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Banking Executive Accountability Regime: the implications and how to prepare

BEAR: the implications and how to prepare

The proposed Banking Executive Accountability Regime (BEAR) is designed to make senior executives in banks more accountable for the actions and outcomes of their organisation. While it is a positive move to help restore public trust in banks, banks need to prepare now to undertake more compliance obligations, defining of roles and responsibilities, and remuneration planning, than currently exists.

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Business people having a meeting around a table

Announced in the 2017 Federal Budget, the Banking Executive Accountability Regime (BEAR) is intended to encourage a more accountable banking industry. BEAR will apply to all Authorised Deposit-taking Institutions (ADIs) and their subsidiaries, and any Australian branches of foreign-owned ADIs.

The BEAR Exposure Draft and draft Explanatory Memorandum was released on Friday 22 September, and is likely to be close to the final legislation that will come into effect on 1 July 2018.

The draft proposes that each ADI must meet specific obligations, including:

  • meeting key personnel obligations (through its ‘accountable persons’)
  • complying with its accountability obligations, specifically in how it conducts itself and engages with the Australian Prudential Regulation Authority (APRA)
  • providing accountability maps and accountability statements, and 
  • implementing specific remuneration policies.

The purpose is to ensure that each accountable person cannot avoid responsibility for issues that occur under their management. There will be a maximum civil penalty of $200 million for larger ADIs and $50 million for smaller ADIs. This is aimed at encouraging ADIs to meet the new expectations as set by BEAR.

“There's going to be far greater granularity and transparency of people's responsibilities, and that goes from the Board of Directors and Non-Executive Directors through to the C-Suite, as well as legal and human resource professionals,” says Michael Cunningham, Partner, Advisory, KPMG. “It's quite a lot of work for the industry to set up and meet these requirements.”

Impact from a compliance perspective

All accountable persons must be registered with APRA, which will also be given new and strengthened powers. As mentioned, ADIs must provide APRA with accountability maps of the roles and responsibilities of each accountable person – for scrutiny when they are appointed, and if problems occur during their management.

“BEAR will put enormous pressure on the banks – from mapping accountabilities and making accountability statements, to reviewing their overarching governance processes,” Cunningham says.

Cunningham notes that the draft legislation doesn’t define how an individual can demonstrate due skill or diligence.

“Nor are there any prescriptive guidelines around how an ADI can demonstrate that reasonable steps have been implemented, or how an accountable person is going to know things are working the way they should,” he says. 

He says the draft holds ambiguity around which accountable persons are captured in a foreign bank branch.

“Foreign ADIs’ offshore operations aren’t captured, but the ADI and Branch activities in Australia are. And there are concerns as to whether the role of Senior Officer Outside Australia in time could be included,” he says.

Impact on people management

The greater scrutiny will require banks to be specific in their job descriptions and performance expectations. Steve Clark, Director, Advisory, KPMG, says clarity around individual accountabilities will be vital.

“If you're one of a number of people who could be responsible for a particular issue because accountabilities are not clearly defined, under the proposed drafting APRA may hold you all accountable,” Clark says.

For some individuals in roles such as CIO or Head of People, this regulatory scrutiny will be new. Clark says all accountable persons will need up-skilling to understand their obligations.

“You can’t have a situation where someone is on the hook from a BEAR perspective, but no-one in their reporting hierarchy supports the fulfilment of their obligations.”

This could require a “significant body of work to get role architectures right”, he says.

“Going forward, BEAR accountabilities will need to be kept in sync with organisational and people moves. Banks with modern position management systems may be better placed to manage this,” he says.

A remuneration perspective

BEAR proposes that organisations defer a portion of variable remuneration for at least 4 years from accountable persons. It requires ADIs to have robust remuneration policies, including the ability to reduce variable remuneration of an accountable person where they have not met their obligations.

Tim Nice, Partner, Leadership, Performance & Reward, KPMG, explains that the amount to be deferred for the CEO of a large ADI is the lesser of 60 percent of variable remuneration, or 40 percent of total remuneration. That scales down for medium and smaller ADIs.

“They’ve tried to define variable remuneration in a relatively simple fashion,” he says. “It's basically anything that is based on the achievement of objectives or a retention bonus. While the regime is intended to come into effect from 1 July 2018, the remuneration aspects would apply from January 1, 2019. However, there is an exception for contracts that were already in place and not varied. So ADIs are going to have to look at their contractual arrangements to confirm the timing for the deferral requirements.”

Nice says in cases where an accountable person has not met their obligations, BEAR may require commensurate adjustment incentive pay.

“You have to think through the consequence management within your remuneration policy. You also have to take a big-picture view of BEAR within your overall remuneration strategy. For example, how does the requirement to defer a significant portion of executives’ pay for 4 years fit with your other remuneration frameworks? Do you need to align the pay structures for those executives that aren’t accountable persons?”

UK SMCR lessons

For organisations concerned about managing BEAR, the UK’s Senior Managers and Certification Regime (SMCR) is a good example to look to.

“The experience we’ve had from the UK suggests that companies need to get running on this. It is a significant resource, time and financial commitment to get it right, with a very tight implementation window,” Nice says.

Cunningham adds that the UK experience has highlighted the need for clarity in the roles of supporting committees.

“It calls out the functioning health of various committees, so there has to be a review of various committees’ responsibilities, their terms of references, their charters, and if that is being mapped correctly to the individuals on the committees,” he says.

Anthony Donohoe, Director, Banking Consulting, KPMG UK, says ADIs should not underestimate the operational impacts of the BEAR.

“New systems and approaches will be needed to keep BEAR documentation aligned with changes in an ADI’s structure and people moves,” Donohoe says. “For accountable persons a key concern will be demonstrating that they have exercised ‘reasonable steps’ – in the UK Senior Managers are supported in this by the Compliance Regime but this does not appear to be hard-coded into BEAR.”

Planning ahead

If the BEAR legislation is agreed in October 2017, banks have just 8 months to ensure they are ready.

“While there’s a lot that’s uncertain, organisations need to get on and start the hard work of implementing,” Clark says. “They need to gain executive alignment and build an awareness across those areas of the business that are going to be affected.”

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