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It’s about the BEAR

It’s about the BEAR

By Tracey Mylecharane

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Could the Banking Executive Accountability Regime be the next important step in corporate law?

Snapshot:

  • The federal government has introduced the Banking Executive Accountability Regime (BEAR) in an attempt to increase accountability in Australia’s banking sector.
  • The BEAR’s framework is drawn from the accountability and regulatory framework set out in the UK Senior Managers Regime.
  • It is too early to tell if the BEAR will be a significant development in Australian corporate law history.

 

Corporate law has seen some significant developments over the past 50 years which have been fundamental in shaping the direction of the corporate world in Australia. One such development is the introduction of the Banking Executive Accountability Regime (BEAR), which forms part of the government’s measures designed to facilitate a more accountable and competitive banking system. According to federal Treasurer Scott Morrison’s press release at the time of the announcement, the BEAR is designed to “ensure that banks and their executives are held accountable when they fail to meet expectations”.1 This article will consider whether the BEAR in its current form is likely to be a meaningful development in Australian corporate law history.

Key developments in Australian corporate law

The world of corporate law has evolved over many years as an interesting, challenging and trying area of law, tending to derive its purpose and legitimacy from the social ends which it serves.2

A significant move in the history of corporate law was the introduction of the Uniform Companies Act in 1962. This was the result of a series of complex and problematic issues arising because of companies operating in different states having to navigate separate sets of legislation. The Uniform Companies Act was adopted in all states and territories. What followed was a stock market boom well known in history and, with it, abuse and misconduct to manipulate trading on the stock exchanges. Regulation of the securities market became necessary and, indeed, was a topic of frequent discussion and debate.

Following recommendations by the National Securities and Exchange Commission, the Whitlam Labor government introduced the Corporation and Securities Industry Bill 1974 (Cth) to establish a national regulatory commission responsible for overseeing the securities market. The Bill lapsed with the dismissal of the Whitlam government, however, it was an important step in igniting the discussion and focus on the need for corporate regulation.

The Inter-State Corporate Affairs Commission and the Stock Exchange of Sydney and Melbourne working party was implemented in 1967. It improved the efficiency of the market in company securities by developing a system where brokers could pool certain securities, pool money paid in by buyers and strike balances against other brokers that could be claimed at a central clearing house.

During 1984-1990 the Companies and Securities Law Review Committee was responsible to the federal and state Attorneys-General for the review of matters of company law referred to it. The Committee’s work included legislation enabling companies to defend themselves from certain partial takeover bids, giving companies power to handle their capital better by being able to buy back their own shares, abolishing par value for shares, establishing a business judgment rule in the law about directors, and introducing a derivative action whereby a shareholder can, under certain conditions, bring a law suit on the company’s behalf. This law became, arguably, one of the most significant contributions to the development of rights of shareholders.

In terms of regulatory power, 1989 saw the establishment of the first national regulatory body, the Australian Securities and Investments Commission (ASIC). This was followed by the introduction of the Corporations Act 2001 (Cth), which is the principal legislation regulating companies in Australia. It superseded the Corporations Act 1989 (Cth) and was important because, even though it is a complex piece of legislation, it is a fully unified system which allowed for simplification of the previous scheme.

Regulation and regulatory power is an area of political, economic and legal debate. This article will now consider regulation within the financial sector in the present day.

Post GFC period and the BEAR

Following the global financial crisis (GFC) in 2008, the Australian financial sector (AFS) has come under much scrutiny and criticism for the way it operates. The GFC was the result of, arguably, deep lapses in standards and the failings of core values and restraint of individuals and the entities within which they worked, to act consistently with overarching principles of public interest.3 It can be no surprise that increased scrutiny and criticism of Australia’s banking sector followed. Since the GFC the AFS has seen more than 20 inquiries and reviews take place.

In a move to respond to both public and political pressures the federal government announced several measures designed to facilitate a more accountable and competitive banking system as part of its 2017 budget. It undertook to bring forward a “comprehensive package of reforms to strengthen accountability and competition”4 within the banking sector. As part of these measures the BEAR was introduced.

According to the consultation paper,5 the BEAR aims to improve accountability in the banking sector by:

  • increasing powers of the Australian Prudential Regulation Authority (APRA) to remove directors and senior executives from APRA-regulated institutions
  • establishing a set of expectations of authorised deposit-taking institutions (ADIs) and their senior executives and directors
  • increasing APRA’s power to impose penalties on ADIs should they fail to meet their BEAR obligations
  • introducing a requirement that senior executives and directors of ADIs be registered with APRA prior to appointment, and maps of their roles and responsibilities be provided to APRA
  • requiring remuneration for ADI senior executives to be deferred for at least four years to ensure accountability for their decisions
  • providing stronger powers to APRA to require ADIs to review and adjust remuneration policies.

Following a short consultation period, the government issued the Treasury Laws Amendment (Banking Executive Accountability and Related Matters) Bill 2017 (the Bill)6 and accompanying Explanatory Memorandum.7 The Bill amends the Banking Act 1959 (Cth) (Banking Act) to establish the BEAR. The Bill was introduced into the House of Representatives on 19 October 2017, and was passed by the Senate with little amendment on 7 February 2018 The key requirements of the Bill will come into force from 1 July 2018 for larger institutions, and 1 July 2019 for smaller institutions.

