAR.

Insurers should also review their insurance policies to reflect BEAR. ADIs and their related bodies corporate are not permitted to take out insurance against the consequences of breaching the BEAR. ADIs are also prohibited from indemnifying accountable persons from the consequences of breaching BEAR. However, these prohibitions do not apply to liability for legal costs.

BEAR has been established with the intent of prompting entities to strengthen their risk culture and improve their processes and controls around decision making. It will be interesting as to whether the increased accountability standards translate to an improvement in the operating culture of ADIs which may result in a reduction in liabilities and claims, or whether BEAR is simply more red tape in an already heavily regulated area.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.