New regulations in Australia will introduce a brand new regulatory regime for the financial services sector similar to the UK’s regime to by 1 July next year.
The Australian government has published proposals for a Banking Executive Accountability Regime Bill (the BEAR) which is intended to strengthen accountability, compliance and discourage excessive risk taking in the banking sector. A helpful executive summary was published alongside the proposals.
Which firms are in scope?
These new rules apply to ‘authorised deposit-taking institutions’ (ADIs) in Australia that are authorised as such by the Australian Prudential Regulation Authority (APRA) and subsidiaries of ADIs in Australia and overseas. This does not include a foreign ADI, unless it operate a branch in Australia which will be caught. Exemptions from compliance with certain aspects of BEAR can be given to a particular ADI or class of ADIs although it is unclear in what circumstances such exemptions would be given. ADIs are classified as either small, medium or large depending on the value of their assets.
Which staff are covered by the regs?
The BEAR imposes a stronger accountability framework on ‘accountable persons’ in ADIs. These are people that hold a position in the ADI or its subsidiary and have actual or effective management or control of the ADI or its subsidiary or a significant part of the ADI or subsidiary. There are various roles and responsibilities which automatically designate someone as an accountable person (e.g. being a Board member or having management responsibility). Accountable person includes the head of an Australian branch of a foreign ADI.
What are the key features of the BEAR?
- clearly defined accountability statements and accountability maps for ADI groups;
- a register kept by APRA of all accountable persons (ADI’s must apply to APRA to register their senior people as accountable persons);
- adoption of a remuneration policy consistent with the BEAR;
- deferral of 10, 20, 40 or 60% of variable remuneration for accountable persons for a minimum of 4 years (dependent on if it is a small, medium or large ADI and whether the accountable person is the CEO) – an ADI can apply to APRA for approval of a shorter deferral period;
- anti-avoidance rules relating to the BEAR obligations;
- significant civil penalties for non-compliance (including up to AUD210 million fines); and
- expanded regulatory and investigatory powers for the APRA.
When will the BEAR come into force?
A 7 day consultation period ended on 30 September 2017. The BEAR will now proceed through the legislative approval process and may be subject to amendment. In its current draft, the BEAR will come into force on 1 July 2018, although the rules applying to variable remuneration will only apply to awards granted on or after 1 January 2019. There will however be numerous compliance requirements before 1 January 2019.
The BEAR is an ambitious revamp of the Australian FS landscape. It proposes an entirely new regulatory framework. The reaction from local industry and stakeholders has been mixed. The 7 day consultation period has been criticised as being insufficient to allow proper responses.
The Australian Bankers Association has raised various concerns (in general that the bill is too wide reaching and lacking in detail many areas). Concerns include that 1 July 2018 is too soon a deadline for commencement, the BEAR applies to all subsidiaries of an ADI group without distinguishing which subsidiaries are of significance to the group, the accountable persons definition catches too many people, the definition of remuneration is too wide and catches retention awards and buy out awards and there is no detail about when exemptions from the BEAR may be granted.
July 2018 may not give affected organisations as much time as they would wish to become compliant. By way of comparison, the UK’s regulatory framework was rolled out over several years during which time numerous guidance notes and statements were released.
The BEAR uses the UK framework as its template and so many of its requirements will be familiar to UK regulated entities. There are clear similarities, particularly with regard to the requirements to produce accountability statements and maps. Groups caught by the UK and Australian rules may wish to use experiences from the implementation of UK requirements when implementing the new Australian rules.
As the 4 year deferral may be longer than currently used, with a 3 year deferral being the global standard, with the notable exception of UK regulated firms which are often subject to longer deferral periods, it will be important for firms to communicate these changes to participants well in advance.
The proposals provide for some transitional arrangements, with reference to existing employment contracts being required to comply with the BEAR’s deferred remuneration requirements by 1 January 2020. However, as, for example, deferred remuneration is usually dealt with separately to the employment contract, we hope that further guidance is published to clarify the position ahead of the 1 July 2018 implementation date.
These rules are currently in draft and are subject to change. Once the proposals are final, we will publish a detailed newsletter identifying the key final rules.
If you have any questions about this, or anything else, please do ask – we are delighted to help!
Jordan and Jessica