The APRA Teddy Bear growls

In a non-too subtle attempt to get on the front foot before being flayed by the Financial Services Royal Commission next month, APRA has published an information paper outlining how banks will be expected to meet their obligations under the new Banking Executive Accountability Regime (BEAR).

[Note An edited version of this article, by Pat McConnell and Benjamin Koh, appeared in Australian Banking and Finance on 22nd October 2018.  Many thanks to editor Elizabeth Fry.]

Notwithstanding the fact that the BEAR legislation was a misguided and ultimately failed attempt to head off a Royal Commission, the job of implementing this mishmash legislation has fallen to APRA (why not ASIC is a separate but relevant question?).

The purpose of the BEAR is laudable in than it attempts to assign ‘accountabilities’ in banks, by identifying who is accountable for what (‘accountable persons’) and then telling people what they are accountable for, in an ‘accountability statement’.   The idea, of course, is to clearly identify who was/is responsible for something going wrong and then, presumably, getting them fired and maybe even clawing back ill-gotten gains.

So far so good and relatively easy, since most employees should already have a ‘job-description’ which should describe what they are responsible for. A so-called ‘accountability map’ then is an organogram (or organization chart) that covers these responsibilities and it the responsibility of the board and senior management to ensure that the organization chart is complete, up-to-date and covers all accountabilities in the firm.

So far this is management-101.

The APRA information paper states that banks [using the term ‘Authorised Deposit-taking Institutions’ (ADIs) used under the Banking Act] under BEAR have accountability obligations to take reasonable steps to “conduct its business with honesty and integrity, and with due skill, care and diligence”.

This is merely restating the existing law found in section 912A of the Corporation Act but administered by ASIC.

What is probably relevant is the identifying of a class of accountable persons that captures all directors of the board and individuals with actual or effective senior executive responsibility for management or control of a significant or substantial part or aspect of the operations of the bank. These accountable persons now have an explicit obligation to take reasonable steps in conducting their responsibilities to prevent matters from arising that would adversely affect the bank’s prudential standing or prudential reputation.

This may mean that an individual Board director or CEO might be personally liable for any scandals that emerge under their watch.

Subjective and discretionary

While BEAR is effectively a regulatory tool for APRA, does it also mean that any affected shareholder, concerned about the reputational damage of a company can bring an action directly against a specific Board director or the CEO if, for example, scandals like those that have recently unfolded?

In serious cases of non-compliance with accountability obligations by accountable persons under BEAR, APRA may disqualify an individual from being an accountable person.

There are several practical problems with this.

What is deemed ‘serious’ is not articulated.  It is also dependent on the subjective and discretionary decision of APRA to disqualify an accountable person. And, it is dependent on the bank to determine the amount of reduction of an accountable person’s variable remuneration that the bank thinks is proportionate to any failure to comply with accountability obligations as evaluated by the bank.

For example, if an accountable person has allowed for years the practice of selling outdated medical definitions in life insurance policies and which resulted in significant financial profits made for the bank, the bank may deem such conduct “not serious” (as evidenced by regulators previously allowing negotiated outcomes of a charity donation). APRA may choose not to enforce its powers to ban the accountable person (which would be consistent with the modus operandi of the regulators as exposed at the Royal Commission). The person might also get a mere deferral (but not reduced) bonus (as revealed at the Royal Commission).

Adding to the lacklustre practical effect of BEAR, accountable persons are allowed to formulate their own ‘accountability statement’. No doubt many will seek the help of legal counsel in drafting such a document and to establish numerous plausible deniability and get-out clauses.

Accountable persons are required to then sign their statement with an ‘acknowledgment of obligations’ in a form suggested by APRA.  The form includes statements such as: acting with honesty and integrity, and with due skill, care and diligence; and dealing with APRA in an open, constructive and cooperative way.

In other words, to obey the law.

The only difference is giving APRA direct authority over them as individuals.

Finally, notwithstanding the delineation of responsibilities within a bank (with the CEO ultimately holding all responsibility), there will be multiple instances of overlap between various accountable persons. Who is exactly accountable in a particular situation is a complex question that has no simple ‘silver bullet’ answer.

Furthermore, everyone and no one has responsibility for the long-term culture of any organisation – which is what the BEAR is trying to tie down.

Unless there is a strict liability requirement, in the real world of ever-changing business, the BEAR will be completely unworkable.

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