In brief
Written by Senior Associate Brenton Pollard
The commencement date of the BEAR legislation is fast approaching and institutions should start planning how to comply with the regime. We look at the changes made to the BEAR legislation following industry submissions, the timing for implementation and key steps to take.
Background
On 19 October 2017, the Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill 2017 (BEAR) was tabled before Parliament. Much has been written already about the Federal Government's proposed reforms, the similarities and differences with other jurisdictions and those aspects of the proposed reforms that impose unreasonable regulatory burdens on Australian Deposit-taking Institutions and their senior managers in an already highly regulated industry. However, with the commencement date of BEAR fast approaching, institutions must now turn their minds to how they should go about complying with the regime.
Changes made to BEAR legislation
Notwithstanding the very short consultation on the form of the draft legislation published on 22 September 2017, the Government has listened to some of the submissions from the industry and its advisers in relation to the form of the legislation and made a number of important amendments. It is not clear that they are necessarily improvements.
- The application to subsidiaries has been narrowed somewhat such that it only applies to a significant or substantial part or aspect of the operations of the Australian Deposit-taking Institution (ADI) or the 'relevant group of bodies corporate that is constituted by the ADI and its subsidiaries'. It will now be a matter for the ADI to decide whether a subsidiary forms a significant or substantial part of its operations. It is likely that those companies operating the pensions and investments, financial advice and insurance arms will be captured by the legislation, but equally it is clear that not each and every subsidiary of the ADI will be captured.
- All of the new accountability obligations applying to ADIs are now framed as obligations to 'take reasonable steps to' comply with the relevant requirement, which will allow ADIs to establish a reasonable steps defence in the event of any action by APRA for breach of the obligations.
- The obligation on ADIs to prevent matters arising that would adversely affect their 'reputation' has been amended so that it is now an obligation only in relation to their 'prudential' reputation and not their reputation at large. We are not sure that this provides much assistance and, again, creates further room for argument and doubt.
- APRA has the power to exempt an ADI from obligations under the BEAR legislation if it is satisfied that compliance would contravene a law of a foreign country. This provides an avenue for relief for Australian branches of foreign ADIs who will have sometimes inconsistent obligations in their home jurisdiction, particularly around remuneration.
- For Accountability Statements and Accountability Maps, APRA will have the power to prescribe additional content requirements for these documents. Therefore, notwithstanding the relatively high-level requirements for these documents as set out in the legislation, there is a risk that APRA could significantly increase the content requirements of these documents.
- Significantly, APRA can, by legislative instrument, provide for an 18-month transition period following the commencement of the legislation on 1 July 2018 for ADIs to submit Accountability Statements and Maps, albeit that the substantive obligations on ADIs and Accountable Persons will still apply by 1 July 2018.
- Accountable Persons will now have the right to a full merits review (by the AAT) of a decision by APRA to disqualify them. This is a very welcome and necessary amendment.
Timing for implementation
The BEAR Bill has been referred to the Senate Economics Legislation Committee, which is due to report to Parliament on 24 November 2017. With Parliament sitting for a further two weeks between 27 November and 7 December, there is a good chance that the legislation will pass through Parliament before the end of the year (although nothing is certain in the current political climate). As noted above, ADIs will be required to comply with most of the substantive requirements of the BEAR legislation by 1 July 2018. In the context of the milestones to be achieved by then (addressed below), the time required to implement and embed the requirements of the BEAR legislation is limited and considerable progress will need to be made by institutions in the coming months to ensure readiness at the time of commencement of the regime.
Key steps to implementation
As project teams are formed and project plans are drawn, ADIs will be engaged in planning the steps required to implement this significant regulatory change. While this process is likely to differ from business to business (depending on size and structure of the ADI), key milestones for the implementation of the BEAR legislation are likely to include:
- Project governance: given the wide impact of the BEAR legislation, consideration should be given to the key internal stakeholders involved in implementing the regime. This may include the establishment of a working group comprising individuals from Legal, Compliance, Regulatory Affairs, Employment/HR/Tax and IT, with oversight by a steering committee of more senior executive level employees. Consideration will also need to be given to the extent to which external advisers will be used to assist with implementation from both an institutional and individual perspective.
- Key design principles and identification of Accountable Persons: the identification of Accountable Persons is best undertaken after an ADI clearly sets out its approach to the interpretation of the BEAR legislation and how those requirements are likely to apply to its business. For example, consideration may need to be given to:
- what constitutes a 'significant or substantial part or aspect of the operations of the ADI' requiring an Accountable Person to be responsible for it;
- the approach that should be taken to individuals based overseas who may have responsibility for management or control of the ADI or a significant part or aspect of the ADI;
- issues that may arise with matrix management arrangements, agile working arrangements and shared responsibilities; and
- for Australian branches of foreign banks, whether the head of the branch has sufficient oversight of all of the activities of the Australian branch or whether additional Accountable Persons require registration with APRA.
- Support for Accountable Persons: given the significant personal consequences that the regime will have on Accountable Persons (eg remuneration consequences and potential disqualification), early engagement with Accountable Persons and training on the key aspects of the regime, and the program that the ADI has put in place to implement the regime, is likely to be critical to ensure buy-in from those individuals who face increased exposure.
- Regulatory documentation: Accountability Maps and Statements will require careful preparation given their purpose is to articulate clearly how the ADI is governed and who has responsibility for what. They will need to accurately record the chains of delegations throughout the ADI. As ADIs are required to keep these regulatory documents up-to-date, care will need to be taken to ensure that the documents comply with the regulatory requirements but do not descend into a level of detail that would make them impracticable to keep up-to-date.
- Changes to policies and procedures: ADIs may need to undertake a detailed review of existing delegations and policies to consider the impact that the BEAR legislation has on those delegations and policies (eg Code of Conduct and compliance and HR policies and procedures). Different delegations and new policies and procedures may well be needed to ensure compliance with the requirements of the regime (eg Accountable Persons Handbook, breach reporting processes etc). In addition, employment contracts, indemnity agreements and D&O insurance policies may need to be revisited to ensure consistency with the requirements of the regime. Tax advice will also be important when the deferral of remuneration is considered.
- Reasonable steps assurance frameworks for Accountable Persons: given the increased risk of liability, Accountable Persons should better document the core elements of the steps taken to fulfil their responsibilities so as to demonstrate the taking of 'reasonable steps' in discharging their responsibilities. This will likely include documenting and building upon existing governance and management arrangements already in place.
- Embedding the BEAR legislation: following implementation of the BEAR within the ADI, the requirements of the regime will need to be administered on an ongoing basis (eg Accountability Maps and Statements will need to be kept up-to-date, Accountable Persons may require ongoing training and processes will need to be established to take account of the new remuneration requirements for an Accountable Person's variable remuneration). The regulatory burden that this will impose on ADIs is not insignificant and early consideration should be given to the 'owner' of any new regulatory processes on an ongoing basis.