The Banking Executive Accountability Regime

by Dentons


Last week the Turnbull Government announced that it will overhaul the Australian financial services system and bring forward a comprehensive package of reforms aimed at strengthening accountability and competition within the banking industry.

The Government intends to achieve this by implementing a number of measures, including introducing a new ‘Banking Executive Accountability Regime’ that will apply to authorised deposit-taking institutions (ADIs) (effectively banks, building societies and credit unions) (Regime).

What does the Regime mean for ADIs?

Whilst the particular details of the Regime are yet to be announced, it will without doubt be imperative that ADIs familiarise themselves with the details once released. ADIs will have to, for example, review documents that regulate their relationships with Executives to ensure that they comply with and are consistent with the Regime. It is also expected that going forward, ADIs will need to:

  • carefully assess the suitability of prospective Executives to hold senior positions (including by checking that the prospective Executive has not been disqualified from the Regime register in the past);
  • include clauses in Executive contracts of employment that provide that:
    • the employment of an Executive is conditional upon APRA approving the appointment of the Executive and including the Executive’s name on the Regime register;
    • the employment of an Executive will come to an end in circumstances where the Executive is removed from the Regime register; and
    • variable remuneration will not be payable to the Executive in circumstances where APRA has disentitled the Executive to any such payment;
  • develop detailed maps setting out the roles and responsibilities of each Executive, consistent with the requirements of the Regime and suitable for provision to APRA;
  • review and update Remuneration Policies required by Prudential Standards to ensure that they comply with the Regime in respect of any variable remuneration (including that the minimum portion of the component is deferred for at least four years);
  • update any internal employment policies and procedures that apply to Executives and relate to performance-based components of remuneration (policies on bonuses, short-term incentives, long-term incentives, etc.) to ensure that they are consistent with the Regime;
  • regularly review the abovementioned documents to ensure that they are producing appropriate outcomes that are in line with expectations of APRA and the public;
  • create an organisational culture that focuses on accountability and decision-making for sustainable, long-term decisions (and not only short-term profits);
  • provide training on the Regime, corporate governance and risk-culture to the Board, the Board Remuneration Committee, senior executives and any staff involved in remuneration arrangements or risk and compliance (such as in-house counsel, human resources professionals and internal audit professionals); and
  • update compliance processes and disciplinary procedures to ensure that if an obligation imposed by the Regime is not met, the ADI is well positioned to identify that the obligation has not been met, determine how and why that occurred and ensure that it doesn’t happen again. It will also be important that those processes and procedures include mandatory reporting requirements.

There are a number of other practical issues that may arise with the Regime, depending on what the Regime ultimately looks like. These may include:

  • Reporting requirements - when will an ADI be required to report a suspected breach?  Will it be once the ADI becomes aware of an allegation against an Executive, or will it be once the ADI has completed an investigation into the allegation and found the allegation to be substantiated?
  • Non-executive directors - what will happen when APRA removes a non-executive director’s name from the Regime registry? Will the Regime automatically disqualify the non-executive director from his or her directorship, or will the ADI be required to take the ordinary steps to remove the non-executive director from that position?
  • Employees - what will happen when APRA removes a senior executive’s name from the Regime registry? Will the Regime provide that the ADI is not liable to the senior executive for the early termination of his or her contract of employment (if it is a fixed term contract)?
  • Remuneration - what will happen to existing contractual entitlements if those entitlements are inconsistent with the remuneration requirements of the Regime (for example, if an Executive has an entitlement to be paid the full amount of a bonus after one year)? Will the Regime invalidate those entitlements?

What will the Regime look like?

Whilst limited information is currently available about the Regime, the Government has indicated that it will consist of three key components – ‘Registration’, ‘Powers and Penalties’ and ‘Remuneration’:

1. ‘Registration’

  • ADIs will be required to notify the Australian Prudential Regulation Authority (APRA) before a senior executive or director (Executive) is appointed.
  • If APRA is satisfied that the appointment is appropriate it will record the Executive on the Regime register.
  • Once recorded on the Regime register, an Executive will be personally responsible for complying with obligations, including ensuring that business is conducted in a manner that is consistent with ‘good prudential outcomes’.
  • Upon appointment, a map of the role and responsibilities of the Executive must be provided to APRA.

2. ‘Powers and Penalties’

  • If an Executive is found to have contravened an obligation under the Regime, APRA will have the power to:
    • remove the Executive from the Regime register (which will presumably mean that the person can no longer be an Executive of the ADI);
    • disqualify the person from being appointed to any other APRA-regulated institution; and/or
    • disentitle the person to variable remuneration that he or she would have otherwise been entitled to receive (for example, a bonus).
  • APRA will have the power to seek the imposition of a civil penalty against an ADI or Executive (a maximum of $200 million for larger ADIs and $50million for smaller ADIs).

3. ‘Remuneration’

  • A portion of an Executive’s variable remuneration (for example, a bonus) will be required to be deferred for at least four years.
  • The size of the portion will depend on the position held by the Executive, but will be a minimum of either 40 or 60 per cent.
  • APRA will have stronger powers to require ADIs to review and adjust their remuneration policies if APRA does not consider the policies are producing appropriate outcomes.

Whilst the details of the Regime are scarce, it is possible that it will have a number of similarities to the Senior Managers and Certification Regime (SMCR) that applies in the United Kingdom. Further information about the SMCR can be found here. Dentons will, of course, provide a further client alert once further details of the Regime have been made available.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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