3/20/18 - Australian Banks Prepare for the Banking-Executive Accountability Regime
Home > News & Insights > Insights & Publications

3/20/18 - Australian Banks Prepare for the Banking-Executive Accountability Regime

In May 2017, Australia’s federal government responded to mounting public concerns about poor culture in Australian banks over the last decade by proposing a banking-executive accountability regime (commonly known by its acronym, the BEAR).

Legislation giving effect to the BEAR was passed by the federal Parliament on 7 February 2018.

For large1 authorised deposit-taking institutions (or ADIs), the regime will come into force on 1 July 2018 and will take effect for other ADIs on 1 July 2019.

The BEAR aims to:

  • Align behavioural standards at banks with community expectations for proper conduct
  • Increase the accountability of board members and senior executives, described as accountable persons (or APs), in relation to those expectations

The BEAR draws heavily from the U.K.’s senior-managers and certification regime (SMCR) and is broadly in line with the heightened regulatory focus on individual accountability across the globe. The Australian Prudential Regulation Authority will have responsibility for the regime, in addition to its oversight of culture, remuneration, governance, risk management, and fit-and-proper requirements for ADIs and other financial institutions.

Key Elements of the BEAR

The regime applies to ADIs regulated by APRA and consists of several key elements:

  • Designation of the APs to whom the regime will apply
  • Expectations about AP and ADI conduct of a “systemic and prudential” nature
  • Implementation requirements
  • Remuneration provisions
  • Enforcement
What institutions are covered by the regime?

APRA-regulated ADIs — covering domestic banks, credit unions, building societies, foreign bank subsidiaries, and Australian branches of foreign banks.

All subsidiaries (even non-ADI subsidiaries) will be required to meet the accountability obligations, as if those subsidiaries were themselves ADIs. A subsidiary will only need to allocate an AP if the subsidiary’s activities are significant or substantial within the ADI group (e.g., significant or substantial insurance or wealth-management subsidiaries).

APRA will have the power to grant conditional relief to an ADI or AP for which compliance with the BEAR would result in noncompliance with similar foreign laws (e.g., the U.K.’s SMCR).

Who are accountable persons?

The definition of an AP has principles-based and prescribed elements.

  • The principles-based element captures those with “actual or effective senior executive responsibility” for management and control of the ADI or of a “significant or substantial” part of the operations of the ADI group.
  • The prescribed element captures ADI board members (with the obligations of nonexecutive directors limited to their oversight roles) and those with specific senior-executive responsibility (including the chief executive officer, chief financial officer, chief operating officer, chief risk officer, and those with responsibility for managing IT, human resources, audit, compliance, and anti-money-laundering functions).
What are the conduct expectations?

Both ADIs and APs will be required to meet expectations in relation to conduct of a “systemic and prudential nature.” The overlap with conduct regulated by conduct regulator the Australian Securities and Investments Commission remains unclear.

APs will be expected to:

  • Conduct business with honesty, integrity, due skill, care, and diligence
  • Deal with APRA in an open, constructive, and cooperative way

ADIs will be obliged to take reasonable steps to ensure business is conducted in line with these standards and that the regime’s expectations are met for APs and across the ADI group. In addition, both APs and ADIs will be obliged to take reasonable steps to prevent matters from arising which would adversely affect the ADI’s prudential standing or prudential reputation. Reasonable steps will include having appropriate governance, controls and risk management, delegations, and mechanisms for dealing with problems.

What implementation requirements are proposed?

ADIs will be required to register their APs with APRA before they start in their roles. The ADI will be responsible for assessing the suitability and appointment of APs. APRA is not intending to undertake detailed vetting of proposed APs. It will limit itself to suitability concerns.

ADIs will also be required to provide APRA with accountability statements setting out the roles and responsibilities of each AP, and to consolidate these statements into a single accountability map detailing the allocation of roles and responsibilities of APs across the ADI group.

What does it say about remuneration?

The BEAR requires that ADIs defer a minimum percentage of an AP’s variable remuneration for a minimum of four years. The minimum amount to be deferred varies according to the size of the ADI and the AP’s position and responsibilities.

For CEOs of large ADIs, this minimum will be the lesser of 60% of variable remuneration or 40% of total remuneration for a year. Lower percentages apply (40% and 20%, respectively) to other APs, with further concessions for small ADIs.

ADIs will be obliged to reduce variable remuneration where an AP fails to meet his or her accountability obligations.

How will the regime be enforced?

APRA will have the power to disqualify APs where it is satisfied an individual does not meet the BEAR’s expectations.

ADIs will be subject to civil penalties for noncompliance, varying according to the size of the ADI (e.g., up to AU$210 million for breaches by large ADIs).

APs will not be subject to fines or other penalties (as senior managers are under the SMCR). To the extent relevant, they will be subject to fines and penalties under legislation administered by the conduct regulator, ASIC.

How Promontory Can Help

Ensuring new responsibilities will be met by the implementation date is now a key priority for ADIs and their APs. ADIs will benefit by:

  • Developing accountability statements and maps
  • Reviewing employment contracts, remuneration arrangements and policies, recruitment processes, and processes for fit-and-proper assessments, to align with the new requirements
  • Reviewing and providing assurance in relation to general governance mechanisms, risk and culture frameworks, compliance and breach reporting, internal procedures and systems, and compliance with prudential standards to support APs in meeting their responsibilities
  • Developing appropriate frameworks and processes to provide evidence of meeting reasonable-steps requirements, including board and manager training on these aspects of the regime
  • Providing assurance on data-governance frameworks and advising, where needed, on remediation and the design of enhancements

Financial institutions headquartered outside Australia will also need to consider how the regime applies to their Australian operations. Where Australian ADIs have operations in other jurisdictions, they may need to consider how relief relating to inconsistency with foreign laws will apply and be accessed.

Our experience with the U.K.’s SMCR suggests that implementation will be a challenging — but beneficial — exercise for banks. For many SMCR firms, preparing accountability maps and statements, for instance, was a resource-intensive but useful exercise that clarified accountabilities and reporting lines and identified and addressed gaps and overlaps.

ADIs in Australia face the key challenges of developing governance and operational frameworks that will help meet APRA’s expectations and provide evidence that reasonable steps have been taken. ADIs will therefore need to review and, if necessary, adapt current frameworks to ensure activity covered under the regime is well monitored throughout the institution.

Contact Us

Please contact Promontory to discuss how we can assist your financial institution in preparing for the BEAR.

Jeffrey Carmichael
CEO, Promontory Australasia

Steven Bardy
Managing Director


1. The definitions will be determined by the minister. At this stage it is expected that large ADIs will be those with three-year-average total resident assets of over AU$100 billion, medium ADIs will have between AU$10 billion and AU$100 billion in these assets, and small ADIs will be those with less than AU$10 billion.