Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 1 Banking Executive Accountability Regime

Outline of chapter

1.1 This Bill amends the Banking Act to establish the BEAR. The BEAR is a strengthened responsibility and accountability framework for the most senior and influential directors and executives in ADI groups.

1.2 To support the BEAR, the Bill gives APRA new and strengthened powers.

Context of amendments

1.3 The Australian financial system is the backbone of the economy and plays an essential role in promoting economic growth. For it to operate in an efficient, stable and fair way all participants must have trust in the system.

1.4 ADIs must operate at the highest standards and meet the needs and expectations of Australian consumers and businesses. Participants need to be confident that financial firms will balance risk and reward appropriately and serve their interests.

1.5 The House of Representatives Standing Committee on Economics undertakes an annual inquiry into the performance and conduct of Australia's banks.

1.6 In response to the first report from the Committee the Government announced in the 2017-18 Budget a comprehensive package of reforms to strengthen accountability and competition in the banking sector. In doing this, the Government announced that it would legislate the BEAR.

1.7 A key objective of the BEAR is to improve the operating culture of ADIs and increase transparency and accountability across the banking sector. By setting out accountability obligations in the Banking Act and providing guidance about them, the Bill makes clear and enhances the obligations of ADIs and reinforces the standards of conduct expected of them by the community.

1.8 The BEAR complements the existing regulatory framework. This includes ASIC's role regulating market conduct, the duties placed on directors under the Corporations Act, and APRA's existing prudential framework and standards.

Summary of new law

1.9 The Bill amends the Banking Act to establish the BEAR: an enhanced accountability framework for ADIs and persons in director and senior executive roles.

1.10 The BEAR imposes a heightened accountability regime on ADIs and people with significant influence over conduct and behaviour in an ADI. It requires them to conduct themselves with honesty and integrity and to carry out the business activities for which they are responsible effectively.

1.11 It does this by creating a new definition of 'accountable person'. An accountable person is a Board member with oversight over the ADI or a senior executive with responsibility for management or control of significant or substantial parts or aspects of the ADI group. 'ADI group' refers to the ADI or relevant group of bodies corporate which constitutes an ADI and its subsidiaries. Accountable persons must be located in the ADI and should be located in significant or substantial subsidiaries. Not all subsidiaries will have accountable persons located in them. Throughout an ADI group accountable persons must have clear lines of responsibility to cover all of the business activities of the group.

1.12 The general obligation placed on accountable persons is framed in the context of their particular responsibilities. These will be clearly defined in accountability statements for each accountable person and an accountability map for each ADI group. Each accountable person should be registered with APRA.

1.13 Accountability maps and statements are designed to give APRA greater visibility of lines of responsibility. The maps will provide a clear view of the allocation of responsibilities throughout the ADI group, to ensure that there is accountability for all parts or aspects of the group's business.

1.14 An ADI must comply with its BEAR obligations. These include new accountability, remuneration, key personnel and notification obligations. An ADI must ensure that it has a remuneration policy consistent with the BEAR, its accountable person roles are filled and it has given accountability statements and maps to APRA.

1.15 ADIs must set remuneration policies deferring an accountable person's variable remuneration to incentivise accountable persons not to engage in behaviours inconsistent with BEAR obligations.

1.16 APRA will have additional examination and disqualification powers to enhance its ability to enforce the BEAR.

1.17 If an ADI breaches its BEAR obligations, significant civil penalties may be imposed by a court.

1.18 If an accountable person breaches its BEAR obligations, that person may face disqualification or financial consequences through the reduction of variable remuneration.

1.19 Recognising there are different business models and group structures in the banking industry, the Bill uses both high level principles as well as prescribed detail. The BEAR will work with existing legislative and regulatory frameworks.

Comparison of key features of new law and current law

Detailed explanation of new law

1.20 The BEAR:

•

imposes a set of obligations to be met by ADIs and accountable persons;

•

introduces a definition of 'accountable person' and requires their registration with APRA prior to commencement in an accountable person role;

•

requires that ADIs give APRA accountability statements detailing the roles and responsibilities of each accountable person;

•

requires that ADIs give APRA accountability maps allocating the roles and responsibilities of accountable persons across the ADI and its subsidiaries; and

•

gives APRA new and stronger enforcement powers.

1.21 The Bill imposes strengthened obligations on ADIs and accountable persons in, or maintaining control over, an ADI and its subsidiaries.

1.22 As a result of the accountability maps and statements ADIs will provide to APRA, APRA will know who is responsible for relevant business lines and activities in an ADI group. This is an important element of the BEAR. It ensures accountable persons cannot avoid responsibility for problems which happen under their watch.

1.23 The objects provision of the Banking Act will be updated to include reference to the BEAR. [Schedule 1, item 7, paragraph 2A(d)]

1.24 All references in this explanatory memorandum are to the Banking Act, unless otherwise stated.

An ADI's obligations under the BEAR

1.25 As noted above at paragraph 1.21, the BEAR imposes strengthened obligations on both ADIs and their accountable persons. The obligations cover conduct that is systemic and prudential in nature. Breaches by an ADI or an accountable person are to be dealt with effectively and seriously.

1.26 APRA may apply to a court for the imposition of a civil pecuniary penalty when there is evidence of an ADI failing to comply with the BEAR relating to prudential matters. However, where there has been a minor breach, such as a failure to notify APRA of a change to an accountability map or statement (required under Division 5 of the BEAR), APRA may make a direction under section 11CA of the Banking Act.

Obligations under the BEAR

1.27 In summary, the BEAR obliges an ADI to:

•

comply with its accountability obligations, which cover the way an ADI should conduct itself and how it should engage with APRA (for more information see paragraphs 1.44 - 1.55);

•

meet its key personnel obligations, by ensuring all areas of an ADI's operations and those of its group are attributed to accountable persons (for more information see paragraphs 1.56 - 1.70);

•

give APRA accountability maps and statements, which explain who is responsible for all parts and aspects of the ADI (for more information see paragraphs 1.146 - 1.154); and

•

defer the remuneration of accountable persons for a period of up to four years, have remuneration policies that allow for a reduction in remuneration in proportion to any failure to meet the BEAR obligations, and continue the deferral where there is a likely failure by an accountable person to meet the BEAR obligations (for more information see paragraphs1.71 - 1.88). [Schedule 1, item 1, section 37]

1.28 An ADI's BEAR accountability obligations require it to conduct its business with honesty and integrity, deal openly with APRA and ensure that it takes reasonable steps to prevent matters impacting negatively on the prudential reputation or standing of the ADI. Accountability obligations are further explained below at paragraphs 1.41 - 1.52. [Schedule 1, item 1, section 37C]

1.29 An ADI's key personnel obligations require it to ensure that responsibility for all parts or aspects of an ADI group are covered by accountable persons. This increases the transparency of responsibilities in ADIs so any breach of accountability obligations in an ADI group can be attributed to an accountable person. [Schedule 1, item 1, subsection 37D(1)]

1.30 Other key personnel obligations include ensuring that prohibited persons are not accountable persons and complying with APRA directions to reallocate responsibilities of accountable persons. [Schedule 1, item 1, paragraphs 37D(1)(b) and 37D(1)(c)]

1.31 An ADI must take reasonable steps to ensure its subsidiaries meet the accountability obligations, obligations relating to key personnel and notification obligations around the deferral of remuneration of accountable persons. [Schedule 1, item 1, paragraph 5, 37C(e), 37D(1)(d) and 37E(1)(d)]

Scope of obligations to an ADI's activities

1.32 The BEAR recognises consumers often associate the wide range of financial services and activities provided by subsidiaries under an ADI's brand. Poor behaviour in a subsidiary can have a negative effect on the ADI's brand and public standing and has the potential to undermine confidence in the ADI itself.

