The BEAR gets bigger

On 1 July, the Banking Executive Accountability Regime (BEAR) commenced for all medium and small authorised deposit-taking institutions (ADIs). The regime immediately grew from covering only four banks – albeit the country’s four largest – to apply to an additional 149 banks, credit unions and building societies. The number of accountable persons registered with APRA expanded from under 100 to more than 1,400. 

The BEAR establishes heightened expectations of accountability for ADIs, their directors and senior executives. It came into effect for the major banks from 1 July 2018, and is administered and enforced by APRA. After implementing the regime for the large banks, APRA turned its attention to the medium and small ADIs, spending many months engaging with small and medium ADIs to help them understand their BEAR obligations and prepare to implement them from the 1 July 2019 start date set by legislation.

Regardless of the size of an ADI, it must: 

• identify its own individual accountable persons (ie directors and senior executives), who must then be registered with APRA; 
• provide APRA with individual accountability statements clearly outlining the specific director or senior executive responsibilities within the organisation; 
• provide APRA with an accountability map outlining how accountability is allocated across the institution, in a manner appropriate to its size, risk profile and complexity; and
• adhere to explicit requirements on minimum deferred variable remuneration for those identified accountable persons (in short, a minimum amount of variable remuneration must be deferred for at least four years). It must also have a remuneration policy that requires that, if an accountable person has failed to comply with their accountability obligations, their variable remuneration will be reduced by an amount proportionate to the failure.

Giving the BEAR bite

The purpose of the BEAR is to drive a strong risk culture from the top down by ensuring directors and executives in ADIs are held appropriately accountable for their actions and decisions. As APRA has previously observed, bankers have historically been well rewarded for good performance, but – until fairly recently – it was rare for them to suffer significant consequences for failings, particularly of a non-financial nature. The BEAR is designed to address this by providing much clearer accountabilities for individuals, and clear behavioural expectations to which they can be held.

For the most part, medium and small ADIs are required to meet the same obligations as larger banks under the regime, however two aspects vary depending on the size of the bank. Firstly, the method to calculate the minimum amount of variable remuneration to be deferred varies depending on the ADI’s size: this could potentially result in a lower percentage of variable remuneration being deferred for accountable persons in small ADIs and higher percentages for accountable persons in medium and large ADIs. 

Secondly, where APRA applies to the Federal Court of Australia to seek a penalty if an ADI breaches its obligations under the BEAR, the maximum penalties a court can impose on an ADI also hinge on the size of the ADI: 

• For large ADIs, 1,000,000 penalty units ($210 million);
• For medium ADIs, 250,000 penalty units ($52.5 million); and
• For small ADIs, 50,000 penalty units ($10.5 million).

APRA will assess compliance with the BEAR as part of its ongoing supervision of ADIs. The nature of those reviews and actions will depend on the size and complexity of individual institutions. APRA’s attitude towards enforcing the BEAR provisions will be consistent with the “constructively tough” approach outlined in APRA’s new Enforcement Approach, released in April this year.

BEAR with it

At the heart of much of the misconduct unearthed by the Royal Commission was poorly designed or enforced systems and practices in relation to incentives and accountability within institutions. In conjunction with APRA’s update of its prudential standard on remuneration, the BEAR will help ADIs to genuinely enhance their governance and risk management through much clearer understanding and articulation of individual accountabilities. The result should be better outcomes in the long-term for the ADIs, their shareholders and their customers.

Anyone seeking to understand APRA’s expectations on the implementation of the BEAR should review the October 2018 information paper outlining APRA’s expectations for implementing the regime. The information paper and other BEAR information.

This article was published in APRA Insight - 1 2019.