The federal government has moved one step closer to introducing new accountability rules for senior bankers.
The Treasury has released a consultation paper for its proposed Banking Executive Accountability Regime (BEAR), which aims to increase the accountability of authorised deposit-taking institutions (ADIs), as well as their director and senior executives.
“The BEAR will provide greater clarity regarding their responsibilities and impose on them heightened expectations of behaviour in line with community expectations,” Treasury said.
“Where these expectations are not met, APRA [the banking regulator] will be empowered to more easily remove or disqualify individuals, ensure ADIs’ remuneration policies result in financial consequences for individuals, and impose substantial fines on ADIs.”
People need to have faith in their bankers
In recent years, there has been growing community concern about culture and behaviour in banks, according to Treasury’s consultation paper.
“There have been too many instances where participants have been treated inappropriately by banks and related financial institutions,” it said.
It is “imperative that participants have trust in the system” if it is to operate in an efficient, stable and fair way.
“It must operate at the highest standards and meet the needs and expectations of Australian consumers and businesses,” the consultation paper said.
“Participants need to be confident that financial firms will balance risk and reward appropriately and serve their interests.”
Who should be held accountable?
One of the BEAR’s aims is to provide greater clarity about the responsibilities of the most senior bankers – but this poses challenges.
On the one hand, Treasury doesn’t want the net of responsibility to be cast so narrowly as to exclude people with effective responsibility for management and control.
On the other hand, it doesn’t want the net to be cast so wide that responsibility can be deflected. “The risk is that if everybody is responsible, nobody will be accountable.”
Anyone defined as an ‘accountable person’ will be held to “a heightened standard of responsibility and accountability” under the new regime.
Banks need to change their salary policies
In this year’s budget, the federal government made two announcements about senior bankers’ pay:
- Between 40-60 per cent of an executive’s variable remuneration will be deferred for at least four years
- APRA will have stronger powers to require lenders to change their remuneration policies when APRA believes they’re producing inappropriate outcomes
Treasury’s consultation paper said lenders should ensure that their payment structures did not incentivise a short-term focus or excessive risk-taking.
“Deferring variable remuneration is aimed at providing an appropriate period of time for risks to crystallise and for variable remuneration to be adjusted downwards as a result. The intention is to better align the realisation of risk with reward,” it said.
“A potential consequence of requiring variable remuneration to be deferred is that firms may adjust pay structures, shifting the balance of payment from variable to base remuneration.
“As a result, individuals may face reduced incentives to engage in, or create a culture of short term excessive risk taking.”
The BEAR’s next step
The Treasury has invited people to comment on its consultation paper, with submissions due by 3 August.
For the BEAR to become law, the government would then have to introduce new legislation, which would then have to be approved by parliament.
Given the timeframe, it is unlikely that any new rules would be introduced in 2017.