1.33 Therefore, an ADI is obliged to take reasonable steps to ensure that the subsidiaries within the ADI group meet the obligations under the BEAR. In addition, where the activities of a subsidiary are significant or substantial within the ADI group, at a minimum an accountable person located within the subsidiary should have responsibility for that subsidiary. This is not to suggest that all subsidiaries will have an accountable person located within them.

1.34 This is intended to capture, for example, significant or substantial insurance or wealth management subsidiaries within an ADI group. If an ADI's wealth management arm acts in breach of BEAR obligations, then it may adversely affect the prudential reputation or standing of the ADI.

1.35 A foreign ADI is not subject to the BEAR for its offshore operations or for any locally incorporated non-ADI subsidiaries. However, its Australian branch operations are obliged to comply with the BEAR to the extent required by their operations and presence in Australia. [Schedule 1, item 1, paragraph 37(2)(b)]

1.36 If a foreign ADI has a significant presence in Australia then it may be required to list several accountable persons to ensure that the operations of the ADI group in Australia are appropriately covered. If a foreign ADI does not have a significant presence in Australia, fewer accountable persons would likely be necessary for the ADI to show it complies with the BEAR.

1.37 If an ADI has obligations and requirements under a corresponding foreign law, such as the United Kingdom's Senior Manager Regime (SMR), and APRA is satisfied that compliance obligations under the BEAR would be inconsistent with the law of a foreign country, then APRA may give the ADI a written notice specifying its BEAR obligations to the extent of any inconsistency with the law of that country. The ADI is then not required to comply with the obligation as specified. [Schedule 1, item 1, sections 37AA and 37BC]

1.38 To ensure that the BEAR can operate flexibly and is appropriately targeted the Minister has a power to exempt an ADI from the application of the BEAR. If the Minister decides to grant an exemption, he or she does this by giving the ADI a written notice. [Schedule 1, item 1, subsection 37A(1)]

1.39 A person adversely affected by the Minister's decision to exempt or not exempt an ADI from the BEAR has the capacity to appeal the decision. That person or ADI may apply for judicial review by the Federal Court under the Administrative Decisions (Judicial Review) Act 1977 (AD(JR) Act). A legal challenge concerns the lawfulness of the Minister's decision process, as required by the BEAR.

1.40 A ministerial decision to exempt, or not exempt, an ADI from the BEAR is not subject to merits review. Not having merits review is justified because permitting a potentially protracted merits review process in circumstances where the Minister did not exempt an ADI could undermine public and industry confidence in the prudential system and create uncertainty in financial markets. If requested the Minister must provide reasons for his or her decision, as required by section 13 of the AD(JR) Act.

1.41 The Minister has a power to exempt a class of ADIs from the application of the BEAR. To do this the Minister must make a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.204 and 1.206 below). [Schedule 1, item 1, subsection 37A(2)]

1.42 This instrument-making power recognises the importance of having a flexible system which lets the Minister consider the variety of ADIs in the Australian financial system and allows the Minister to exempt a class or classes of ADI if he or she decides it is appropriate.

1.43 The Minister would use this power where it is not necessary to include the particular ADI or class of ADIs to achieve the objectives of the BEAR.

The accountability obligations of an ADI

1.44 A key objective of the BEAR is to improve the operating culture of ADIs and increase transparency and accountability across the banking sector. By setting out accountability obligations in the Banking Act and providing guidance about them, the Bill makes clear and enhances the obligations of ADIs and reinforces the standards of conduct expected of them by the community.

1.45 The accountability obligations of an ADI are to take reasonable steps to:

•

conduct its business with honesty and integrity and with due skill, care and diligence [Schedule 1, item 1, paragraph 37C(a)];

•

to deal with APRA in an open, constructive and co-operative way [Schedule 1, item 1, paragraph 37C(b)]; and

•

to prevent matters arising which affect the prudential reputation or standing of the ADI. [Schedule 1, item 1, paragraph 37C(c)].

1.46 The ADI's obligation to deal with APRA in an open, constructive and co-operative way does not displace its legal professional privilege, to the extent permitted by law and the ADI acts in a way which is consistent with the maintenance of that privilege.

1.47 In considering whether an ADI has met its accountability obligations, APRA will consider an ADI's actions and its behaviour from a prudential perspective. Actions taken by an ADI that protect the ADI and its customers from a prudential standpoint are consistent with the accountability obligations.

1.48 An ADI is responsible for its subsidiaries, and must take reasonable steps to ensure its subsidiaries meet the accountability obligations outlined at 1.42 and 1.46. [Schedule 1, item 1, paragraph 37C(e)]

1.49 An ADI is responsible for each accountable person it nominates, including those in a subsidiary or a parent company. The ADI must take reasonable steps to ensure each of its accountable persons meet his or her accountability obligations. [Schedule 1, item 1, paragraph 37C(d)]

1.50 Unless the Minister has exempted an ADI, the ADI must meet its BEAR accountability obligations. [Schedule 1, item 1, paragraph 37(2)(a)]

1.51 The steps by which an ADI complies with the BEAR are described as 'reasonable steps' in section 37CB. [Schedule 1, item 1, section 37CB]

1.52 The Bill provides guidance to an ADI about how it may take reasonable steps to meet its accountability obligations. It is important to note that section 37CB is not exhaustive in identifying what may be a 'reasonable step'. [Schedule 1, item 1, section 37CB]

1.53 A reasonable step may be setting up appropriate governance arrangements. It could cover setting clear lines of responsibility for each of an ADI group's business activities. It is complemented by the BEAR requirement for ADIs to give APRA accountability maps and statements. An ADI's accountability map can show how it has fully considered the appropriate management structure for the ADI or broader ADI group and how it attributes effective responsibility for key business activities to accountable persons.

1.54 A reasonable step may also be delegating responsibilities for key functions to appropriate persons. It could cover actions like having an effective process to determine whether a person has sufficient experience and judgement to undertake a particular responsibility. A reasonable step also includes having appropriate procedures to identify and remediate problems.

1.55 The terms 'honesty', 'integrity', 'due skill' and 'diligence', 'open, constructive and co-operative' are not defined terms in the Banking Act. The ordinary meanings of each of those terms are generally well understood, and are used in other laws and considered by established case law.

The key personnel obligations of an ADI

1.56 The BEAR imposes key personnel obligations to ensure that responsibility for all parts or elements of an ADI group are covered by an accountable person. The size and complexity of an ADI or an ADI group will affect the number of functions covered and the number of accountable persons nominated to cover those functions.

1.57 Generally, an ADI would - in complying with the BEAR - be expected to ensure that the accountable person is a Board member responsible for oversight or a senior executive responsible for management or control. However, because different business structures may be used, the ADI has the discretion to determine the most appropriate allocation of accountable persons to its business activities.

