The Banking Executive Accountability Regime – known as BEAR – has been in place for the large banks for less than a year, but the Royal Commission has seen enough already to recommend:
- extending the scope of organisations caught by the regime
- adding ASIC as a 'co-regulator' responsible for consumer protection and market conduct aspects of BEAR with APRA remaining responsible for prudential aspects
- specifying an additional 'accountability' be added to the existing laundry list of roles applicable to banks in respect of product design, delivery and maintenance
In poker parlance the Government Response has been not only to 'see' those recommendations, but also to 'raise' them by foreshadowing that it will go even further to extend the scope of organisations caught by the regime. The Royal Commission suggests that APRA regulated institutions such as insurers (life and general) and superannuation trustees be included. The Government suggests it will go much further to catch any and all financial services licensees in the BEAR net – mimicking perhaps the broadly applicable Senior Managers regime in the UK.
BEAR imposes requirements on institutions, and individual directors and senior employees, to take steps to conduct the business in accordance with specified accountability obligations: Acting with due care, skill and diligence, honestly and with integrity; Open and constructive dealings with APRA; and, most significantly, preventing matters arising that would adversely affect the organisation's prudential standing or reputation. A 'map' of accountability for every aspect of the business must be created and each accountable individual must have clear statement of their accountabilities. There are remuneration deferral and clawback requirements for those accountable individuals. Breaches must be notified and significant penalties apply.
If the Government's foreshadowed approach is adopted, then every financial services licensee in Australia will need to make sure that individual executive accountability for everything that happens in that company is clearly allocated and that steps are taken to ensure so much as is possible that, in essence, bad things do not happen. It is unclear whether the deferred remuneration obligations from BEAR will also be extended more broadly – in particular the variable remuneration four year deferral period. If so, this will have a significant impact on the remuneration arrangements of many executives in the sector. It seems almost inevitable this will create challenges for organisations in their recruitment and retention of senior executives as well their management of internal relativities between regulated and non regulated staff. These can be significant tasks and we recommend that companies start early to embed BEAR accountability principles even before they become mandatory – indeed, proactive implementation of BEAR will help demonstrate a company's commitment to strong governance, sound culture and clear accountability.
In our experience there is potential business upside to be realised implementing a BEAR program, in particular in terms of improved clarity of reporting lines and responsibilities as well as executive engagement. But it takes some time and engagement to tease out the niggling issues, accountability gaps, and unnecessary overlaps which exist in many, if not all, organisations to derive positive benefit rather than just incurring a compliance burden. Untangling accountabilities, like untangling a knot, is rarely achieved in haste.
We see potential difficulty arising from the proposed co-regulatory arrangement under which ASIC will be responsible for consumer protection and market conduct aspects of BEAR and APRA for prudential aspects. For example, notwithstanding that it is a distinction at the heart of the 'twin peaks' model, the conceptual distinction between an issue raising a question of 'market conduct' and one which may affect 'prudential' standing or reputation can be, as a practical matter, opaque. The Royal Commission recognised that "[c]onduct often has both prudential and non-prudential connotations" [para 5.1.2]. How the BEAR regime is ultimately amended to give effect to the Royal Commission's recommendation will be crucial to avoiding additional complexity for financial services organisations seeking to identify and promptly report issues to the appropriate regulator.
MinterEllison has the unique multi-disciplinary expertise required to help companies design and deliver BEAR implementation, including corporate governance, regulatory, employment law and risk management expertise. Importantly we offer:
- a team of experts who worked closely with one of the big banks throughout its successful implementation of BEAR so we understand from a practical perspective how to implement BEAR in a dynamic environment.
- a unique remuneration governance team, which helps Boards and CEOs with better pay designs, stronger alignment with performance and shareholders, and more effective pay governance.
Our team brings together the various expertise required to ensure that any BEAR program is practically workable and legal defensible as well as driving business benefits from clear accountability mapping.