Look for the BEAR necessities (but don’t forget about your worries and your strife)
By Shaun McGushin, Director Ash St. with research contributions from Cassian Ho, Lawyer Ash St.
The Banking Executive Accountability Regime (BEAR) passed into law earlier this year on 20 February 2018. This new compliance regime already applies to all large authorised deposit-taking institutions (ADIs) and will apply to other ADIs (including mutual ADIs) from 1 July 2019.
The primary purpose of BEAR is to hold the directors and senior executives of ADIs accountable for the conduct of their ADIs. With maximum civil penalties of A$210 million (scaled down for smaller ADIs), it is critical for mutual and smaller ADIs to begin preparing for compliance now and not to wait.
Review Organisational Structure
ADIs must now provide the Australian Prudential Regulatory Authority (APRA) with an accountability statement and accountability map, including a list of every “accountable person” and their role in the organisation. In many cases for mutual and smaller ADIs, this would include all of the senior management and should be the starting position. The intention is clear. The accountable persons will between them, be responsible for all the operations of the ADI and its subsidiaries.
ADIs should begin (if they have not already) to take the following preparatory steps:
- identify each director or senior executive of the organisation;
- describe the role and responsibilities of each accountable person, being specific as to the actual or effective management or control exercised by the person and in relation to which aspects of the business; and
- ensure the organisation’s role architecture is updated to prepare an accountability map which shows reporting lines and responsibilities, reviewed on an ongoing basis to comply with notification obligations to APRA.
As the accountability obligations of an accountable person are limited by reference to “each of the responsibilities that cause him or her to be an accountable person”, it is absolutely critical to ensure accurate descriptions are provided to APRA. On the other hand, it is the ADIs responsibility to ensure that the accountable persons cover all aspects of their operations.
Policies, Systems and Training
All ADIs are required to take “reasonable steps” to meet a number of accountability obligations under BEAR. While there is no exhaustive definition of what constitutes reasonable steps, the Act suggests, and the Explanatory Memorandum confirms, that reasonable steps “are systemic in nature”. This should include updating governance policies and systems to:
- ensure all accountable persons understand their BEAR obligations;
- include codes of conduct in internal processes to reinforce compliance (possibly to cover broader staff to engrain compliance in the corporate culture);
- ensure that responsibilities are delegated appropriately and clearly; and
- establish clear reporting lines, including to identify, notify and remedy any breach of BEAR.
Deferred Remuneration Policies
BEAR also regulates the variable remuneration of accountable persons. While the purpose here is to incentivise accountable persons to comply with BEAR and to reduce the variable remuneration if there is a failure, it may place upward pressure on remuneration as the accountable person’s risk increases in relation to the variable remuneration component. ADIs should carefully review their remuneration policies, including the powers and charter of any remuneration committees to reflect the mandatory 4-year deferral period that will apply, but also to ensure:
- flexibility when dealing with variable remuneration;
- appropriate powers and controls are present to deal with a situation where the accountable person has not met their BEAR obligations;
- timing and accounting frameworks deal with the situations where significant remuneration is deferred for extended periods; and
ADIs should also note the prohibition against indemnifying an accountable person for a breach of BEAR. The clear intention is that an accountable person will suffer a decrease in their variable remuneration if there is a breach of BEAR.
Given the amount of coverage over BEAR’s implications as well as the media coverage surrounding the Royal Commission, the boards of directors and remuneration committees of mutual and smaller ADIs should expect some scrutiny by members or shareholders in decisions relating to the remuneration of accountable persons. The level of scrutiny for the large ADIs we expect will be far more significant.
It is important to note however, that these limitations do not apply to a person’s variable remuneration entered into before 1 January 2019 or may not apply in some cases until 1 January 2020 so this measure will be one which becomes more significant over time. In addition, some mutual and smaller ADIs should note that there is an exemption for small amounts of variable remuneration which may be as determined by the Minister or less than A$50,000.
It is important to get the right advice when setting up your processes to comply with BEAR. Contact Ash St. Legal and Advisory today to discuss how our professional services may be able to assist your business in getting this important new process right.
Shaun McGushin +61 2 8651 8717 | email@example.com
Cassian Ho +61 2 8651 8713 | firstname.lastname@example.org
This communication is intended to provide commentary and general information only. It is not intended to be a comprehensive review of all aspects of the matter referred to. It should not be relied upon as legal advice as to specific issues or transactions.
About the author
Shaun McGushin leads the Ash St. Projects & Finance team. He is one of Australia’s most experienced advisers on infrastructure and finance, including buying and selling infrastructure assets, public private partnerships, project finance, corporate finance, acquisition finance, capital markets and workouts.
Formerly a partner of both Corrs and Freehills, Shaun has over thirty years’ experience advising local and international corporates on a wide range of transactions with particular focus on the infrastructure, power, energy and resources industries. He has a reputation for successfully completing major transactions, no matter how complex, and is sought for his strategic and negotiating skills.
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