Under the Australian Prudential Regulation Authority Act 1998 (Cth), APRA’s prudential framework already includes standards covering culture, remuneration, governance, risk management and fitness and propriety. These standards apply in addition to the duties imposed on directors under the Corporations Act 2001 (Cth). The BEAR is designed to develop and strengthen APRA’s existing supervisory framework which, if successful, is intended to complement the powers for regulating market conduct held by ASIC (as set out in the Australian Securities and Investments Commission Act 2001 (Cth)).

The increased powers given to APRA under the BEAR are unprecedented. APRA will have the power to intervene in internal corporate governance matters and will be able to disqualify directors and senior executives if it forms the view that such action is warranted. While financial penalties will not be able to be imposed on individuals by APRA, such penalties will be able to be imposed on ADIs if APRA forms the view that the “expectations” as set by the BEAR have not been met by ADIs. This is significant.

The modelling around the increase in APRA’s powers draws from international accountability and regulatory frameworks, particularly the Senior Managers Regime (SMR) introduced in the UK and the Managers-in-Charge (MIC) measure introduced in Hong Kong.8 In the UK, the Parliamentary Committee on Banking Standards (PCBS) was appointed by parliament to consider and report on professional standards and the culture of the UK banking sector. In its June 2013 report “Changing Banking for Good”9 the PCBS criticised the approved persons regime, stating that “a lack of personal responsibility has been common place throughout the industry. Senior figures have continued to shelter behind an accountability firewall”. Its recommendations focused on personal responsibility.

Certainly, some action towards increasing accountability and competition in the banking sector is necessary. However, after a careful review of proposed legislation, the BEAR has various occurrences where terms are ill defined, or not defined at all, which may lead to confusion and a lack of understanding when institutions and individuals attempt to understand and comply with the requirements. For example, the Explanatory Memorandum at [1.49] states that the key terms comprising the obligations including “honesty”, “integrity”, “due skill” and “diligence” and “open, constructive and co-operative”, while not defined in the Banking Act, will have their ordinary meaning applied. Will someone be considered to have conducted him or herself as acting with “integrity” if they abide by the law? Or is something further required? The fact is that the terms will need to be applied on a case by case basis, and this gives rise to the possibility of considerable argument without further guidance.

A recent case decided by the United Kingdom Upper Tribunal Tax and Chancery Chamber, Palmer v Financial Conduct Authority,10 deals with the complexity surrounding what constitutes due skill, care and diligence by senior executives. The case illustrates how regimes within the financial services sector introduced with the overarching intention of addressing accountability of senior executives to ensure customer protection can be unclear and genuinely confusing, resulting in litigation. In turn, this fails to result in the change of individual behaviour in the context of improving culture.

 

Conclusion

According to federal Treasurer Scott Morrison, the BEAR will lend itself to delivering heightened standards of behaviour for directors and senior executives of our banks to satisfy community expectations and to ensure the strength of the banking system. All this is to come from what the BEAR promises to deliver as summarised above – which may be a little overreaching.

It seems that the BEAR in its current form is problematic. It is vague, lacks clarity, appears rushed and ill-considered, and from a former litigation lawyer’s perspective, has the potential to give rise to the need to seek clarity on key terms which will require litigation.

Notably, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established on 14 December 2017 and commenced on 12 February 2018. The Commissioner, the Hon Kenneth Hayne AC QC, has been requested to submit an interim report by 30 September 2018 and is scheduled to provide a final report by 1 February 2019. We must wait to see what the outcomes of the Royal Commission are, in conjunction with the effect of the introduction of the BEAR in July 2018 and 2019, before being able to assess whether the BEAR can deliver its objectives and, in turn, whether it will make its mark as a significant development in Australian corporate law history.

 

Tracey Mylecharane is a lecturer with the ANU College of Law. She teaches civil litigation practice and banking and finance law. Tracey's research interests relate to regulation within the Australian financial system, with a focus on the BEAR, ASIC and the banking sector more generally.

 

1. See Media Release “Building an accountable and competitive banking system”, 9 May 2017, http://sjm.ministers.treasury.gov.au/media-release/044-2017/.

2. Paul Redmond, Corporations and Financial Markets Law (7th edn), 2017, Lawbook Co, pv.

3. Dimity Kingsford Smith, Thomas Clarke and Justine Rogers, “Banking and the Limits of Professionalism”, (2017), 40 University of New South Wales Law Journal 411.

4. See Media Release “Building an accountable and competitive banking system”, 9 May 2017, <http://sjm.ministers.treasury.gov.au/media-release/044-2017>.

5. See BEAR Consultation Paper, July 2017, www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2017/BEAR/Key%20Documents/PDF/BEAR_cp.ashx.

6. See Treasury Laws Amendment (Banking Executive Accountability and Related Matters) Bill 2017, https://static.treasury.gov.au/uploads/sites/1/2017/09/exposure-draft.pdf.

7. See Explanatory Memorandum, https://static.treasury.gov.au/uploads/sites/1/2017/09/explanatory-memorandum.pdf.

8. Note 7 above.

9. See "Banking Commission publishes report on changing banking for good", 19 June 2013, www.parliament.uk/business/committees/committees-a-z/joint-select/professional-standards-in-the-banking-industry/news/changing-banking-for-good-report/.

10. [2017] UKUT 0313 (8 August 2017), www.gov.uk/tax-and-chancery-tribunal-decisions/charles-anthony-llewellen-palmer-v-the-financial-conduct-authority-2017-ukut-0313-tcc.

 


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