Banks are warning new government rules over executive behaviour will create legal headaches and an unlevel playing field that could make it harder to attract key staff.
The nation’s banks are upset at what they think is too short a consultation period for the government’s planned Banking Executive Accountability Regime (BEAR). They argue it will introduce competitive distortions because it will be limited to “authorised deposit-taking institutions” but it will also capture their non-banking operations such as insurance and wealth within the vertically-integrated industry structure.
One of the concerns is the deferred remuneration regime could make it harder to attract staff who may favour working at non-BEAR regulated competitors with less scrutiny.
The banks will call for BEAR to be extended to insurance companies and superannuation funds.
In an unprecedented move, the government moved to reach inside banking institutions by defining cultural expectations when it unveiled a package of reforms in the May budget designed to improve bank culture.
The industry’s peak lobby group has slammed the three-week consultation period, given the complexity of the policy. The banks are putting the final touches to their BEAR submissions due with Treasury on Thursday.
“The Australian Bankers’ Association endorses executive accountability that drives good customer outcomes. This regime is a significant step forward but needs to be done carefully to get it right,” chief executive of the Australian Bankers’ Association Anna Bligh said.
“Once again the ABA is disappointed with a rushed three-week consultation for such significant reform.”
Tackling poor conduct
Treasury’s consultation paper last month said BEAR will apply where there is poor conduct or behaviour “that is of a systemic and prudential nature”. It also pointed to a new duty to deal with Australian Prudential Regulation Authority in an “open and cooperative way”.
But banks say such principles are ambiguous and concepts of “systemic” conduct and “open” dealings don’t form part of existing duties under the Corporations Act, or various requirements imposed by the APRA.
If these terms are ultimately included in the statute, the banks are worried managers’ actual duties in practice won’t become clear until the provisions are litigated. For example, it may be uncertain how a duty to be “open” with the regulator interacts with that of legal professional privilege.
Banks are confused whether BEAR sets out additional duties that may override existing duties, and submissions are expected to point to the potential duplication with APRA’s prudential standards CPS 510 and CPS 520, which deal with governance and “fit and proper person” requirements, that are well understood.
Given their inherent conservatism, uncertainties about BEAR’s application are likely to result in over-reporting, at least initially, which could be burdensome for the regulator and the banks, in the absence of some sort of materiality threshold, the banks will argue.
Some banks are preparing their own submissions to Treasury as well as participating in submissions being prepared by industry associations the Australian Bankers’ Association and the Customer Owned Banking Association. However, individual bank submissions may end up being confidential given they are expected to contain detail about remuneration policies.
Extend to super, insurance
The banks will argue it is unfair for ADIs to fall under the regime – that will include a minimum four-year deferral of 40 per cent of an executive’s variable remuneration – while non-ADIs in the financial sector, such as the big insurance or fund management groups, are not captured. If the regime is really about protecting customers, it should apply to all companies delivering a particular type of product or advice and not be related to the ownership structure of the companies, the banks will argue.
“Systemic trust in the financial sector comes from customers being able to trust all financial institutions regardless of whether or not they are a bank. The ABA believes the regime should extend to all entities regulated by APRA, such as insurance companies and superannuation funds,” Ms Bligh said.
“Senior executives move across the financial services sector during their working careers and banks are keen to ensure that the regime applies to all possible recruits. Insurance and superannuation are just as important to a person’s financial wellbeing as banking.”
The banks also consider the size of the civil penalties proposed in the law as being much larger than those that exist in the legal system at present, and will argue penalties should be proportionate to type of behaviour that is the subject of the fine.
Customer-owned banks are understood to be concerned that BEAR will impact on them even though they didn’t cause the cultural problems that brought about its introduction.
Banks are expecting an exposure draft for BEAR to be released in the spring session of parliament but consider this timing ambitious given the extent of the unanswered questions.