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Deputy Chair Helen Rowell - speech to the Australian Institute of Company Directors Breakfast

A is for accountability

Good morning, and thank you for the opportunity to speak to you today.

Over the past few weeks, there have been a number of articles in the financial news examining the legacy of the financial services Royal Commission. In light of the many concerning revelations that emerged during nine months of hearings in 2018, the key question being asked is whether the underlying issues that caused such damage – to many consumers and to public trust in the financial sector – have been, or are being, fully rectified.

Despite substantial progress in many areas, the answer is: not yet. But that’s to be expected, given the number and complexity of Commissioner Hayne’s proposed reforms, and the fact that many require legislative changes. Restoring public trust that financial institutions will do the right thing by customers will also take time, and hasn’t been helped by additional issues of concern continuing to emerge. 

At their heart, many of the problems identified through the Royal Commission and subsequently were the result of failures in governance and culture. These are areas where it can be difficult to identify the underlying causes or drivers of poor outcomes; also, the poor outcomes often were the product of many small decisions, rather than one major decision, making it harder to pinpoint when things went wrong and who should be held accountable. Expertise and understanding of the changes needed to promote sound governance and culture is also still developing. Weaknesses in these areas are challenging to address quickly, let alone to assess whether they will be long-lasting. So it would be unrealistic to expect all of the identified problems in these areas to be fixed in the space of 12 months. Nevertheless, there is a clear need for institutions – and regulators – to enhance their approach to issues of governance, culture, remuneration and accountability (GCRA), and it is encouraging that progress has been made on this over the last year.

Today, I would like to focus on the “A” – Accountability. Lack of accountability and consequences were significant contributing factors to the misconduct and poor behaviour highlighted by Commissioner Hayne. Put simply, there was too often little or no clarity on where accountability should rest and therefore little or no consequence for poor outcomes. Executives were rewarded with handsome bonuses when things went well, and also when they went badly. Although Commissioner Hayne emphasised that ultimate responsibility for poor outcomes lay with institutions and their boards, regulators such as APRA were not immune from criticism. As Commissioner Hayne wrote in his interim report: “When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done”.

Over the past year, APRA has escalated its efforts to tackle GCRA and lift industry practices in these important areas; indeed, transforming GCRA across the institutions we regulate is one of the four strategic focus areas of our latest Corporate Plan. It should therefore be no surprise that GCRA-related activities were front and centre within the 2020 Policy and Supervision Priority documents we released last month. What I’d like to do this morning is provide an update on the steps we will be taking this year to ensure both APRA-regulated entities, and APRA itself, are held to a higher standard of accountability for the benefit of the customers and communities we serve. 

Paying the price

The starting point for any discussion on accountability must be a recognition of two central principles that underpin APRA’s approach to this issue.

The first is that boards are ultimately responsible – and therefore accountable – for the performance of their companies, executives and employees, and the outcomes they deliver to consumers. The second is that APRA is responsible for holding entities, including boards and senior managers, to account for meeting their prudential obligations, and we are accountable for making sure we use the tools and new powers we have to do just that.

APRA’s intensified approach to GCRA, outlined in a paper we released last November, seeks to find an appropriate balance between the role of boards in strengthening GCRA practices, and APRA’s regulation and supervision of GCRA. The paper outlines areas where APRA proposes to strengthen its prudential requirements (for example for risk management) with a view to setting heightened minimum expectations, while also endeavouring to leave boards with flexibility to determine how exactly they meet these heightened expectations. Our proposals for GCRA also incorporate wider use of risk governance declarations and self-assessments by boards, supplemented by a range of supervisory activities (including thematic reviews) undertaken by APRA to assess industry’s progress.

A good example of our approach is the introduction of a strengthened prudential standard on remuneration. Accountability and remuneration – especially variable remuneration – go hand in hand. If remuneration is the carrot, then accountability, in the form of remuneration being withheld, is the stick. And as APRA Chair Wayne Byres remarked two years ago, the carrots in the financial sector have long been large and the sticks brittle. In other words, the rewards have been generous, but there are often seemingly few repercussions for poor outcomes.

The draft CPS 511 Remuneration proposes far more prescriptive requirements for regulated entities to ensure their remuneration frameworks align with the long-term interests of entities and their stakeholders, including customers, beneficiaries and shareholders. However it also recognises that boards are ultimately responsible, and therefore requires them to approve and actively oversee the remuneration framework, and regularly confirm it is being applied appropriately in practice.

It’s been seven months since we released the draft standard for consultation, and it is fair to say we have received quite a lot of feedback on it. This reflects the divergent, and often strongly-held, views across various stakeholders on how best to promote appropriate remuneration outcomes for executives. APRA has therefore undertaken significant stakeholder engagement to give us the best chance of striking an appropriate balance in our regulatory settings. We conducted 40 industry engagements to gauge early views, held multiple webinars, and have received almost 80 formal submissions from regulated entities, industry bodies, remuneration consultants, shareholder and proxy groups, governance bodies and consumer advocates.

