By Rebecca Sellers*
Will New Zealand be caught by the BEAR senior managers’ regime?
New Zealand’s largest banks, some life insurers and other subsidiaries of Australian banks could soon be subject to a new senior managers’ regime.
On 13 July, the Australian Federal Government released a consultation paper seeking feedback on policy considerations and implementation of a new banking executive accountability regime, already being referred to as “BEAR”. BEAR would apply to foreign subsidiaries of authorised deposit taking institutions (ADIs), including subsidiaries that provide non-banking services, such as insurance.
The proposals are in part a response to the Coleman Report which found that no individual had lost their job because of recent scandals. The call for senior executives to be held responsible for bank culture is part of a global move towards individual accountability. Last week the UK Financial Conduct Authority fined David Watters, a compliance oversight officer, £75,000 for failing to take reasonable steps to put in place a compliant advice process to protect customers. This led to a serious risk of unsuitable advice being given to customers about the merits of transferring their pensions from a defined benefit to a defined contribution scheme.
Defined benefit schemes are usually more valuable for a saver than defined contribution schemes.
Watters did not advise customers to transfer. His failings were in respect of oversight. He was fined for failing to consider whether the advice process was compliant. He also failed to gain a sufficient understanding of the relevant regulatory requirements; did not obtain an appropriate third party review of the process to ensure compliance and failed to take reasonable steps to ensure that advisers were properly monitored to reduce the risk of unsuitable pension transfer advice being given to customers. The singling out and fining of an individual compliance officer has been described as “a game changer”.1
The objective of the BEAR is to apply a heightened responsibility and accountability framework to senior and influential directors and executives within ADIs. The regime would introduce registration requirements for directors and senior executives. The Australian Prudential Regulation Authority (APRA) would have new powers to remove directors and senior executives and to impose penalties. The BEAR would enhance, not replace the existing concept of responsibility and accountability under the APRA Fit and Proper Framework. The Australian Securities and Investments Commission (ASIC) will remain responsible for regulating conduct.
Remuneration would also be regulated by the BEAR. Variable remuneration would be deferred for at least four years and APRA would have stronger powers to require ADIs to review and adjust remuneration policies. The remuneration proposals would only apply to executives not oversight functions. In April, the Sedgwick Retail Banking Remuneration Review Report on product sales and commissions made 21 recommendations to strengthen the alignment of retail bank incentives, practices and good customer outcomes. PwC predicts that there will be significant changes in remuneration approaches at ADIs because of BEAR and the Sedgwick recommendations.2
The consultation paper acknowledges that that the BEAR will apply costs to some market participants but not to others. For example, an insurer that is not a subsidiary of an ADI will not be subject to the BEAR. This is justified on the basis that ADIs enjoy “a privileged position of trust in the financial system”. The rationale for the wide scope of the BEAR is that consumers engage with a subsidiary because of the strength of the parent company brand. Poor conduct at subsidiary level has the potential to undermine the confidence in the ADI itself. The consultation paper gives as an example public concern over recent mis-conduct in the insurance and financial advice subsidiaries of ADIs.
Who would be caught by the BEAR?
Prescribed functions such as Chair of the Risk Committee or Head of Internal Audit would be caught, but it is also proposed that the definition of “accountable person” should have a principles-based element, designed to catch individuals who have significant influence over conduct and behaviour, whose actions could pose risks to the business and its customers. Different business groups would need to register different accountable persons under this principles-based element, depending on the business model and group structure.
The Australian proposals seek to draw on similar overseas regimes, in part because the international banking groups will already be subject to these frameworks. In March 2016, the United Kingdom introduced the Senior Managers Regime which now covers banks and insurers and from 2018 will cover the rest of the UK financial services industry. In April this year, Hong Kong introduced the Managers-in- Charge measures. The BEAR proposals use the UK model as a template, but would not adopt all elements of the UK regime. The BEAR would only apply where there is poor conduct or behaviour that is of a systemic and prudential nature.
The proposed BEAR has already been subject to criticism in Australia. David Murray, the former head of the financial systems inquiry said that the proposals took APRA “too close” to becoming the manager of the banks.3 There is no timetable put forward for implementation of BEAR although the consultation paper does seek feedback on transition issues and implementation timeframes.
Consultation on the issues and options raised in paper closes on 3 August 2017. The paper expressly asks for input on whether the definition of “accountable persons” should apply to individuals in subsidiaries with an ADI parent, including where the subsidiary is not regulated by APRA. It has long been recognised that foreign ownership of New Zealand’s banks can create cost and complexity. BEAR is worthy of consideration to ensure that the costs of implementation would bring benefit to New Zealand customers.
*Rebecca Sellers is a director of Melior Law & Regulation.