Australia: new accountability regime BEAR seeks to shakeup banking sector
17 Oct 2017

The Australian Treasury has unveiled draft legislation for the new Banking Executive Accountability Regime (BEAR), which was partly inspired by the UK’s Senior Managers and Certification Regime (SM&CR).

The legislation aims to change the “poor compliance culture” in the Australian banking sector by creating individual responsibilities – and individual consequences – for banking executives.

Sector representatives have complained about the short time period for industry consultation, but these reforms have been anticipated for a long time.

In recent years government and regulatory agencies have undertaken a number of reviews and enquiries into the behaviour of Australia’s four biggest banks, National Australia Bank (NAB), Commonwealth Bank (CBA or CommBank), Australia and New Zealand Group (ANZ) and Westpac.

These reviews were prompted by a series of high profile scandals at the Big Four banks. In October 2016 all four banks were forced to pay out $178 million in compensation for billing hundreds of thousands of customers for financial advice services which were never provided.

In just the last 24 months the Big Four have also been in the headlines for forging signatures, overcharging wealth management customers, and market manipulation.

Recent revelations suggest the banks have not learned from their mistakes. NAB was again in the spotlight in May for alleged false witnessing by its financial planners, but the dubious honour of 2017’s most dramatic scandal to date goes to CBA, which has been accused of systematic and widespread violations of anti-money laundering regulations (more on that later).

In recent months the House of Representatives’ Standing Committee on Economics has released two reports on its Review of the Four Major Banks. The Committee identified the lack of accountability and personal consequences for senior executives as a key problem.

The Committee points out that no senior executive has lost their job over a range of “extremely serious” incidents and systemic failings.

One startling example is NAB’s head of wealth management Andrew Thorburn, who received a 36% pay rise after his division wrongly charged 220,000 customers by $36.5 million.

The banks have argued that responsibility for failures is collective and cannot be attributed to any one executive or director. In its review, however, the Committee concluded that the major banks “have a poor compliance culture and have repeatedly failed to protect the interests of consumers.

This is a culture that senior executives have created. It is a culture that they need to be held accountable for.”

The draft legislation published by the Treasury would amend the Banking Act by giving dramatically increased powers to the Australian Prudential Regulation Authority (APRA) to hold individual senior executives and directors to account. It is expected to come into force on 1st July 2018.

As drafted, the BEAR requires authorised deposit-taking institutions (ADIs) such as banks, building societies and credit unions to comply with accountability obligations. This includes ensuring all areas of responsibility in the institution are attributed to “accountable persons” such as senior executives or directors.

The ADI must provide APRA with an “accountability map” explaining who is responsible for all parts and aspects of the institution.

This is an effort by regulators to pin down and enforce accountability, rather than allowing a banking culture in which responsibility is treated as diffuse – as the saying goes, when it’s everyone’s responsibility, it’s also no one’s responsibility.

The legislation grants far greater discretionary powers to APRA and the Finance Minister than they currently hold, including the ability to disqualify accountable persons and summon witnesses for examination under oath.

Significantly, the BEAR also requires ADIs to defer a significant proportion of the remuneration of accountable persons for four years (the exact amount varies based on the ADI).

Consumer protection advocates have applauded the goal of increased accountability, but say that the legislation doesn’t go far enough. Consumer watchdog CHOICE argues that the decision to limit accountability to poor conduct of a “systemic and prudential nature” misses the most crucial element of the UK’s similar SM&CR because it does not consider poor consumer outcomes.

The banks themselves are, unsurprisingly, also unhappy with the draft legislation, albeit for very different reasons. Banking industry groups have said that the regulations are too broad (they don’t want BEAR applied to subsidiaries and non-executive directors, and in some cases are arguing for smaller ADIs to be exempted); too narrow (they want insurance companies and superannuation companies included); too unclear, too harsh and too intrusive.

One thing all industry groups agree on is that they want more time, pointing to the three year implementation period for the SM&CR in the UK.

Their complaints are likely to fall on unsympathetic ears. After years of scandals, topped off by the recent CBA money laundering allegations, public opinion of the banks is running extremely low.

The rapid pace at which BEAR is moving towards becoming law is itself a sign that the government is feeling under pressure to be seen taking a strong stance against the scandals and failures of the Big Four, and is unlikely to walk back the planned legislation.

Despite their considerable political influence and ongoing lobbying efforts, the banks may find that this time they just have to grin and bear it.

By Elise Thomas

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