It’s no secret that much of the feedback was critical of what APRA was proposing, including the 50 per cent cap on the use of financial metrics in determining variable remuneration, longer vesting periods and clawback provisions. Disappointingly from APRA’s perspective, we received much less in the way of realistic alternative suggestions as to how we could design the standard differently to satisfy disgruntled stakeholders while still achieving our regulatory objectives.  

Given clear evidence that existing frameworks have been driving poor outcomes for consumers, and also entities themselves, the status quo is not an option. However we also recognise the genuine concerns raised by stakeholders about some aspects of draft CPS 511. We have been thinking hard about the options, especially around the 50 per cent limit on financial performance measures. The introduction of a limit on the use of financial metrics in connection with long-term variable remuneration was a recommendation of the Royal Commission.1 Our challenge in revising the draft standard is to design a package of requirements that remains true to the intention of the recommendation, namely to ensure appropriate focus on both financial and non-financial outcomes in establishing remuneration frameworks and determining remuneration, and is also suitable across entities of widely different size, nature, and complexity. 

In that context, it is important to remember that we are approaching the remuneration standard as a package of initiatives – looking at how performance is measured, the rewards that are available, the time horizon over which risk emerges, and the responsibilities and accountabilities for decision-making. Enhanced disclosure is another aspect that we are thinking about. We want to deliver a framework that works holistically, and not just look at each individual component in isolation. As we have been mulling over the submissions and thinking about alternative approaches, we have been conscious of trying to make sure the framework as a whole leads to good governance in relation to remuneration decisions. We plan to publicly announce the next steps in this process in the coming months.

A strengthened regime 

Another factor APRA is considering as we review our remuneration prudential standard is how it will interact with Government plans to extend the Banking Executive Accountability Regime (BEAR) to the insurance and superannuation sectors. With that in mind, we have been actively engaging with Government as part of the development of its consultation package on the Financial Accountability Regime (FAR), which addresses another five Royal Commission recommendations. The Government has foreshadowed its intention to introduce legislation creating the FAR before the end of the year, however there is much that entities can and should be doing now to ensure they are well prepared.

An essential first step is for organisations to clarify internal lines of accountability. This can be achieved by boards and senior management having frank discussions that build a clear, transparent and common understanding of who is accountable for what, the actions expected to meet relevant obligations, and the consequences for any failure to meet those obligations. Irrespective of the FAR, this is a useful process that can highlight any deficiencies and weaknesses, including any unduly complex arrangements within an institution’s governance and accountability arrangements, and enable them to be addressed. Based on APRA’s experience of BEAR implementation, this is a more helpful first step than focusing on the content and format of the accountability statements and maps.

Another area where some entities stumbled in implementing the BEAR regime was to concentrate too intently on the number of accountable persons rather than appropriateness of who is included as an accountable person. Just as APRA’s prudential framework is principles-based, it’s important to note there will be no single solution under the FAR: its implementation will necessarily vary in practice from institution to institution because every business operates differently. Institutions should therefore seek to meet requirements in a way that reflects the understanding of senior executives and directors of how accountability should work in practice within their organisation. Nevertheless, a very small number of accountable persons may be an indication that accountability is overly concentrated, while a very large number of accountable persons may be an indication that accountability is inappropriately diluted.

Finally, APRA also observed that the entities more likely to face challenges implementing the BEAR requirements were those that engaged consultants to do it for them, including drafting their accountability statements and maps, rather than utilising consultants to facilitate structured internal discussion and assist (rather than drive) their development. Institutions may well wish to use external advisors to facilitate, provide structure or challenge their internal dialogue, however it remains the responsibility of each institution to own and drive its understanding of how accountability works within its organisational structure. Furthermore, accountable persons should be involved early and deeply in the process as they are the ones who must meet their FAR obligations and ultimately bear the risk of breaches should they not do so.

The case for change

The decision to expand the BEAR to other areas of the financial sector hasn’t been universally welcomed by some in the business community. Primarily, the arguments for this centre on red tape and increased regulatory burden, and potentially deterring talent from taking up roles in the industry. Others have argued that the types of misconduct seen in banking aren’t nearly so prevalent elsewhere in the financial sector and hence strengthened accountability requirements are not needed.

