The Commonwealth Government’s Banking Executive Accountability Regime (BEAR) has recently been passed and awaits Assent from the Governor-General before taking effect. Some of the measures introduced by BEAR impact upon an authorised deposit-taking institution’s (ADI’s) directors and officers liability insurance policy (D&O Policy).

What are the relevant new measures?

The BEAR:

  • introduces accountability obligations to “accountable persons” (APs) of ADIs;

  • gives new powers to the Australian Prudential Regulation Authority (APRA) to investigate potential breaches, determine what part of an AP’s remuneration is “variable remuneration” which is required to be deferred and to disqualify APs for breaches;

  • prohibits an ADI (or its related body corporate) from indemnifying APs against the consequence of breaching a BEAR obligation. This prohibition does not apply to an indemnity for legal costs; and

  • prohibits an ADI (or its related body corporate) from paying premium for an insurance policy which insures APs against the consequence of breaching a BEAR obligation. This prohibition does not apply to insurance cover for legal costs.

A breach of the BEAR could result in a penalty of up to $210 million for a large ADI. APs are not liable to civil penalties individually for a breach of the BEAR, although APs may be disqualified, and may also be liable to damages in civil claims.

For further details of other changes, please see our previous article here.

How does it affect an ADI’s D&O Policy?

Three key considerations arise:

  1. Are APs “insured persons” under the D&O Policy?

  2. Is the definition of Claim broad enough to capture actions that may be taken under BEAR?

  3. Whether the D&O Policy breaches the prohibition against an ADI insuring against a breach of a BEAR obligation?

ADIs should consider whether APs are covered by their insurance programme. An ADI’s D&O Policy is likely to cover some APs already given the management roles they play. If there is doubt over whether certain APs are covered, ADIs should consider expressly adding APs as insured persons.

The D&O Policy may require further amendments to ensure that it responds to the new actions which can be taken by APRA. For example, the definition of “Claim” under the D&O may not include contesting an APRA order to disqualify APs.

The above amendments need to be carefully drafted so as not to breach the prohibition on an ADI paying premium for an insurance policy which insures an AP against the consequence of breaching the BEAR. There is a fine balance between triggering the prohibition and cutting across important existing coverage for Ds&Os.

ADIs should also consider whether any existing deeds of indemnity provide indemnity for APs. If so, carefully consider whether the indemnity breaches the prohibition on an ADI indemnifying APs against the consequence of breaching an obligation under the BEAR.

What next?

ADIs should review their D&O policies and deeds of indemnity in light of the above issues and consider whether amendments are required to both their policy and indemnity. We have extensive experience in this area and can assist with drafting and negotiating the required changes.