1.58 It is the ADI's responsibility to ensure responsibilities are allocated appropriately. If an ADI does not or cannot do this, APRA has the power to direct an ADI or subsidiary with respect to the allocation of responsibilities. APRA can use this power if it is concerned that the ADI's allocation of responsibility (or failure to do so) is likely to give rise to a prudential risk. [Schedule 1, items 1 and 9, section 37DB and subsection 5(1)]

1.59 This reflects the key BEAR obligation on an ADI to ensure it assigns all management and control responsibilities within an ADI group (the ADI and subsidiaries) to accountable persons. [Schedule 1, item 1, section 37D]

1.60 Section 11CG is amended so that an ADI commits an offence and is liable to a criminal penalty of a maximum of 50 penalty units (currently $10,500) if it fails to follow a direction from APRA with regards to the allocation of responsibilities. [Schedule 1, item 12, paragraph 11CG(1)(b)]

1.61 Similarly, section 11CG is amended so that an officer of an ADI commits an offence and is liable a criminal penalty of a maximum of 50 penalty units (currently $10,500) if the officer's duties include making sure that an ADI follows a direction from APRA and the officer has not taken reasonable steps to ensure that the ADI complies with a direction from APRA with regards to the allocation of responsibilities. [Schedule 1, items 12 and 13, paragraph 11CG(2)(a) and subsection 11CG(2A)]

1.62 The combination of key personnel obligations and the accountability maps will operate to let an ADI satisfy itself and show APRA that it has allocated all key personnel obligations to accountable persons and that those accountable persons can discharge their obligations under the BEAR. This will demonstrate full coverage of the ADI group by accountable persons without the need to have an accountable person individually responsible for every single subsidiary, for example.

1.63 An ADI must also ensure that persons who are prohibited from being an accountable person are not placed into an accountable person role. [Schedule 1, item 1, paragraph 37D(1)(b)]

1.64 A person is prohibited from being an accountable person if they are not registered as an accountable person. The ADI should register the person as an accountable person with APRA to overcome this restriction. [Schedule 1, item 1, paragraph 37DA(1)(a)]

1.65 A person would not be prohibited from occupying an accountable person role without registration for 28 days where the person has unexpectedly become an accountable person to fill an unforeseen vacancy or is temporarily filling a vacancy. [Schedule 1, item 1, subsection 37DA(2)]

1.66 For example, a person may unexpectedly become an accountable person where the incumbent goes on sick leave or may fill a role temporarily when the accountable person goes on leave of sufficient duration to effectively vacate the accountable person role.

1.67 This means that the person could be in an accountable person role for up to 14 days before the ADI submits an application to APRA to have the person registered. As discussed at paragraph 1.136, registrations take effect 14 days after the application is made to APRA.

1.68 APRA has the power to determine another period of time that the person may be temporarily or unexpectedly in an accountable person role before they are prohibited. APRA can exercise this power by giving a written notice to the relevant ADI or by making a legislative instrument. [Schedule 1, item 1, paragraph 37DA(2)(b) and subsections 37DA(3) and 37DA(4)]

1.69 A transitional provision also applies for a person who holds a position that means the person is an accountable person on 1 July 2018 for large ADIs and 1 July 2019 for small and medium ADIs. An ADI has up to 90 days after that date to register a person as an accountable person before the person would become prohibited if they are not registered. [Schedule 1, Part 3, item 15]

1.70 A person is also prohibited from being an accountable person if APRA has disqualified that person under the BEAR and an ADI commits an offence if it allows a disqualified person to be an accountable person. Disqualification under the BEAR is discussed below at paragraphs 1.163 - 1.171. [Schedule 1, item 1, paragraph 37DA(1)(b) and section 37JC]

Deferred remuneration obligations of an ADI

1.71 The BEAR imposes a statutory obligation on an ADI (including in respect of its subsidiaries) to defer a percentage of an accountable person's variable remuneration. It ensures that accountable persons have clear incentives to make decisions which account for longer term effects. It also ensures that accountable persons are properly held to account for those decisions that have negative future consequences. [Schedule 1, item 1, section 37E]

1.72 If an accountable person engages in behaviour in breach of their BEAR obligations then the ADI is obliged to withhold all or part of the accountable person's variable remuneration that is deferred under the BEAR. The amount withheld is to be proportionate to the severity and consequences of the breach. This is given effect through requiring an ADI's remuneration policy to be updated to reflect these requirements. [Schedule 1, item 1, paragraph 37E(1)(b)]

1.73 Deferring variable remuneration is a common practice in many ADIs and other companies. It rewards executives for actions which increase profitability or grow the business over time. However, when those actions negatively affect the business, or harm the community, the BEAR makes clear that deferred variable remuneration should not be paid.

The ADI's obligations concerning remuneration policy

1.74 An ADI must implement a remuneration policy that is consistent with the ADI's BEAR obligations. This updated remuneration policy will be required to be in effect by 1 July 2018 for large ADIs and by 1 July 2019 for small and medium ADIs. [Schedule 1, item 1, paragraphs 37E(1)(b) and 37E(1)(c)]

1.75 The ADI should defer the variable remuneration of accountable persons for all accountable persons for the minimum period. The minimum period is defined as four years or a shorter period approved by APRA. The period starts on the day after the day on which the ADI made the decision that the person was granted variable remuneration. [Schedule 1, item 1, paragraph 37E(1)(a) and section 37EC]

1.76 An ADI may defer the variable remuneration beyond the minimum period if an ADI has reason to believe that the accountable person is likely to have failed to comply with his or her BEAR obligations. For example, the ADI may be undertaking an investigation at the time that the deferred remuneration would have been payable. Once the ADI has determined whether the person has or has not complied with the obligations, the deferred remuneration will be paid or withheld. [Schedule 1, item 1, section 37EC(2)]

1.77 The amount of an accountable person's remuneration to be deferred by an ADI will depend on the size of the ADI. [Schedule 1, item 1, section 37EB]

Table 1.1 Minimum amounts of remuneration to be deferred

1.78 If the minimum amount of remuneration to be deferred, as calculated in accordance with Table 1.1 is less than the amount determined by the Minister the ADI is not required to defer the variable remuneration. If no minimum amount is determined by the Minister, then the amount is $50,000. [Schedule 1, item 1, section 37ED]

1.79 The Minister has the power to determine a minimum threshold amount by legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.204 and 1.206 below). [Schedule 1, item 1, paragraph 37ED(1)(a) and subsection 37ED(2)]

1.80 The Government expects this power to be used to maintain the currency of the minimum threshold over time.

1.81 The Minister has the power to determine what constitutes a small, medium or large ADI by legislative instrument. The Minister will make this instrument based on advice from APRA. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.204 and 1.206 below). [Schedule 1, item 1, subsection 37G(3)]

1.82 The Government intends that - at the outset - the legislative instrument will provide that:

•

a small ADI would have less than or equal to $10 billion on a three year average of total resident assets.

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a medium ADI would have between $10 billion and $100 billion on a three year average of total resident assets.

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a large ADI would be any ADI with greater than or equal to $100 billion on a three year average of total resident assets.

•

all amounts, once finalised, will be indexed.

1.83 The Government will consult on the legislative instrument before it is made.

1.84 An ADI may apply to APRA to seek APRA's agreement to defer the variable remuneration of a specific accountable person for a period of time less than four years. APRA has discretion to approve this shorter deferral period. [Schedule 1, item 1, paragraph 37EC(1)(b)]

1.85 APRA may approve a shorter period of time if APRA is satisfied that the person is no longer an accountable person of the ADI or subsidiary because the person has died, is seriously incapacitated, disabled or seriously ill. APRA must also be satisfied that the ADI has satisfied itself that the relevant accountable person has complied with his or her BEAR obligations based on information that is available to the ADI at the time of applying to APRA for a shorter deferral period, and that it is unlikely that further such information will become known. [Schedule 1, item 1, paragraphs 37EC(4)(a)(i) and 37EC(4)(b)]

1.86 To give full flexibility, APRA can determine other circumstances where a shorter deferral period will apply. APRA may determine these circumstances for a particular ADI or its subsidiaries by issuing a written notice. This administrative decision is judicially reviewable under the AD(JR) Act and there is no merits review available for the same reasons set out in paragraph 1.40. APRA also has the power to determine these circumstances for a class of ADIs or subsidiaries by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 - 1.206 below). [Schedule 1, item 1, subparagraph 37EC(4)(a)(ii) and subsections 37EC(5) and 37EC(6)]

1.87 The Government expects that APRA may use this power in circumstances where an accountable person has changed employers and the new ADI employer buys-out the deferred variable remuneration from the previous ADI employer. APRA could provide that deferral by the new ADI employer should be for the same period as the previous employer deferred the variable remuneration to comply with the BEAR obligations.

