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Regulators’ BEAR powers must be clearly defined

by Andrew Starke, AB+F | 24 Aug 2017
The government’s proposed Bank Executive Accountability Regime (BEAR) risks conflict - with existing Corporations Act and common law duties for directors - and duplication between ASIC’s existing banning and disqualification powers and APRA’s enhanced new powers. It also risks increased compliance costs for the industry, submissions to Treasury from the Australian Bankers’ Association and FINSIA argue. Regulators BEAR powers must be clearly defined ABA - InFinance - FINSIA - ABF

“For both regulators and Authorised Deposit-taking Institutions (ADIs) there needs to be clarity about how these obligations and responsibilities inter-relate,” the ABA submission to Treasury stated.

 “The ABA suggests that clarity can be promoted through a clear definition of ‘systemic and prudential’ to inform the scope of the BEAR and clearly distinguish its operation from these other regimes.”

The ABA supports the Australian Securities and Investment Commission (ASIC) maintaining its existing role as conduct regulator and enforcing consumer protection and market integrity requirements.

“In the circumstances where the same conduct potentially touches two or more of the above regimes, it will be necessary for the ASIC and Australian Prudential Regulation Authority (APRA) to produce joint guidance on how the regulators will respond to an issue in a coordinated manner,” it stated.

Such issues could include breach reporting obligations and interactions between ASIC’s existing banning and disqualification powers with the new APRA banning and disqualification powers under BEAR.

“Without such guidance there is a real risk of different regulatory standards and expectations between regulators on the same conduct. Additionally, uncertainty will create regulatory duplication, unnecessary compliance costs for banks and inappropriate administrative complexity for the regulators,” the ABA noted.

Changes to management styles

FINSIA’s submission — based on feedback from senior representatives of its 10,000 strong membership — also noted potential increased compliance costs, and detrimental changes to management styles from the proposed regime. 

Its members expressed concern that the evidence requirements may lead to executives being overly legalistic and defensive with the effect that they avoid proper risk-taking. “This would be to the detriment of business performance and consumer outcomes by deflecting executive skill from the proper practice of banking”, FINSIA’s submission stated.

Concerns raised about accountable persons

While the Treasury consultation paper envisages that APRA will have enhanced powers in circumstances where an ADI and or an accountable person has failed to meet expectations of the BEAR, both FINSIA and the ABA signalled concerns with ushering in such fundamental changes to industry regulation.

FINSIA, though its UK partner, Chartered Banker Institute, highlighted issues in the implementation of the UK Senior Manager Regime (SMR). “Experience from the implementation of the SMR suggests that it has had unintended consequences for remuneration policies and the acquisition of talent at UK banks. It was noted that the test of reasonable steps has created uncertainty for banks covered by the regime and added to their compliance burden.”

“The ABA’s preferred approach is for the BEAR should build on the existing APRA powers and maintain the requirement for APRA to apply to the Federal Court to disqualify an individual which will ensure the rights of all parties are protected and there is certainty,” the ABA noted.

The ABA has two primary concerns with enhancing APRA’s removal and disqualification powers. The first is in relation to the role of APRA, and the strength and efficacy of its relationship with ADIs as a prudential regulator.

“Our second concern is in relation to the proposal that APRA will have the ability to executively remove and disqualify an accountable person who fails to meet an expectation, without clarity on the process or right to appeal,” said the ABA.

 “The effect of APRA having the ability to determine when an accountable person is removed or disqualified means that the regulator, interpreting the statutory expectation (however it is framed) can impose a very material, and probably career ending, enforcement action on an individual.

 “Contrast this to an enforcement action by ASIC, or another interested party, on the failure by a director or officer to satisfy their directors’ duties, when ASIC must prove that there has been a failure and there are defences, and a right of appeal to the Administrative Appeals Tribunal.

“This is a fundamental reversal of the onus of proof, contrary to Australian judicial principles. Even with prudential standards or guidance the ABA would not consider it just or appropriate for APRA to have the ability to judge (while also retaining the ability to set the standards through Prudential Standards) without appropriate checks and balances and a right of appeal.”

Existing prudential and legal duties

The BEAR will sit beside a number of existing prudential and legal duties, including:

  • APRA’s existing Fit and Proper and Governance obligations as set out in APRA Prudential Standards CPS 520 Fit and Proper (CPS520) and CPS 510 Governance (CPS510);
  • APRA’s existing risk management and risk culture obligations set out in APRA Prudential Standard CPS 220 Risk Management (CPS220);
  • Directors and officers duties under the Corporations Act and common law;
  • Trust law and requirements for trustee companies; and
    Licensing requirements, including obligations of an Australian Financial Services Licence (AFS Licence) holder under the Corporations Act and the obligations of a holder of an Australian Credit Licence (Credit Licence) under the National Consumer Credit Protection Act.
In light of this, and the experience from implementing the UK SMR, FINSIA submitted that “Australia — known to have a robust conduct framework in the APRA standards and the Corporations Act — gathers further evidence on the success of SMR and comparable regimes before contemplating its application here.”

Global banking education standards: FINSIA member survey

FINSIA is a member of the newly-launched Global Banking Education Standards Board (GBEStB). The GBEStB is comprised of 20 banking institutes globally that are working to develop internationally-agreed standards of education for banking professionals. 

As the GBEStB commences its work, FINSIA is surveying its members to gauge levels of support for global education standards, and obtain feedback on what areas global education standards should cover. 

Take the survey>


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