The Government's considering beefing up the responsibilities and accountabilities of senior executives at banks and licensed deposit-takers, and broadening the range of penalties available for use against those who break the laws.
A consultation paper issued as part of Phase 2 of the Reserve Bank of New Zealand (RBNZ) Act review looks at options for "enhanced executive accountability." The RBNZ has never taken a bank director to court, however it does assess the suitability of proposed bank directors and senior managers and has the ability to block appointments.
Currently the RBNZ Act establishes a version of executive accountability for registered banks through an attestation regime. This regime applies to directors of all registered banks and to the New Zealand CEOs of overseas incorporated banks active in NZ as a branch.
The attestation regime supports the bank disclosure regime the RBNZ oversees via a requirement for bank directors to attest to, i.e. sign-off on, the accuracy of information contained in bank general disclosure statements. The RBNZ approach to supervision relies on three pillars being self, market, and regulatory discipline. The self-discipline pillar relies on directors’ attestations to the fact that banks have adequate risk management systems in place.
Directors are responsible and accountable for the integrity of bank reporting, but there are no specific rules around how a bank must meet the attestation requirements with the RBNZ accepting the attestations without auditing the process. Thus the director attestation regime is a key plank of NZ bank oversight, arguably outsourcing regulation to the regulated.
A 2017 review of the attestation regime, done by Deloitte at the behest of the RBNZ, called for a more prescriptive approach to oversight of bank risk management.
Finance Minister Grant Robertson recently said the Government's considering increasing the responsibilities and accountabilities of senior executives for the actions of NZ’s banks and licensed deposit-takers by adopting elements of overseas frameworks.
"Australia’s Bank Executive Accountability Regime and the UK’s Senior Managers Regime are two examples of frameworks that assign duties to individual decision-makers at banks, so that if things go wrong the individuals directly responsible can be identified and held to account. These regimes go a step further than New Zealand’s current Director Attestation Regime for banks, by also holding senior managers to account for the prudent management of their bank within their area of responsibility,” Robertson said.
Pros and cons
The consultation paper notes executive accountability’ refers to the accountability of individuals for meeting legal obligations relating to a regulated entity. For example, taking reasonable steps to ensure that a particular function within a regulated entity is controlled effectively. Despite the use of the term "executive" these regimes may apply to both directors and senior executives, with their obligations distinct from the obligations that apply to the regulated entity itself.
"Following the Global Financial Crisis, a number of jurisdictions have introduced relatively detailed executive accountability regimes. Examples include the UK’s Senior Managers regime, Hong Kong’s Manager in Charge regime, and Australia’s Banking Executive Accountability Regime (BEAR). In part, the introduction of these regimes has reflected a view in these jurisdictions that previous approaches to providing self-discipline proved ineffective," the consultation paper says.
It goes on to say that, in theory, executive accountability regimes can reinforce the incentives on individuals to avoid regulatory issues emerging within their area of oversight, provide clarity and formalise regulatory expectations regarding accountability and governance within regulated entities, and improve the ability of the regulator to make regulatory responses by allowing supervisory or enforcement action to be more targeted.
However, executive accountability models also reflect a departure from the standard liability framework for prudential regulation, which focuses on the regulated entity, and are supported by broader legal duties on directors such as those under company law. This, the consultation paper suggests, can have a number of drawbacks including challenges in determining what certain duties may mean in practice, imposing "significant" costs to regulated parties and the regulator, and the introduction of individual liability can create risk-averse behaviours, especially in big firms where direct oversight is more challenging. This can encourage a "tick-box" approach on the part of executives, rather than the shift in risk culture that executive accountability aims to provide. Additionally people may be discouraged from taking on certain roles.
Three options for beefed-up executive accountability detailed
Nonetheless the consultation paper details three options for beefed-up executive accountability.
Option 1 is referred to as "enhanced status quo." This option would keep the broader attestation framework, while seeking to address the potential vulnerabilities of the attestation regime through operational changes. The changes would include;
* Using the RBNZ’s prudential rule-making power to further set out its expectations in relation to risk management, and perhaps requiring disclosure of accountability arrangements within registered banks
* Providing further guidance and increasing supervisory engagement in areas such as board composition and performance.
"The model would have the benefit of using an existing regime that is well understood by regulated entities. The weaknesses of the attestation regime relate to the proportionality of the liability framework. The attestation regime is implemented through the disclosure rules. These rules provide for criminal liability of directors, and the New Zealand CEO of overseas incorporated banks, for false or misleading statements, even when there may have been no fault element. This is not consistent with current good practice for criminal offences, and may make it harder for the Reserve Bank to take regulatory action," the consultation paper says.
Option 2 is referred to as a "reframed attestation regime." This option would decouple the attestation regime from the disclosure rules, but would retain the existing focus on directors. This could be achieved by, for example, creating high level duties applying to a registered bank, under a civil liability framework. Duties could then be applied to directors in a number of ways, including:
* A positive accountability regime requiring individuals to take certain actions separate to those of the regulated entity. For example, to take reasonable steps to ensure that the entity is being run in a prudent manner.