1.88 A shorter deferral time is not intended to let a person avoid the consequences of breaches of BEAR obligations. It would be based on a situation where the ADI had satisfied itself and APRA that there were no emerging issues that would indicate a potential breach of BEAR in connection with that person which would result in reduction of deferred variable remuneration. As such, APRA may not agree to approve the shorter time period for deferral and approval decisions will be made on a case-by-case basis or, where appropriate, on a class basis by a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 - 1.206 below). [Schedule 1, item 1, subsection 37EC(3)]

Who is an accountable person?

1.89 A key objective of the BEAR is to ensure that an ADI allocates responsibilities to accountable persons across the ADI group. This can include its parent entity or subsidiaries so, where an issue arises, APRA can identify the responsible accountable person.

1.90 The Bill inserts the term 'accountable person' into the Banking Act. 'Accountable person' is defined by reference to a general principle and by reference to listed functions or responsibilities. [Schedule 1, item 1, section 37BA]

1.91 The definition of accountable person builds on existing concepts of accountability and responsibility, such as 'responsible person', 'director' and 'senior manager' which are defined in APRA's existing prudential standards and the Banking Act. [Schedule 1, item 8, subsection 5(1)]

1.92 Under the general principle, a person is an accountable person if the person is in a senior executive position with actual or effective management or control of the ADI, or the management or control a substantial part of the ADI group's operations. As noted above, the ADI group includes the ADI and its subsidiaries. [Schedule 1, item 1, subsection 37BA(1)]

1.93 It is not the Government's intention that simply being in a management role in a subsidiary means the person is an accountable person. This intention is reflected in the use of the term 'senior executive responsibility' for each of the responsibilities identified in subsection 37BA(3). Use of senior executive is to reflect seniority in ADIs and subsidiaries, consistent with their ability to create a prudential impact as a result of their decisions.

1.94 Under the general principle, a person having significant influence over the conduct and behaviour of the ADI group where that person's behaviour or conduct could pose risks to the ADIs business and its customers will be an accountable person. Individuals exercising management or control for significant or substantial parts or elements of the ADI group should be identified in the ADI and, where relevant, in the subsidiaries or the parent of the ADI. This could include the head of a significant or substantial business line within the ADI. Similarly, an accountable person could also be a senior executive responsible for a significant or substantial subsidiary or a major business activity in that subsidiary.

1.95 A Senior Officer Outside Australia may be considered an accountable person under the general principle. However, simply being in this role will not automatically mean the person is an accountable person. In order to be considered an accountable person, a person in the role of Senior Officer Outside Australia would need to have significant influence over the conduct and behaviour of the entity, such that the person's behaviour or conduct could pose risks to the business and its customers.

1.96 An accountable person is also defined by reference to a list of particular responsibilities. A person in an ADI will be an accountable person where the person is in a position that undertakes a particular responsibility as listed in the Banking Act. [Schedule 1, item 1, subsections 37BA(2) and 37BA(3)].

1.97 An ADI may not necessarily have a separate person corresponding to each of the functions listed in the table at section 37BA. In particular, a small ADI could raise its proposed approach with APRA, before the ADI determines the appropriate representation for their size, business operations, customer base and presence in the Australian market.

Table 1.2 Particular responsibilities covered by the BEAR

1.98 Non-executive directors for the ADI will be accountable persons, but their obligations under BEAR will reflect their oversight role for the ADI and its group. They will not be required to perform day-to-day executive and management functions to meet the obligations of the BEAR. Executive directors' BEAR obligations would cover both their oversight roles and their executive and management functions.

1.99 Some organisations will provide the occupants of senior executive and management roles with different titles, but the business practice for the prescribed responsibilities above is reasonably standard. Typically, people with the following role titles would be in scope of the BEAR, subject to individual business circumstances:

•

Chief Executive Officer - responsible for carrying out the management of all business activities of the ADI and its subsidiaries, including allocating responsibility for all parts or aspects of the ADI group to accountable persons and reporting directly to the Board of the ADI;

•

Chief Financial Officer - responsible for management of the financial resources of the ADI;

•

Chief Risk Officer - responsible for overall risk controls and risk management arrangement for the ADI;

•

Chief Operations Officer - responsible for management of the ADI's operations;

•

Chief Information or Technology Officer - responsible for an ADI's information management including information technology systems;

•

Head of Internal Audit - responsible for management of the ADI's internal audit function;

•

Chief People Officer/Head of Human Resources - responsible for human resources functions;

•

Head of Compliance/Chief Compliance Officer - responsible for management of the ADI's compliance function; and

•

Anti Money Laundering Officer - responsible for anti-money laundering obligations.

1.100 Regardless of specific role titles, the general principle, combined with the list of prescribed responsibilities provides a clear set of broad responsibilities that are covered by the BEAR. Changing role titles or breaking up functions will not avoid BEAR obligations. Recognising that there are different business structures and that businesses change over time, APRA has a power to include additional responsibilities in the prescribed list. APRA exercises this power by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 - 1.206 below). [Schedule 1, item 1, subsection 37BA(4)]

1.101 Where a contractor performs a role which is either captured under the general principle or in the prescribed list, the contractor would be an accountable person and would be subject to the accountability obligations.

1.102 An individual is an accountable person if the person has senior executive responsibility for the conduct of all the activities of an Australian branch of a foreign ADI. [Schedule 1, item 1, subsection 37BA(6)]

1.103 APRA also has a power to exclude responsibilities performed in a specific ADI or its subsidiaries from the prescribed list of responsibilities by issuing a written notice to the ADI or its subsidiaries. Where APRA issues a notice anyone in that ADI or its subsidiaries conducting those responsibilities is not considered an accountable person. This administrative decision is judicially reviewable under the AD(JR) Act and there is no merits review available for the same reasons set out in paragraph 1.40. [Schedule 1, item 1, paragraph 37BB(1)(a) and subsection 37BB(2)]

1.104 This power ensures APRA can respond flexibly to changes in business practices. It also recognises that there may be specific circumstances in particular ADIs may justify a different approach to defining accountable responsibilities.

1.105 APRA can exclude specified responsibilities for a particular class of ADIs or subsidiaries so that persons with those responsibilities are not accountable persons. APRA exercises this power by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 - 1.206 below). [Schedule 1, item 1, paragraphs 37BB(1)(b) and section 37BB(3)]

1.106 In exercising this power, APRA must take into account whether including these responsibilities is necessary to achieve the objectives of BEAR.

1.107 As part of its accountability obligations (see paragraphs 1.44 - 1.55) an ADI must take reasonable steps to ensure that each accountable person meets his or her accountability obligations. [Schedule 1, item 1, paragraph 37C(d)]

1.108 An ADI must ensure that responsibility for all parts or elements of the ADI and its subsidiaries is allocated to an accountable person or persons. [Schedule 1, item 1, section 37D]

The accountability obligations of accountable persons

1.109 Unless an accountable person works in an ADI or class of ADIs that the Minister has exempted from the BEAR, an accountable person must meet his or her accountability obligations under BEAR. [Schedule 1, item 1, sections 37B and 37CA]

1.110 The accountability obligations make clear the behaviour and conduct expected of an accountable person - they relate to conduct or behaviour that is systemic and prudential in nature both because of the seniority of accountable persons and because the content of the obligations relates to prudential matters, such as integrity, professional conduct and governance arrangements.

