The Standard

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Industry News: An individual approach to responsibility

by Ali Cain | 24 Oct 2017

A banking system in which people understand and are accountable for their responsibilities, as well as deeper regulatory oversight of financial services businesses, were the key themes of yesterday’s FINSIA roundtable, hosted by PwC.

UK Chartered Banker Institute president Robert Dickie led the discussion, which centred on the new Banking Executive Accountability Regime (BEAR) announced in July.

The federal government initiative is aimed at making bank senior executives and directors more accountable for their businesses.

Under the BEAR system banks will be required to register individuals with the Australian Prudential Regulation Authority (APRA) before appointing them as senior executives and directors.

APRA will also be able to sack executives and directors who don’t meet community expectations, ensure pay structures don’t reward bad behaviour and fine banks.

BEAR draws on a similar system in the UK, knowledge of which Robert was able to bring to the discussion.

The roundtable framed BEAR as an opportunity for cultural change in the banking system, rather than just another compliance project.

The senior executives from the banking sector who took part in in the roundtable acknowledged the complexity of the task requires a collective response across banks, involving operations, human resources, risk management and legal and compliance.

“The BEAR regulations are a shot across the bow for senior management and the board. The message from regulators is: we’re serious and this needs real attention,” Robert opened.

He emphasised this is a governance issue, requiring the board’s full attention. In the UK, regulations also initially focused on the C-suite and board.

Said Robert: “The focus was engaging non-executive directors, but if changes don’t trickle down the business they cannot be effective.”

As a result, there’s now much more emphasis in the UK on individuals taking responsibility for their behaviour at every level of the business, including branch staff, middle management and sales teams.

UK banks are also now required to produce statements of responsibilities that map governance and accountabilities in their operations.

As a Bank of England directive explains, “a statement of responsibilities should be drafted in such a way as to be practical and useable by regulators … this would be achieved by succinct, clear descriptions of each responsibility, which avoids unnecessary detail.”

UK regulators expect banks to be able to clearly identify individuals in their businesses that are responsible for specific functions.

It’s an approach of which Australian banks should keep abreast. So it’s an idea for local bank businesses to think through how they might respond to a similar proposal in this market.


Watching brief

Drawing on his time working for US insurance giant AIG, Robert noted an emerging trend is much closer oversight of financial institutions’ internal and external audit functions.

AIG received $185 million in US government funding after it almost faltered during the financial crisis of 2007/2008. Robert was part of a team brought in to help manage the business as it recovered and paid back the money, largely by divesting more than 40 businesses.

He noted one discussion involved a request by the US Securities and Exchange Commission (SEC) for a direct communication channel between the regulator and AIG’s internal audit function.

Security concerns kyboshed the idea, but it serves as an example of where the leading edge is in banking regulation.

“Dynamic oversight is where it’s going,” Robert said, adding, “when it comes to governance, regulators want to see documents that support oversight because it’s difficult for them to understand how firms are governed in practice.”

Ultimately, regulators want assurance banks are financially sound, they have a sustainable business plan and that the people who run them are competent, open and honest.

“They want to see an upward reporting line and know where people sit in the chain of responsibility,” explained Robert.

But he says it’s important to acknowledge it’s almost impossible to achieve a complete picture because bank staff responsibilities are necessarily fluid and companies are constantly changing.

“People are expected to act with integrity. There was a breakdown in personal accountability through the 1990s and 2000s, which worsened after the 2008 financial crisis. This is why regulators are so hot on individual accountability,” Robert said.

The UK Chartered Banker Institute is pursuing a number of initiatives to encourage people in banking to take personal responsibility and recognise their behaviour has a direct impact on their reputation.

Its approach is to increase professionalism in the banking sector by encouraging banks to adopt its Code of Professional Conduct, as well as other programs.

Initiatives like these build a greater depth and breadth of skills across banks. They also encourage a higher standard of ethics.

FINSIA is pursuing a very similar path and next year will introduce a range of professional designations based on the UK’s own Chartered Banker qualification.

The end result aims to be a higher standard of behaviour in banks to help ensure they can meet BEAR’s requirements.


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