On 10 May 2018 the AICD and law firm Herbert Smith Freehills hosted a special event focussing on the new BEAR.
At the event, APRA Chairman Wayne Byres addressed more than a hundred directors and executives on the implications of the BEAR for the banking sector.
The address from Byres was followed by a Chatham House discussion on the BEAR with by Anne Loveridge GAICD (Non-executive Director, National Australia Bank), Anne Brennan FAICD (Non-executive Director, Rabobank Australia Limited), Michael Vrisakis (Partner, Herbert Smith Freehills) and Ian Laughlin FAICD (Chairman, OnePath Life Limited).
The BEAR is set to commence on 1 July 2018 for larger Authorised Deposit-Taking Institutions (ADIs). Small and medium-size ADIs have a further year to implement the regime’s requirements, in addition to other transitional arrangements.
For those who were unable to attend, a brief summary of the key themes arising from the panel discussion are set out below.
1. Promoting stronger accountability
The panel acknowledged that the strengthened focus on accountability was the most important aspect of the BEAR, with some of the key observations as follows:
- Many ADIs have operated on a model of “collective responsibility”, which had arguably “caused some problems in the past”.
- A culture of “collective responsibility” can lead to a situation where “no one is actually held accountable for any given process”.
- While some panel members agreed that the BEAR will lead to clearer delineations between various roles and responsibilities within institutions, concern was expressed about potential loss of “collegiality” within senior management, and between senior management and the board.
- Harder lines of accountability within the BEAR did pose a risk of artificially dividing accountabilities in a complex environment.
- The BEAR would likely lead to more specific board and committee charters to ensure accountabilities are incorporated into governance documents.
- The new BEAR obligations may lead to a change to the role of non-executive directors within financial services institutions, with a greater focus on compliance.
- Accountability mapping and statements on institutions was a positive change, and increased visibility over accountability as important. One panellists suggested that the mapping process was a useful activity for any larger corporate institution to undertake.
The panel also recognised that issues of accountability would be shaped by the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry as well as APRA’s prudential inquiry into the Commonwealth Bank of Australia.
2. Shifting obligations?
The BEAR aims to achieve greater accountability measures by imposing a new set of obligations on designated “accountable persons” (including non-executive directors) and ADIs.
ADIs and accountable persons will now be subject to the obligation (i) to act with due skill, care and diligence, (ii) act with honesty and integrity, and (iii) deal with APRA in an open, constructive and cooperative way.
If an accountable person breaches their new BEAR obligations, that person may face disqualification or financial consequences through the reduction of variable remuneration. If an ADI breaches its BEAR obligations, significant civil penalties may be imposed by a court.
APRA’s disqualification power is subject to merits review through the Administrative Appeals Tribunal. The AICD and others had advocated strongly for the inclusion of merits review in its submissions on the BEAR in 2017, and its inclusion was a welcome development.
The panel welcomed the new obligations imposed on designated “accountable persons” and ADIs, expressing the view that they were largely a repetition of existing legal obligations imposed on directors and officers.
However, the panel debated whether the obligation to deal with APRA in an open, constructive and co-operative way, created a new duty, or was merely an explicit recognition of what was already expected. One panellist observed that it had no equivalent internationally, and that it may alter the way in which ADIs deal with APRA in future - for example, the approach to legal professional privilege may shift given expectations of greater transparency.
The panel also discussed materiality thresholds for breaches of the BEAR. While the explanatory memorandum to the BEAR legislation makes clear that the government expects APRA to seek penalties for significant breaches only, some panel members expressed the view that more guidance was required from APRA on this issue.
3. Remuneration – “more skin in the game”
A particular focus of the panel discussion was on the impact of the BEAR on remuneration within the sector. The BEAR requires the deferral of a proportion of an accountable person’s variable remuneration for a minimum of four years.
Reflecting on what had prompted the BEAR reforms, one panellist observed that, in the past, institutions had placed too much weight on organisational outcomes at the expense of individual performance.
Panel members also discussed the practical difficulty faced in calibrating the remuneration of high-performing staff to ensure retention and good risk outcomes. One panellist noted that the real challenge for directors and senior managers was not so much in structuring remuneration packages appropriately, but implementing them effectively to achieve good risk outcomes. Another noted that a positive result of the BEAR could be simpler, more transparent pay structures.
Referring to the impact of the new BEAR requirements, one panellist observed that while the BEAR did not make APRA a “paymaster” or supplant the role of the board in setting remuneration, the new requirements meant that accountable persons will now have “more skin in the game for a longer period of time”.
Despite the challenges faced by the sector, panellists stressed the potential opportunity to use the new regime as a catalyst to help rebuild community trust.
4. Implementation issues
All panellists acknowledged that the BEAR was new ground for Australia. There would necessarily be a period of transition where both APRA and industry would work through the regime’s practical implementation. This would take time. It was critical however that institutions saw the BEAR as an opportunity to improve their processes and better communicate with the regulator.
For more information on the new BEAR regime, see the APRA Chair’s speech, “Beyond the BEAR Necessities”, dated 2 May 2018, available here.