1.111 These obligations complement existing conduct and behaviour expectations which are already in place under APRA's Prudential Standard CPS 520 Fit and Proper. APRA may update CPS 520 to reflect the new and strengthened BEAR expectations as appropriate.

1.112 ASIC will continue to regulate instances of poor conduct or behaviour. APRA and ASIC currently work together to oversee and regulate the financial sector and this is unchanged by the BEAR.

1.113 The accountability obligations of an accountable person are similar to those of an ADI. The accountable person has met these obligations if they can show APRA he or she has taken reasonable steps. The obligation to have integrity and honesty and be open with APRA is absolute. [Schedule 1, item 1, paragraphs 37CA(1)(c) and 37CB]

1.114 Accountable person obligations, in an ADI or its subsidiary, include that the accountable person must, in conducting his or her responsibilities:

•

act with honesty and integrity and with due skill, care and diligence;

•

deal with APRA in an open, constructive and co-operative way (this does not displace legal professional privilege);

•

take reasonable steps to prevent other matters which could affect the prudential reputation or standing of the ADI. [Schedule 1, item 1, section 37CA]

1.115 The terms 'honesty', 'integrity', 'due skill' and 'diligence', 'open, constructive and co-operative' are not defined terms in the Banking Act. They are not defined because these terms have a well understood common usage and, in some cases, legal application.

1.116 When an accountable person can show he or she has taken reasonable steps to meet his or her accountability obligations then he or she would not be in breach of those obligations. Section 37CB is not exhaustive in identifying what is a 'reasonable step'.

1.117 Given the seniority of the role of accountable persons, reasonable steps are systemic in nature. An accountable person has taken reasonable steps where appropriate governance, control and risk management and policies and systems are in place; delegations are appropriate given the scope of responsibilities; and there are mechanisms for dealing with problems that arise or might arise.

1.118 The reasonable steps that a person could take to meet their accountability obligations should be considered in terms of that person's functions or responsibilities. For example, a non-executive director in an oversight role may be expected to take different actions to an executive director in order to prevent matters arising that would adversely affect the prudential reputation or prudential standing of the ADI.

1.119 Following appropriate consultation, APRA may issue further guidance on what factors it would consider in determining reasonable steps and the behaviour and conduct it expects will meet the accountability obligations.

1.120 Where accountable persons share responsibilities, all of those people are equally responsible for meeting the accountability obligations. This is designed to prevent accountable persons from shifting blame between accountable persons. Each person responsible for a function listed in an accountability statement and map given to APRA, will be held as an accountable person for that responsibility. [Schedule 1, item 1, subsection 37CA(2)]

1.121 If an accountable person of an ADI or a subsidiary may be placed in a position where compliance with the BEAR could place them in breach of a corresponding foreign law (such as the Manager in Charge regime in Hong Kong), and APRA is satisfied that this contravention could occur, APRA can give the accountable person a written notice specifying the obligation for the accountable person. This will ensure that accountable persons, as with ADIs, are not placed in a position where they breach a foreign law through complying with BEAR. This administrative decision is judicially reviewable under the AD(JR) Act and there is no merits review available for the same reasons set out in paragraph 1.40. [Schedule 1, item 1, section 37BC]

1.122 Such a notice from APRA to an accountable person may contain conditions on which the notice is subject. [Schedule 1, item 1, paragraph 37BC(1)(b)]

Remuneration

1.123 The Bill inserts definitions of 'remuneration' and 'variable remuneration' into the Banking Act. [Schedule 1, item 1, subsection 37E(3) and section 37EA]

1.124 Remuneration is a well understood concept. ^[1] This generally understood concept applies for the purposes of the BEAR. For example, it is based on the principle that remuneration is all of what is paid or payable to an accountable person for the performance of their duties in the course of their employment or their role as a director or senior executive officer.

1.125 Variable remuneration is so much of an accountable person's total remuneration that is not guaranteed because it is conditional on the achievement of pre-determined objectives and can be forfeited if these objectives are not met. [Schedule 1, item 1, subsection 37EA(1)]

1.126 The amount of deferred variable remuneration is apportioned according to the extent it relates to an accountable person role. If the person occupies an accountable person role for only 50 per cent of their time and spends 50 per cent of their time working in a non-ADI parent company for example, then only half of their variable remuneration must be subject to the deferral rules. [Schedule 1, item 1, paragraphs 37E(3)(a)(ii) and 37E(3)(b)(ii)]

1.127 APRA has a power allowing it to adjust 'variable remuneration' to account for new approaches to remuneration that may emerge. APRA exercises this power by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 - 1.206 below). [Schedule 1, item 1, subsection 37EA(4)]

1.128 APRA also has the power to adjust the scope of variable remuneration in respect of one or more accountable persons of a particular ADI or subsidiary. APRA exercises this power by giving the ADI or subsidiary a written notice. This administrative decision is judicially reviewable under the AD(JR) Act and there is no merits review available for the same reasons set out in paragraph 1.40. [Schedule 1, item 1, subsection 37EA(3)]

1.129 As a general rule, variable remuneration is valued at face value, rather than fair value for the purposes of calculating an amount to be deferred. [Schedule 1, item 1, paragraph 37EB(2)(b)]

1.130 APRA also has the power to determine how variable remuneration should be valued in respect of one or more accountable persons of a particular ADI or subsidiary of an ADI. APRA exercises this power by issuing a written notice. This administrative decision is judicially reviewable under the AD(JR) Act and there is no merits review available for the same reasons set out in paragraph 1.40. [Schedule 1, item 1, paragraph 37EB(2)(a) and subsection 37EB(3)]

1.131 APRA also has the power to determine how to value remuneration for a class of ADIs or class of subsidiaries. APRA exercises this power by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 - 1.206 below). [Schedule 1, item 1, paragraph 37EB(2)(a) and subsection 37EB(4)]

Accountable persons - registration requirements

1.132 An ADI must register an accountable person with APRA prior to the person being appointed to the position. An application must be in writing in a form approved by APRA and include all information required by APRA as a part of the registration process. [Schedule 1, item 1, subsections 37HA(1) and 37HA(2)]

1.133 The ADI must ensure a registration is accompanied by a signed declaration that the ADI is satisfied the person is suitable to be an accountable person. [Schedule 1, item 1, paragraph 37HA(2)(c)]

1.134 At the same time, the ADI should also give APRA an accountability statement in respect of the person, as required by section 37F. [Schedule 1, item 1, paragraph 37HA(2)(d)]

1.135 APRA must maintain a register of 'accountable persons'. [Schedule 1, item 1, section 37H]

1.136 A person's registration will take effect 14 days after APRA is notified, unless the ADI withdraws the registration beforehand. [Schedule 1, item 1, subsections 37HA(4) and 37HA(5)]

1.137 While it is the responsibility of an ADI to determine the suitability of an accountable person, the period between the time an ADI applies to register a person and that registration taking effect gives APRA the opportunity to discuss with the ADI relevant information held by APRA including on the register. This information could include whether the person has previously been removed or disqualified as an accountable person, senior manager, director or auditor of an ADI.

1.138 Where a person registered as an accountable person changes employment to work for another ADI, he or she must be registered as an accountable person of their new employer.