* A deemed liability regime. Under this regime, if an entity has contravened a relevant provision then the directors of that entity are also treated as having contravened that provision.
"These changes would more clearly focus the attestation regime on the key underlying conduct, being director oversight of risk management and risk culture. Shifting the liability framework would also allow for the application of a more proportionate set of enforcement tools, such as civil pecuniary penalties for the regulated entity. Such a regime would nonetheless need to be enforced through the courts, and there will need to be protections for individuals, such as rights of review or appeal. There are also risks around the alignment of obligations with existing company law duties," the consultation paper says.
Option 3 is referred to as a "senior managers’ regime." This would extend Option 2 to something closer to the executive accountability arrangements introduced overseas. It would go beyond directors, capturing senior managers involved within certain control functions or business lines.
The consultation paper suggests introducing such a regime would require a high degree of clarity around the senior managers that sit within the scope of the regime, the obligations that fall on those senior managers, and the steps they need to take to discharge them.
"A senior managers regime would provide the Reserve Bank with a broader toolkit for regulatory responses. Introducing a regime would mean a clear shift towards a more intrusive supervisory model with a greater focus on the actions of individuals, rather than the regulated entity as a whole. Given the UK, Australian, and Hong Kong models have been enacted in the near past, there is not yet sufficient experience to derive lessons for New Zealand on their effectiveness," the consultation paper says.
'The RBNZ recognises this disproportionality and has never undertaken any court proceedings against a bank director'
Existing penalties available for offences relating to the registration of banks, disclosure statements and the prudential supervision of registered banks include, for an individual, imprisonment for a term not exceeding 18 months and a fine of up to $200,000. For a body corporate, fines of up to $2 million are possible. The RBNZ has never taken a bank director to court.
Although the RBNZ assesses the suitability of proposed bank directors and senior managers and has the ability to block appointments, it hasn't made any objections over the past five years.
"The process for assessing suitability is a mature process that has been in place for many years. Accordingly, banks are aware of our criteria when seeking a notice of non-objection. The onus is on the board/management of each bank to select suitable candidates and we therefore expect banks to carry out their own thorough assessment before submitting candidates to us for non-objection," An RBNZ spokesman says.
A spokesman for the Treasury and RBNZ team overseeing phase two of the RBNZ Act review notes current penalties or sanctions available to the RBNZ for application to bank directors are mainly criminal ones and tied to disclosure obligations such as signing off false or misleading disclosure statements. The consultation paper, he says, argues this is "somewhat disproportionate" as the criminal sanctions cover behaviour that isn’t necessarily knowing or reckless misconduct on the part of directors, given there’s no intent to mislead.
"In practice the RBNZ recognises this disproportionality and has never undertaken any court proceedings against a bank director."
"The options outlined in the paper seek to address this issue by including a wider range of penalties to sanction behaviour that doesn’t have this conscious ‘intent quality’, but nevertheless results in bad prudential outcomes [where] the individual failed in their duty to ensure the bank had adequate risk management systems or internal controls in place etc," the spokesman says.
"Relatedly, under current arrangements the RBNZ cannot impose sanctions on individual directors if their bank breaches any of their conditions of registrations (CoRs) - the primary way of imposing prudential obligations on banks. That is, the only way of going after directors is via breaches of disclosure obligations not breaches of CoRs per se, although directors, when signing off the disclosure statements, are attesting that a bank has complied with its CoRs."
The spokesman says the types of penalties for individuals, whether limited to directors or including a wider set of office holders within a bank under a BEAR-type regime could include:
* Monetary fines being civil pecuniary penalties, imposed by a court that don’t result in criminal conviction for the individual. Here, the spokesman points out the Australian BEAR regime doesn’t have monetary penalties for individuals but just for the bank as an organisation.
* Removing an "accountable" person, be they a director or executive office holder, from their role, or from the industry.
* Remuneration consequences, e.g. reduction in bonuses or variable component of remuneration if a person fails to comply with their obligations.
"The specification of the nature of penalties that underpin any executive accountability model would be developed following consultation feedback and subsequent decisions from the Minister of Finance. Note, there would still be a role for criminal-type sanctions for the most egregious behaviour on the part of individuals where it can be established that there was a clear intent to mislead or deceive etc," the spokesman says.
The deadline for submissions on the consultation paper is 5pm on Friday, August 16. The RBNZ Act review is being overseen by a team jointly resourced by Treasury and the RBNZ. Robertson announced the RBNZ Act review in November 2017.
“The current Reserve Bank Act is now nearly 30 years old. While it has served New Zealand well in general, now is the right time to undertake a review to ensure our monetary policy framework still provides the most efficient and effective model for New Zealand," Robertson said in 2017.
Phase 1 of the RBNZ Act review focused on monetary policy.