The decision to expand the BEAR to other areas of the financial services industry, along with the design of the new regime, are ultimately matters for Government. However, given the benefits we have seen from the BEAR, APRA supports the principle of increasing the clarity of accountability for insurers and superannuation licensees. Leaving aside the fact that the Royal Commission uncovered a number of issues in superannuation and insurance requiring improvement, including fees-for-no-service and management of conflicts-of-interest, strengthening and ensuring clarity of accountability is simply good business practice. The FAR proposals provide an opportunity for entities to be pre-emptive, and establish clear lines of accountability to potentially head off future problems. Doing so will ensure that if and when significant failings happen, the entity itself can quickly and effectively enforce appropriate accountability. Insurers and superannuation entities are not immune from risks and poor outcomes, and many business operations are becoming larger and more complex. This reflects trends across the financial sector of ongoing industry consolidation and shifts in advice and wealth management business models. These trends make clarity of accountability across all sectors of the financial services industry, and remuneration structures that support that, more important than ever. 

The Government has also proposed a more flexible set of enforcement tools, including the power to issue financial penalties to individuals under the FAR. It was also a recommendation of APRA’s Enforcement Review, released last March, and is a feature of similar regimes overseas, including the SMR in the UK. The primary objective of a broader set of enforcement tools is to enable a more proportionate response when issues arise. Under BEAR, the only penalty APRA can impose on individuals for breaches is to disqualify them – essentially ending their careers. This lack of flexibility potentially limits APRA’s ability to take proportionate action in response to performance or conduct issues that warrant sanction but don’t meet the necessarily high threshold for disqualification. The ability to issue fines under the FAR would therefore provide an intermediate option between taking no action and the nuclear option of pursuing disqualification.

What's good for the goose

Over the past 12 months, APRA has taken steps to increase our own accountability to Parliament and the community. Primarily, this is being achieved through greater transparency. In the same way that entities need to draw up their accountability maps for the BEAR and FAR, APRA developed its own accountability map and accountability statements (as did ASIC). Publishing these statements, which fulfilled another Royal Commission recommendation2, goes one step further and is another demonstration of APRA’s commitment to enhanced transparency. 

We are also engaging with Government to support Commissioner Hayne’s recommendation that a new oversight body be created for APRA and ASIC3. With consultation on the draft legislation now underway, APRA is working with the Government to ensure the new Financial Regulator Assessment Authority is well placed to provide the Government with an effective assessment of regulator performance against their respective mandates.

Transparency and accountability perhaps most neatly dovetail in the area of enforcement. APRA’s ‘constructively tough’ approach not only involves adopting a lower threshold for taking formal enforcement action, but a greater willingness to make actions known publicly. This approach also aligns with our new GCRA approach, with its declared intent to sharpen supervisory focus on holding entities accountable for promptly addressing deficiencies, and sharing insights with industry and the public to reinforce prudential expectations and act as a general deterrent. 

APRA acknowledges that issues will always arise and things will go wrong. What is important in determining how APRA responds when this occurs is the timeliness, comprehensiveness and effectiveness of your response, and the openness and transparency of your engagement with APRA. Indeed, APRA’s objectives in this regard should be largely aligned with the boards of the entities we regulate – namely well governed and prudentially sound entities with a culture that promotes good outcomes for consumers. And that includes being prepared to take prompt and appropriate action when that is not the case. 


We are now one year and 20 days into the post-Hayne era.

While it will likely take another few years for all Royal Commission recommendations to be fully implemented in business practices – and possibly longer to restore public trust – we shouldn’t dismiss the progress that’s been made over the past year, especially in attitudes and awareness. APRA is seeing evidence that the boards and management of financial institutions increasingly recognise that they have legal and ethical obligations beyond maximising profits or collecting bonuses. The welcome efforts from banks, insurers and super funds to help bushfire-affected customers, even at financial cost to their bottom lines, is one recent example that shows a heightened appreciation of the business case for outstanding service to customers and the broader community.

And that’s the message I’d like to leave you with. Tightening up accountability frameworks and practices within financial institutions – or any type of institution – is smart business practice. Clarifying lines of accountability in large, complex institutions makes business sense. Using the FAR and APRA’s new remuneration standard to drive positive cultural change and discourage poor performance and misconduct makes business sense. It is ultimately in institutions’ long-term financial interests for their boards and management to take the lead on enhanced accountability, because a greater emphasis on accountability in the post-Hayne era is inevitable.


1Recommendation 5.3 – Revised prudential standards and guidance states that: “In revising its prudential standards and guidance about the design  and implementation of remuneration systems, APRA should… set limits on the use of financial metrics in connection with long-term variable remuneration”.
2Recommendation 6.12 states that "each of APRA and ASIC should internally formulate and apply to its own management accountability principles of the kind established by the BEAR".
3Recommendation 6.14 – A new oversight authority for APRA and ASIC, independent of Government, should be established by legislation to assess the effectiveness of each regulator in discharging its functions and meeting its statutory objects. 

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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, mutuals, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding around $9 trillion in assets for Australian depositors, policyholders and superannuation fund members.