1.139 The register is not a public document nor is it a legislative instrument. Information provided to APRA under the BEAR is subject to the confidentiality provisions in the APRA Act. This means that APRA can disclose the information to an ADI, to the accountable person to whom the information relates and APRA may make any other disclosures permitted by the APRA Act, including where it has disqualified a person under BEAR. [Schedule 1, Part 2, items 2 - 6, section 56 of the APRA Act 1999]

Notification obligations

1.140 The BEAR obliges an ADI to give APRA accountability statements and an accountability map. These documents show the governance and management controls in an ADI and show the organisation's lines of accountability. The accountability maps and statements are not intended to be viewed as compliance documents, but rather tools of good governance which illustrate that the ADI has appropriate accountability checks and balances and accountable person roles are allocated appropriately according to the size, complexity and customer base of the ADI. [Schedule 1, item 1, sections 37F, 37FA and 37FB]

1.141 ADIs must notify APRA if a person ceases to be an accountable person. This includes situations where the person ceases in that role because he or she has been dismissed or suspended because of a failure to comply with accountability obligations under BEAR. [Schedule 1, item 1, paragraphs 37FC(a) and 37FC(b)]

1.142 An ADI must notify APRA if the variable remuneration of an accountable person has been reduced as a result of that accountable person failing their accountable person obligations. [Schedule 1, item 1, paragraph 37FC(c)]

1.143 An ADI must also notify APRA when the ADI becomes aware that it has breached its accountability obligations, or an accountable person has breached his or her accountability obligations. [Schedule 1, item 1, paragraph 37FC(d)]

1.144 Unless APRA determines another period, an ADI has 14 days to meet its notification obligations. [Schedule 1, item 1, subsections 37F(2) and 37F(3)]

1.145 APRA's exercises its power to determine another period by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 - 1.206 below). [Schedule 1, item 1, subsection 37F(3)]

Accountability statements

1.146 An ADI's accountability statement is a description of the areas of responsibility attributable to each accountable person. Each accountable person must have an accountability statement that outlines the areas over which he or she has effective management or control. [Schedule 1, item 1, section 37FA]

1.147 Accountability statements include a comprehensive description of that part of the ADI or its subsidiaries operations over which the accountable person has actual or effective management or control, as well as other information as requested by APRA. An accountability statement should align with the accountable person's functions and responsibilities. [Schedule 1, item 1, subsection 37FA(1)]

1.148 APRA can clarify and request other information for inclusion in an accountability statement by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 - 1.206 below). [Schedule 1, item 1, paragraph 37FA(1)(c) and subsection 37FA(2)]

1.149 Transitional provisions apply which give APRA the power to determine, by legislative instrument, the information that can be supplied during the first 18 months of the BEAR for an ADI to meet its obligation to provide an accountability statement to APRA. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 - 1.206 below). [Schedule 1, Part 3, item 17(2)]

Accountability maps

1.150 All ADIs must complete accountability maps which accurately show lines of reporting and responsibility in the ADI. The accountability map is a governance document. Many ADIs would already have some form of accountability map, in the form of an organisational structure and position descriptions.

1.151 Accountability maps will help APRA identify accountable persons where an issue arises in a particular area of an ADI or its subsidiary. They will also ensure that there are no gaps in accountable person functions across the ADI and that appropriate governance controls are in place. The accountability maps could also assist an ADI to show the reasonable steps it has taken to avoid any breach of its BEAR obligations.

1.152 The accountability map of an ADI should contain the names of all accountable persons of the ADI and its subsidiaries. This is not taken to mean that each subsidiary must have an accountable person. Rather, within the ADI group or relevant group of bodies corporate as is constituted by the ADI and its subsidiaries, all parts or aspects of the ADIs business should be accounted for. An accountable person may be responsible for the management of a number of subsidiaries, depending on the subsidiaries business and its role in relation to the ADI. [Schedule 1, item 1, paragraph 37FB(1)(a)]

1.153 APRA has the power to clarify and request other information for inclusion in an accountability statement by making a legislative instrument. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 - 1.206 below). [Schedule 1, item 1, paragraph 37FB(1)(d) and subsection 37FB(2)]

1.154 Transitional provisions apply giving APRA the power to determine, by legislative instrument, the information that can be supplied to it during the first 18 months of the BEAR which lets an ADI meet its requirements to provide an accountability map to APRA. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 - 1.206 below). [Schedule 1, Part 3, item 17(3)]

Consequences of breaching the BEAR

1.155 APRA has an established approach to prudential supervision which is set out in the APRA Supervision Blueprint and is supported by enforcement powers under the Banking Act and laws concerning insurance and superannuation.

1.156 These existing powers include:

•

a direction power in section 11CA of the Banking Act which lets APRA compel a regulated entity to take specific action to address particular identified prudential issues;

•

the making of prudential standards under section 11AF of the Banking Act, in which APRA can impose different requirements to be complied with;

•

revoking a banking license under section 9 of the Banking Act;

•

removing or disqualifying a director, senior manager or auditor under Division 3 of Part II of the Banking Act; and

•

seeking an injunction and other orders from a court.

1.157 APRA can continue to use its informal and formal powers in implementing the BEAR. Existing section 11AF is amended to let APRA determine a standard for the purposes of BEAR. APRA also has administrative authority to issue guidance for ADIs in complying with the BEAR. [Schedule 1, item 11, subsection 11AF(1AC)]

1.158 The Government expects that APRA would only seek a civil pecuniary penalty for significant breaches of the BEAR.

1.159 The Bill does not create a cause of action against an ADI or an accountable person of an ADI in addition to any cause of action a person had prior to the commencement of BEAR. [Schedule 1, item 1, subsection 37KB]

Consequences of breaching the BEAR for an ADI

1.160 APRA may seek pecuniary penalties where an ADI has not:

•

met its BEAR accountability obligations (see paragraphs 1.44 - 1.55);

•

met its key personnel obligations including ensuring that each significant and substantial part or aspect of the ADI's operations are covered by an accountable person (see paragraphs 1.56 - 1.70);

•

met its obligation to register an accountable person and give APRA an accountability statement for that person (see paragraphs 1.132 - 1.138 and 1.140);

•

met its obligation to give APRA an accountability map (see paragraphs 1.140 and 1.154); and

•

met its remuneration obligations, including by deferring variable remuneration as required and having a remuneration policy that meets the BEAR requirements (see paragraphs 1.71 - 1.88). [Schedule 1, item 1, subsection 37G(1)]

1.161 A civil pecuniary penalty must be imposed by a court. The maximum penalty available will depend on the size of the ADI. For large ADIs the maximum civil pecuniary penalty will be 1 million penalty units, (currently $210 million), for medium ADIs the maximum penalty will be 250,000 penalty units (currently $52.5 million) and for small ADIs the maximum penalty available will be 50,000 penalty units (currently $10.5 million). [Schedule 1, item 1, subsection 37G(2)]

1.162 The amount of the civil pecuniary penalty must be determined by a court, and would be set with regard to the seriousness of the breach. The maximum penalties represent the seriousness of these breaches, reflecting the potential harm to consumers and other financial market participants. The maximum penalties also reflect the damage to public confidence in the financial system resulting from a failure by an ADI and its senior officers to meet its BEAR obligations, such as maintaining fundamental standards of honesty and integrity, which result in prudential and systemic harm.

