Directors’ Counsel: Beware the Bear

The Federal Government’s proposed Banking Executive Accountability Regime must be examined closely, writes Prof Bob Baxt AO FAICDLife.

On 22 September, the Federal Government released its proposed regulations for the Banking Executive Accountability Regime (known as BEAR) with just seven days allowed for consultation. The legislation is to be fast-tracked before the end of the year or early 2018.

The regime is aimed at dealing with a chronic issue our corporate and business regulators have faced in recent years: the unsatisfactory cultural behaviour of some employees of a number of banks and other financial institutions.

The regulations are as draconian as I had anticipated and foreshadow a new, tougher line the Government is likely to take in dealing with these types of matters.

The House of Representatives Standing Committee on Economics report, called the Review of the Four Major Banks (or Coleman Report), states that no individuals have had their employment terminated as a result of scandals that may have occurred in the financial and related sectors. Adds the committee, “The major banks have a ‘poor compliance culture’ and have repeatedly failed to protect the interests of consumers. This is a culture that senior executives have created. It is a culture that they need to be accountable for.”

The recommendation in the Federal Government’s consultation paper, which is based on the Coleman Report, relies heavily on UK initiatives to establish a more appropriate accountability standards regime for banks, financial institutions and related companies. The UK’s Senior Managers Regime is aimed at lifting the responsibility and accountability of the most senior and influential directors working in relevant institutions. It was also applied in a similar regime in Hong Kong. In the UK, it took nearly three years for the formulation of rules and plenty of time was given for comment and discussion. This is in stark contrast to the time Treasurer Scott Morrison gave to directors and officers of Australian financial institutions to reflect on the regulations. Seven days is, quite simply, unacceptable.

BEAR’s origins go back to concerns raised by Greg Medcraft, the retiring chairman of the Australian Securities and Investments Commission (ASIC), regarding the influence of corporate culture on employee conduct, and the role of boards in shaping and overseeing an appropriate culture. He wanted the Government to make amendments to the Corporations Act 2001 that would, in effect, regulate culture.

It is a pity ASIC did not match its claims — that there were matters needing to be fixed — by bringing appropriate litigation years earlier.

No major cases have been decided in recent years in which any bank or financial services leader has been found guilty of breaches of major rules that apply to the appropriate conduct of that line of business. But we have seen over the past 12 months increased pressure for the establishment of a Royal Commission into banking from the Australian Labor Party and minor parties. The Federal Government feels considerable pressure to accelerate legislation that will deal more effectively with the regulation of the behaviour of directors and officers of Authorised Deposit-taking Institutions (ADIs).

The BEAR regulations will introduce a heightened responsibility and accountability framework for the most senior and influential directors and executives within ADIs, rather than replacing or changing the existing framework of corporate law. Extensive provisions apply to those described as accountable persons (in occupied positions of trust and responsibility) in financial institutions described as ADIs. Civil penalties may be sought in the courts to a maximum of one million penalty units (currently $210m) for large ADIs, 250,000 penalty units (currently $52.5m) for medium ADIs, and 5000 penalty units (currently $10.5m) for small ADIs.

The Australian Prudential Regulation Authority (APRA) will be given wide powers of examination of officers and directors and also significant powers to seek their disqualification in certain circumstances. There is a presumption that a person is guilty unless they establish their innocence. However, the next step of creating criminal sanctions has not been taken.

The regulations do make provision for disqualification orders and similar orders that may be sought by APRA against individuals to be reviewable by the Federal Court — this is an important feature of modern commercial legislation in Australia. APRA already has the power to direct that an ADI remove directors or senior managers who do not comply with the standards set on the basis that they are not fit and proper persons to be in charge. Finally, these standards and the proposals to be contained in BEAR will apply in addition to the provisions of the Corporations Act and related legislation.

Readers may recall that in 2007, Treasurer Peter Costello ensured that the Federal Court would be the final decision-maker when APRA (or some similar body) was given the power to seek to disqualify a person or to bring about some similar punishment.

The previous legislative framework operated on the basis that a person was deemed to be guilty when charges were brought against those persons in the context of these issues. The accused bore the onus of establishing to the court that the disqualification proposal should be set aside.

A case in 2006 relating to disqualification of seven former trustees of the AXA staff superannuation fund was taken to the Federal Court, which set aside the guilty verdict and, in effect, set aside the ruling that they were not fit and proper persons. Legislation by press release — and retrospective and strict liability legislation — is a most unfortunate initiative that has been a feature of legislation in the past few years. It looks like it has returned with the proposed BEAR regulations.

This reversal of the onus of proof/strict liability approach in legislation was severely criticised by the now-defunct Corporations and Markets Advisory Committee in its 2006 report Personal Liability for Corporate Fault. It was followed by the Council of Australian Governments agreeing to a set of principles, leading to a review by all Australian governments of legislation holding directors and other corporate officers criminally liable for acts of the corporation, with various statutes amended.

The proposed BEAR regulations ignore these clear signals that draconian regulation relying on this approach is just not acceptable in a society that cherishes the notion that a person is innocent until proven guilty.

While the BEAR legislation appears to be targeted at a relatively specialised area of business, it can have a significant flow-on effect. We already have too many pieces of legislation that work on the basis that a person is guilty unless he or she proves their innocence. This is not the common law system of justice that we understand in Australia.

Perhaps in the Senate there may be attempts to water down some of the provisions, but it seems that we are now entering a new era of regulatory action.

We should strongly protest the introduction of a scheme that would take away the court’s ability to deal with these matters in an effective and balanced way. To do anything otherwise would put the whole regime, and the livelihood of many hundreds of people who work in the institutions, at serious risk.

Bear at a glance

The Banking Executive Accountability Regime (BEAR) will apply where there is poor conduct or behaviour “that is of a systemic and prudential nature”. It proposes civil penalties of up to $210 million for major banks, with a maximum $10.5m fine for smaller, Authorised Deposit-taking Institutions.

Directors and senior executives of the banks would be held responsible and accountable where they fail to meet the expectations of their regulator, the Australian Prudential Regulation Authority.