As Australia passes the Bank Executive Accountability Regime firms will need to decide how they are going to react.

Trust. That’s one commodity that banks around the world have found in short supply. Ever since the financial crisis in 2008 public faith in banking has plummeted around the world. The question for regulators and the entire sector is how they can go about regaining that trust? For many the big issue revolves around accountability – attempting to show that executives are accountable for their actions and will face sanction when things go wrong. In Australia, that move has led to the Banking Executive Accountability Regime.

To supporters this is a welcome attempt to inject much-needed transparency into the process, but opponents fear it could discourage innovation, create confusion and keep top talent from executive positions.

Promoting accountability

It’s now ten years since the financial crisis, but the anger still simmers. For all the misery inflicted few executives have faced real consequences for their failures. Establishing greater accountability at executive level is a crucial tool to regaining that trust and preventing the sector reliving past mistakes.

BEAR has now passed through the Senate and the countdown to implementation is well under way. Under the new laws, ADIs and their subsidiaries will have greater obligations to ensure their business continues to act with integrity in everything it does. They will be subject to increased penalties thanks to the greater powers of the Australian Prudential Regulatory Authority (APRA) and there will also be some restrictions on executive pay.

APRA also gets more robust laws to penalise firms. Under BEAR they can now issue penalties up to $200 million.

These rules come into force on July 1 2018 for larger organisations while smaller sized organisations will have a further 12 months to become BEAR compliant. The rules will apply to all ADIs including Australian Banks, branches and subsidiaries and all accountable persons – those individuals defined as holding particular positions within the bank and having a certain level of responsibility.

This shouldn’t come as a major surprise for most of those affected. The legislation draws on other moves such as the Senior Managers’ Regime in the UK. These have provided a useful template for those framing the law, as well as a few useful lessons for Australian companies as they decide how to approach the new rules. In short, the UK shows that they will need significant resources, both in terms of time and finances – to address structures within their organisations and ensure they can meet their obligations. Firms will need to clearly assign accountabilities throughout an organisation and make certain that their reporting processes are compliant with new regulatory requirements.

Cause for concern

It might also offer a few pointers at where opposition might come in. The introduction of SM&CR was not without complaint. Some executives were worried they could be on the hook for any problem which happens within their areas of operation. Others warned that it could affect talent acquisition with people being put off executive roles for fear of the enhanced liability they may shoulder.

Replies to the consultation on BEAR also raised concerns about the strengthened role of the APRA.

In its response NAB stated:

“The BEAR has the potential to materially change the role of APRA as prudential regulator, and in doing so undermine its supervisory relationship with ADIs. To address this risk, the scope of the BEAR, and APRA’s role in conduct regulation, needs to be clearly defined in any new legislation.”

The big question is: how will this impact the role of APRA and can this create confusion and inconsistencies?

Getting ready

Like it or not though, the changes are coming and financial institutions will have a lot on their plate getting prepared. Firstly, ADIs will have to provide compliance maps, setting out what they are doing to adhere to the new guidelines. This will set out the responsibilities of each accountable person and the scrutiny they will receive. Each of those persons will have to be registered with the APRA

People must be clear about their job descriptions. Firms will have to outline their responsibilities and factors which will determine their performance in a more accurate way. If more than one person could be accountable they could all be deemed accountable for the same issue.

Firms will also have to look at their renumeration policies. The legislation requires firms to defer variable renumeration for at least four years. Banks will need to have robust systems in place which enable them to reduce the renumeration of an accountable person if performance merits it.

Most of all, ADIs and accountable persons need to get their reporting in shape so they can show the regulators that they took all ‘reasonable measures’ to comply with their obligations. What those reasonable measures are is not entirely clear. The Bill has limited guidance on what steps the accountable person needs to take to satisfy ‘reasonable compliance’. Indeed, it does acknowledge that the steps may vary depending on the individual’s function and position.

The focus, instead, is on good governance – putting in place effective control and risk management processes to maintain compliance, and ensuring safeguards are in place to prevent inappropriate behaviour or delegations of responsibilities and that firms have effective oversight, to identify occasions when problems arise and implement remedial measures accordingly. In other words, if a company implements good governance, compliance should come as second nature.

This is the intention of the bill and is the aim of regulators in Australia, the UK and around the world. Each in their own way are wrestling with the same challenge, to imbue greater accountability into the system, to increase transparency and restore trust. The onus is on firms to keep pace with the expectations of regulators. Some organisations will do this better than others.

The key is information. Firms must keep control of their data to ensure traceability to demonstrate that they have performed everything the regulator could have expected of them. They also need to keep their fingers on the pulse of regulatory change – to see the latest guidelines issued by the regulator, and any enforcement actions taken. By doing so they can see which way the wind is blowing, and what’s blowing in it and stay ahead of the game.

There are wider lessons to be learned. Whether it’s Australia with BEAR or the UK with SM&CR regulators are moving in the same direction. They want a financial sector which is trustworthy, accountable and transparent. Achieving that goal will benefit everyone so it makes sense to go above and beyond, to be forward looking and to deliver best practice before regulators start to demand it.