1.163 As noted above, the Minister will determine by legislative instrument the kinds of ADIs which will be considered as small, medium or large. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.204 and 1.206 below). [Schedule 1, item 1, subsection 37G(3)]

1.164 When considering whether to impose a civil pecuniary penalty, the Federal Court must consider the impact a potential penalty would have on the ongoing viability of the ADI. Existing Schedule 2 to the Banking Act also includes factors that the Federal Court must consider. This includes the seriousness of the contravention and the harm caused by that contravention to the community. [Schedule 1, item 1, subsections 37G(4) and 37G(5)]

1.165 Existing Schedule 2 to the Banking Act also sets out the timeframe in which APRA may start court proceedings. Consistent with the current law APRA will have six years from the date of the misconduct to start court proceedings for a breach of the BEAR.

Consequences of breaching the BEAR - an accountable person

1.166 If an accountable person breaches BEAR, APRA may disqualify an accountable person from acting as an accountable person of:

•

an ADI or in a subsidiary;

•

a class or classes of ADIs or their subsidiaries. [Schedule 1, item 1, subsections 37J(1) and 37J(2)]

1.167 APRA may make this disqualification for a period that APRA considers appropriate.

1.168 The BEAR is designed so that APRA has sufficient information from the ADI's accountability map and statements upon which to make a decision about the accountability of an individual for a breach of that individual's accountability obligations. For example, before taking an action concerning an accountable person, APRA would consider the person's accountability statement and the ADI's accountability map to confirm whether responsibility points to the accountable person in question.

1.169 APRA must be in a position to justify a decision to disqualify an accountable person, including having regard to the seriousness of the non-compliance. This approach is consistent with APRA's approach to the disqualification of senior managers, directors or auditors under the Banking Act. Minor breaches or incursions would be unlikely to result in a disqualification. [Schedule 1, item 1, paragraph 37J(1)(b)]

1.170 APRA must give written notice of a disqualification to the person and the ADI. The written notice must specify the day the disqualification takes effect; this must not be earlier than 7 days after it is signed.

1.171 An accountable person has protections and rights to procedural fairness under BEAR. Before APRA makes its final decision to disqualify a person, the person and the relevant ADI must be given a written notice and an opportunity to respond to the matter. APRA must take into account anything provided by the person or ADI. [Schedule 1, item 1, subsection 37J(5)]

1.172 APRA can administer the disqualification provisions with flexibility. It can vary or revoke a disqualification. [Schedule 1, item 1, section 37JA]

1.173 For the avoidance of doubt, section 52F(2) does not apply to a person disqualified under BEAR. [Schedule 1, item 1, section 37JB]

1.174 Amendments to the APRA Act let APRA publicly disclose information about a decision it has taken to disqualify a person, or the reasons for such a decision. However, APRA is not obliged to release information about disqualifications under the BEAR. [Schedule 1, item 5, subsection 56(7F) of the APRA Act 1999 ]

1.175 APRA's powers concerning disqualification, including to vary or revoke a disqualification, are subject to merits review. An affected person is able to request that APRA reconsider its decision. Where a person remains dissatisfied with APRA's decision the affected person is able to seek a review by the Administrative Appeals Tribunal. Providing merits review ensures transparency around the decision making process. [Schedule 1, item 1, subsections 37J(8) and 37JA(4)] .

Examination powers

1.176 APRA has examination powers in other regulatory Acts that let it examine individuals in those industries subject to APRA regulation (for example, sections 55 and 62C of the Insurance Act 1973, section 142 of the Life Insurance Act 1995 and sections 270 and 277 of the Superannuation Industry (Supervision) Act 1995).

1.177 The Bill gives APRA additional examination powers to investigate potential breaches of the BEAR and extends these powers to all of APRA's supervisory functions under the Banking Act. Applying these powers to the banking sector would mean it was regulated consistently with other industry sectors regulated by APRA. [Schedule 2, items 7, 8, and 9, sections 61A to 61Q]

1.178 The examination powers allow APRA to require a person to appear before an investigator, set out who can be present at an examination and how a person's lawyer may participate during an examination. They empower an investigator to require a person to produce books, accounts or documents that are may be relevant to an investigator. [Schedule 2, item 9, sections 61A, 61C, 61D and 61E]

1.179 APRA can require a person to appear before an investigator where the investigator reasonably believes the person has information relevant to an investigation. The person must either swear or affirm that the information they give APRA is true and must answer questions relevant to the investigation.

1.180 A person commits a criminal offence and will be liable to a penalty of a maximum of 30 penalty units (currently $6,300) if the person fails to appear before the investigator, fails to participate as required, was not permitted to be present during an examination but attended, fails to act as required under the examination provisions or fails to produce relevant documents. [Schedule 2, item 9, sections 61A, 61D, 61E, 61F and 61G]

1.181 Amendments to existing section 52F mean that in addition to complying with a requirement to give information, a person must also comply with a requirement to produce a book, account or document, or sign a record despite the material potentially incriminating the person. [Schedule 2, items 2, 3, 4, 5 and 6, section 52F]

1.182 However, under existing subsection 52F(2) information given by an individual (a natural person rather than a body corporate) is not admissible as evidence against the individual in criminal proceedings or in proceedings for the imposition of a penalty, other than proceedings in respect of the falsity of the information or a disqualification under section 21 of the Banking Act. This is expanded to also include where a book, account or document, or signed record are not admissible. [Schedule 2, item 3, 4, 5 and 6, subsection 52F(2), paragraphs 52F(2)(a) and 52F(2)(b)]

1.183 The book, account or documents, or the signed record can be used to gather other evidence against that person or against a third party, for example an employer, partner or alleged accomplice of the person. With regard to Chapter 9 of the Attorney-General's Department's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, it is appropriate to not limit the use of the information, book, account or documents provided or signed record beyond the individual because doing so would significantly limit APRA's ability to regulate the Banking Act and address matters related to prudential risk.

1.184 Where a person knowingly destroys or in some other way alters a document which is relevant to an investigation the person is liable to a maximum term of 2 years imprisonment. [Schedule 2, item 9, section 61B]

1.185 Where a person's lawyer participates in the examination, the APRA investigator may determine when the person's lawyer may speak to the investigator and when the person may be examined by his or her lawyer. An investigator may stop an examination or line of enquiry if the investigator believes the person's lawyer is obstructing the examination. [Schedule 2, item 4, section 61E]

1.186 Records must be made of an examination and provided to the person who was examined. Conditions may be imposed on the record including limiting who it can be shared with. A person who breaches these conditions is liable to a maximum term of 6 months imprisonment. [Schedule 2, item 4, section 61F]

1.187 Under existing provisions in the APRA Act, APRA can share records from an investigation subject to the conditions in section 56 of the APRA Act.

1.188 New provisions set out when statements made during an examination or other documents, including a report made by an investigator of an investigation, may be admitted and used as evidence during a legal proceeding. [Schedule 2, item 9, sections 61H, 61J, 61M and 61N]

1.189 The weight placed on a statement, where the statement is submitted instead of the person who made the statement appearing at the proceedings, is affected by several factors, including any time that has elapsed between the making of the statement and its potential use. [Schedule 2, item 9, section 61K]

1.190 A person must be given notice of a statement or a report which the other party intends to submit as evidence. The person has an opportunity to object, in writing, to the statement being submitted as evidence. A person cannot object to a report being submitted as evidence but the report is inadmissible if the court or tribunal is not satisfied that the person, or the person's lawyer, has had sufficient opportunity to examine the report or cross examine the persons who prepared the report. [Schedule 2, item 9, sections 61L and 61P]

1.191 A statement made during an examination is not admissible if it discloses a matter subject to legal professional privilege. Similarly, a lawyer may refuse to comply with a requirement to give information or provide certain documents if the information or documents contain privileged communication, made by or on behalf of the lawyer in his or her capacity as a lawyer. [Schedule 2, item 9 and item 10, subsection 61H(5) and section 62A]

