The BEAR reforms – Banks and their senior executives to be held to account
The Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Act 2018 (BEAR Act) (which received Royal Assent on 20 February 2018) is intended to incentivise good behaviour and ensure that banks and individuals are held to account where they fail to meet the standards expected of them.
In summary, under the BEAR Act, authorised deposit-taking institutions (ADIs) (and their subsidiaries) are required to:
- register their “accountable persons” with APRA, and ensure that accountable person roles are filled at all times. An accountable person is a board member with oversight over the ADI or a senior executive with responsibility for management or control of significant or substantial parts or aspects of the ADI group;
- give APRA accountability statements detailing the roles and responsibilities of each accountable person and accountability maps allocating the roles and responsibilities of accountable persons across the ADI group; and
- set remuneration policies which defer an accountable person’s variable remuneration for a period of up to 4 years, allow for a reduction in remuneration in proportion to any failure to meet the BEAR obligations, and continue the deferral where there is a likely failure by an accountable person to meet the BEAR obligations;
The accountability obligations of an ADI and its accountable persons include:
- acting with honesty and integrity and with due skill, care and diligence;
- dealing with APRA in an open, constructive and co‑operative way; and
- taking reasonable steps to prevent matters arising which affect the prudential reputation or standing of the ADI.
Under the Act, taking of reasonable steps includes having:
- appropriate governance, control and risk management in relation to that matter; and
- safeguards against inappropriate delegations of responsibility in relation to that matter; and
- appropriate procedures for identifying and remediating problems that arise or may arise in relation to that matter.
ADIs are also prohibited from:
- indemnifying accountable persons against the consequence of breaching a BEAR obligation; and
- paying a premium for an insurance policy which insures accountable persons against the consequence of breaching a BEAR obligation,
in both cases with a carve out for liability for legal costs. ADIs should consider whether their existing D&O policies or deeds of indemnities should be amended to avoid a potential breach of the BEAR obligations.
APRA will also have additional examination and enforcement powers to enhance its ability to enforce the BEAR Act. If an ADI breaches its BEAR obligations, significant civil penalties may be imposed by a court and if an accountable person breaches its BEAR obligations, that person may face disqualification or financial consequences through the reduction of variable remuneration.
The BEAR Act commences:
- for large ADIs, on 1 July 2018; and
- for small and medium ADIs, on 1 July 2019.
The Treasurer has indicated that the Government will consult shortly on a legislative instrument defining small, medium and large ADIs for the purpose of the BEAR.
See also Treasurer, Hon Scott Morrison’s media release dated 7 February 2018.
Strengthening APRA’s crisis resolution powers
On 14 February 2018, the Senate passed the Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Bill 2017 (Bill) which gives the Australian Prudential Regulation Authority (APRA) additional powers for crisis resolution and resolution planning in relation to regulated entities. The Bill is currently awaiting Royal Assent.
The Bill provides
- clear powers that enable APRA to set requirements on resolution planning and ensure banks and insurers are better prepared for a crisis; and
- an expanded set of crisis resolution powers that equip APRA to act decisively to facilitate the orderly resolution of a distressed bank or insurer.
See also Treasurer Hon Scott Morrison’s media release dated 14 February 2018.
Cracking down on credit card practices and boosting competition in banking
On 15 February 2018, the Senate passed the Treasury Laws Amendment (Banking Measures No.1) Bill 2018 (Bill) which forces credit card providers to scrap unfair and predatory practices. The Bill is also currently awaiting Royal Assent.
Key features of the Bill include:
requiring that affordability assessments be based on a consumer's ability to repay the credit limit within a reasonable period (from July 2018);
banning unsolicited offers of credit limit increases (from January 2019); and
simplifying how credit card interest is calculated and requiring credit card providers to have online options to cancel cards or to reduce credit limits (from January 2019).
The Bill will also:
- allow any ADI (i.e. any banking business with an ADI licence) to use the word 'bank' in relation their business (which is intended to reduce barriers to new entrants to the banking sector and provide a more level playing field amongst ADIs); and
- strengthen financial stability by giving APRA a new reserve power to make rules in respect of the lending activities of non-ADI lenders if these activities are materially contributing to risks of instability in the Australian financial system.
See also Treasurer Hon Scott Morrison’s media release dated 15 February 2017.