From 1 July 2019, small and medium ADIs will also be required to comply with the Banking Executive Accountability Regime (“BEAR”).
What is the BEAR?
The BEAR, set out in the Banking Act 1959 (Cth) (“Banking Act”), requires ADIs, their directors and senior executives to comply with heightened standards of accountability. The BEAR establishes deferred remuneration, registration requirements for accountable persons, notification obligations, and penalties for failure to comply with obligations.
The Australian Prudential Regulation Authority (“APRA”) will administer and enforce the regime. APRA will have power to investigate potential breaches and to disqualify accountable persons where breaches are substantiated. APRA has recently released an information paper to assist large ADIs refine their regime, and to assist small to medium ADIs in preparing for implementation.
APRA’s Chairman Wayne Byres commented that many problems in the financial system have arisen due to “organisational complexity and diffused responsibility”. The BEAR addresses this by requiring ADIs to enhance their governance and risk management through transparent accountability structures and processes.
The key elements of the regime are accountable persons, notifications and remuneration. This article provides an overview of the BEAR and should be read in conjunction with APRA’s Information Paper and Part IIAA of the Banking Act.
ADIs are required to identify and register their accountable persons. An individual will be an accountable person if he or she has actual or effective senior executive responsibility for the management or control of the ADI (or a significant aspect of the ADI). The appropriate number will vary with the size and complexity of the ADI. It is likely that small ADIs may only require a few individuals (other than directors) to be accountable persons.
Who are the accountable persons?
ADIs should identify individuals that, when combined, are responsible for all parts or aspects of the ADIs operations. The ADI must strike a balance between registering too many or too little accountable persons – a large number of individuals may inappropriately dilute accountability, whereas a small number of executives may not effectively cover all aspects of operations and may therefore inappropriately concentrate accountability.
What are accountable persons accountable for?
The areas of accountability should be identified by considering the ADIs key functions as well as individual’s influence and control over the organisation.
ADIs are required to provide to APRA an accountability statement for each accountable person. The accountability statement must clearly articulate the areas of responsibility attributed to that person. The statement must be sufficiently explicit and detailed in defining the accountable person’s responsibilities and establishing the outcome expected in relation to each responsibility.
ADIs are also required to provide to APRA an accountability map showing lines of reporting and responsibility within their organisation. APRA expects an accountability map would include reporting lines to and from each accountable person.
How do I register an accountable person?
Accountable persons must be registered with APRA prior to commencing their duties. The application to register an accountable person must include a signed declaration that the ADI is satisfied that the person is suitable to be an accountable person. This declaration should be made by the chair of the relevant board committee or a board delegate.
What if I am a foreign ADI with a branch in Australia?
An Australian branch of a foreign ADI must ensure that there is an accountable person with senior executive responsibility for the conduct of all the activities of the Australian (i.e. the senior manager or head of branch). APRA also expects that the ADI will register a senior officer outside Australia.
Notifications to APRA
An ADI is obliged to notify APRA within 14 days, when a prescribed event occurs. A prescribed event includes:
- changes made to an accountability statement or map;
- a person ceasing to be an accountable person;
- the ADI becoming aware of a breach of accountability obligations by the ADI or an accountable person;
- an accountable person being dismissed or suspended due to a failure to comply with their accountability obligations; and
- variable remuneration being reduced due to failure to comply with accountability obligations.
To support the notification obligations, APRA expects ADIs will establish internal governance and processes to enable timely identification of any breaches of their obligations.
ADIs must set remuneration policies that defer a specified proportion of the variable remuneration of accountable persons for a minimum period of 4 years. Variable remuneration is remuneration that is conditional on the achievement of objectives, for example, a bonus.
This requirement is intended to create an incentive for accountable persons to make decisions taking account the long term effects. The minimum amount of variable remuneration to be deferred varies depending on the position held by the accountable person (unless a shorter period is approved by APRA).
If the accountable person is found to have failed to comply with his or her accountability obligations, the variable remuneration must be reduced and withheld by an amount that is proportionate to the failure.
Civil penalties apply where an ADI fails to meet its obligations under the BEAR. The maximum penalty that may be applied by a court is determined with reference to the size of the ADI.