1.192 If evidence would have been admissible except for the amendments made by this Bill, the evidence is still taken to be admissible. [Schedule 2, item 9, section 61Q]

1.193 The investigator may require the person under examination to read the record, or have it read to them, and sign it. It is a criminal offence for a person not to comply with these requirements, with a criminal penalty of a maximum of 30 penalty units (currently $6,300). [Schedule 2, item 9, section 61G]

1.194 The investigator must give a copy of the record to the person, without charge. However, the investigator may impose conditions on the record. For example, the investigator may impose a condition limiting the capacity of the person to share the record with other persons. If the person fails to comply with the conditions the person has committed a criminal offence and is liable to a maximum term of 6 months imprisonment. [Schedule 2, item 9, section 61F]

1.195 If APRA or the investigator are satisfied that a person has failed to comply with a part of the Banking Act, APRA or the investigator may write to the Federal Court. The Federal Court may order the person to comply. [Schedule 2, item 10, section 62B]

Indemnification of ADIs and accountable persons

1.196 To ensure that breaches of the BEAR have meaningful consequences on ADIs and accountable persons, indemnification against the financial consequences of breaching the BEAR is prohibited. [Schedule 1, item 1, section 37KA]

1.197 The prohibition against indemnification for loss associated with breaching the BEAR does not cover any insurance obtained with respect to legal costs that may be incurred in a BEAR-related legal action. [Schedule 1, item 1, subsection 37KA(3)]

1.198 The purpose of the BEAR would be undermined by:

•

allowing an ADI to obtain insurance to cover financial loss as a result of a civil pecuniary penalty imposed on it; or

•

allowing an accountable person to be indemnified for financial loss if an accountable person's variable remuneration is reduced or for pecuniary penalty or criminal fine or if they lose their employment through disqualification.

Review of the BEAR

1.199 Three-years after the BEAR comes into effect, the Minister must initiate a review of the operation of the regime. The review must be completed within six months. [Schedule 1, item 1, subsections 37KC(1) and 37KC(2)]

1.200 A written report will be produced and tabled in Parliament 15 sitting days after the Minister has received a copy of the report. [Schedule 1, item 1, subsections 37KC(3) and 37KC(4)]

1.201 The provision requiring that a review be undertaken will be automatically repealed on 1 July 2023, as the review will be complete by that date and there will be no need to retain the provision in the Banking Act. [Schedule 1, item 14, section 37KC]

Other amendments

1.202 The Banking Act is amended to include new definitions in section 5(1) of the Act. [Schedule 1, items 8 and 10, subsection 5(1); Schedule 2, item 1, subsection 5(1)]

1.203 APRA is provided with the general administration of Part IIAA of the Banking Act. General administration provisions reinforce the principle that an administrator or regulator is authorised to do whatever may be fairly regarded as incidental to, or consequential upon, the things that the they are authorised to do by the law. [Schedule 1, item 1, section 37K]

Scrutiny of legislative instruments

1.204 The Minister has powers to do the following by making a legislative instrument:

•

determine the threshold below which a person's variable remuneration does not need to be deferred. [Schedule 1, item 1, paragraph 37ED(1)(a) and subsection 37ED(2)]

•

determine what constitutes a small, medium or large ADI. [Schedule 1, item 1, subsection 37G(3)]

•

exempt a class of ADIs from the application of the BEAR. [Schedule 1, item 1, subsection 37A(2)]

1.205 APRA has several legislative instrument making powers designed to allow the BEAR to operate with flexibility. These are:

•

determining circumstances where variable remuneration is deferred for a shorter period. [Schedule 1, item 1, subparagraph 37EC(4)(a)(ii) and subsection 37EC(6)]

•

including additional responsibilities in the prescribed list of accountable person responsibilities. [Schedule 1, item 1, subsection 37BA(4)]

•

excluding specified responsibilities for a particular class of ADIs or subsidiaries so that persons with those responsibilities are not accountable persons. [Schedule 1, item 1, paragraph 37BB(1)(b) and subsection 37BB(3)]

•

adjusting the scope of 'variable remuneration' to account for new approaches to remuneration that may emerge. [Schedule 1, item 1, subsection 37EA(4)]

•

determining the method to work out the value of variable remuneration. [Schedule 1, item 1, paragraph 37EB(2)(a) and subsection 37EB(4)]

•

determining the timeframe in which an ADI must comply with its notification obligations. [Schedule 1, item 1, paragraph 37F(2)(b) and subsection 37F(3)]

•

specifying additional information that must be included in an accountability statement or accountability map. [Schedule 1, item 1, paragraphs 37FA(1)(c) and 37FB(1)(d), and subsections 37FA(2) and 37FB(2)]

1.206 These instruments are of a legislative character and are scrutinised by the Parliament, including potential disallowance, under section 42 of the Legislation Act 2003. They are not decisions of an administrative character.

Application and transitional provisions

1.207 The BEAR provisions will apply to large ADIs from 1 July 2018 and to small and medium ADIs from 1 July 2019.

Registering an accountable person

1.208 Transitional provisions apply so that an ADI will have 90 days to register an accountable person who was in place on 1 July 2018 for large ADIs and for small and medium ADIs, on 1 July 2019. [Schedule 1, Part 3, item 15]

Providing accountability statements and maps

1.209 Transitional provisions apply to give APRA the power to determine, by legislative instrument, how an ADI may meet its requirement to provide an accountability map and statement during the first 18 months the BEAR applies to it. The exercise of this power is subject to Parliamentary scrutiny through the disallowance process (see paragraphs 1.205 - 1.206 above). [Schedule 1, Part 3, item 17]

1.210 The Government expects this power to be used to provide for an increasing level of detail in accountability maps and statements over time as ADIs put in place processes to implement the regime. The exercise of APRA's power is subject to Parliamentary scrutiny through the disallowance process.

1.211 An ADI which provides more detail and information in an accountability statement and map during the transitional period is also taken to have met its obligations. [Schedule 1, Part 3, item 17(4)]

Remuneration obligations

1.212 A large ADI must update its remuneration policies to comply with the BEAR deferred remuneration provisions from 1 July 2018. Small and medium ADIs must ensure their remuneration policies are updated from 1 July 2019. [Item 2 of the table in subsection 2(1) of the Bill]

1.213 The BEAR remuneration requirements apply to the variable remuneration of an accountable person of a large ADI if the decision to grant the variable remuneration to that person was made on or after 1 January 2019. [Schedule 1, Part 3, item 16(1)]

1.214 If an employment contract is in place on Royal Assent, all ADIs should update contracts to reflect the ADI's BEAR compliant remuneration policy and the BEAR's deferred remuneration requirements by 1 January 2020. [Schedule 1, Part 3, item 16(2)]

1.215 To the extent that updating a contract existing on the date of Royal Assent of this Bill is found by a court to be an acquisition of property on other than just terms in breach of section 51(xxxi) of the Constitution, the BEAR's requirement for that contract to be compliant by 1 January 2020 will not apply. [Schedule 1, Part 3, item 16(3)]

Other amendments

1.216 The Bill includes consequential amendments of an editorial nature. [Schedule 1, item 6, paragraph 56(12)(a) of the APRA Act, item 13, Schedule 2, item 7 and item 8, Part VII, and Schedule 2, item 11, Part IX]

1.217 The Bill includes a provision to repeal that part of the Bill requiring the Minister to undertake a review. The repealing provision commences on 1 July 2023 and will operate to ensure that the Banking Act maintains its currency over time. [Schedule 1, item 14, section 37KC]