Banking and Finance Disputes Monthly – Regulatory Spring Clean

28 September 2017

September has seen a lot of government regulatory activity in the regulators’ continued effort to spring clean the financial services sector and the corporate sector at large. This follows a hive of activity in recent months across the regulatory spectrum, with regulators such as AUSTRAC, APRA (its independent inquiry into the Commonwealth Bank) and the ACCC (first criminal successful prosecution for cartel conduct in August 2017) all muscling in on the action.

ASIC’s Bank Bill Swap Rate (BBSW) action comes to a head in October with the BBSW civil penalty proceedings against NAB, ANZ and Westpac hearing set down for three months commencing on 22 October 2017.

This article focuses on key developments that have taken place in September in relation to:

  1. the Bank Executive Accountability Regime that was announced in the Government’s 2017-18 Budget;
  2. an ASIC enforcement review;
  3. the introduction of the Australian Financial Complaints Authority (AFCA); and
  4. recommendations that have been made for whistle-blowers.
BEAR Regime

The Federal Government has taken a step towards introducing the Bank Executive Accountability Regime (BEAR), similar to that in the UK (the SMR – Senior Manager Regime) and in Hong Kong.

The Treasury Laws Amendment (Banking Executive Accountability & Related Measures) Bill 2017 (Bill) which sets out the proposed BEAR regime was published by the Government on Friday 22 September 2017, allowing only a seven day consultation period.

The purpose of the BEAR regime is to strengthen the responsibility and accountability framework for the most senior influential directors and executives in authorised deposit taking institutions (ADIs). It forms part of APRA’s regulatory regime.

The BEAR regime is proposed to take effect from 1 July 2018 and will require ADIs to put in place designated accountable persons and provide accountability maps and statements clearly defining each individual’s responsibilities. If an ADI breaches its BEAR obligations, it is proposed that the civil penalties of up to $210 million for a large ADI can be imposed by the Federal Court. If individuals breach their BEAR responsibilities, they will not face civil penalties under the regime, but APRA will have the power to disqualify a person from acting in that position. Additionally, and importantly, in an attempt to deter accountable persons from engaging in behaviours that are inconsistent with their BEAR obligations, the regime places obligations on the ADI to introduce remuneration policies that defer a minimum percentage of an accountable person’s variable remuneration by a minimum of four years, and reduce the variable remuneration if the person breaches their accountability obligations.

The accountability obligations will be on Board members or senior executives with responsibility or control of significant or a substantial part or aspects of the ADI group. However, the obligations will also extend to individuals of subsidiaries where those activities are substantial, to ensure that an accountable person will have responsibility in those circumstances. The obligations will also apply to a local ADI of a foreign ADI.

The accountable person has to carry out his or her obligations with honesty and integrity, and with due skill care and diligence. He or she has to take reasonable steps to prevent matters arising that affect the prudential standing or reputation of the organisation, and they must deal with APRA in an open, constructive and cooperative way. Legal professional privilege is not displaced.

The accountable persons include the Board (including Non Executive Directors) and management personnel that directly report to the Board such as the CFO, COO, CRA, CIO (including IT), internal audit head, compliance head, human resources head and the person responsible for anti-money laundering.

The Explanatory Memorandum states that an accountable person could include the head of a business line or a senior executive responsible for major business activity in the subsidiary.

The regime will apply to an ADI or its subsidiaries where the person has actual effective management or control of the ADI, a subsidiary or a significant or substantial part of the ADI’s subsidiary operation.

The liability of an ADI, including for a civil penalty, is not insurable, nor can an entity indemnify or take out an insurance policy to indemnify an executive. However, an indemnity or insurance cover for legal costs is permitted under the regime.

Under the regime, APRA will have investigation powers to investigate suspected contraventions, including the power to carry out private examinations similar to the examinations carried out by ASIC pursuant to section 19 of the Australian Securities and Investments Commission Act 2001 (Cth).

The BEAR regime will not apply to insurance companies (unless they are subsidiaries of an ADI). However, APRA has said on more than one occasion, the most recent being to the House of Representatives Standing Committee on Economics on 13 September 2017 that it will consider, once the new framework is put into place for banks, whether ‘some of the concepts within the regime have wider application … they might have significant benefit more broadly [to all prudentially regulated institutions]’.

ASIC Enforcement Review

ASIC at present has an ASIC Enforcement Review underway and issued a consultation paper on 6 September 2017, seeking responses by 4 October 2017. It is seeking to widen its banning powers under section 920A of the Corporations Act 2001 (Cth) to enable ASIC to ban a person who performs a function in a financial service business of any sort. Presently, ASIC has the power under section 920A to ban people from providing financial services. The extension of its powers under this section is aimed at preventing individuals from still being involved in a financial services business but not providing financial services advice themselves. It would also give ASIC the power to ban someone from any of the financial services business.

Introduction of the Australian Financial Complaints Authority

Following consultation, on 14 September 2017 the Federal Government issued its revised legislation to set up its new external dispute resolution scheme, which will start up on 1 July 2018, the Australian Financial Complaints Authority (AFCA).

AFCA will combine the Financial Ombudsman Service (FOS) and the Credit & Investment Ombudsman (CIO).

Financial firms will be required to be members of AFCA.

Whilst FOS and CIO have a claim limit of $500,000 with a compensation cap of $309,000 for small business, the new body will have a claim limit of $1 million and a compensation cap of not less than $500,000. For credit disputes, small businesses will now be able to bring a claim where the credit facility is up to $5 million, with a compensation cap of up to $1 million. Additionally, there will be no monetary limits for superannuation claims.

One of the changes to the Bill was to the transitional arrangements. The revised Bill requires membership of FOS and the CIO to be maintained for up to 12 months following AFCA’s commencement on 1 July 2018, to enable the resolution of outstanding disputes prior the cessation of the two schemes. There will be stakeholder consultation about AFCA’s terms of reference. ASIC will also have directions power to increase the limits on the value of claims or remedies that may be awarded.

Whistle-blower Protections

Greater whistle-blower protection has been high on ASIC’s agenda for a while and on 13 September 2017 the Federal Parliamentary Joint Committee on Corporations and Financial Services issued its report on Whistle-blower Protections. The Committee has recommended a rewards system for whistleblowers and the appointment of a Whistleblower Protection Authority.

The Committee recommended that a reward be given to any whistleblower by the Court or other body imposing the relevant penalty against a wrongdoer, with the reward amount to be determined within the prescribed body’s absolute discretion within a legislated range of percentages of the penalty.

The percentage allocated would be determined by a consideration of factors including the degree to which the whistleblower’s information led to the imposition of the penalty, the timeliness of the disclosure and any involvement by the whistleblower in the conduct for which the penalty was imposed. The recommendation for a reward mechanism was made in spite of evidence that a bounty system provided enough of an incentive to create a legal services market for whistleblowers.

This article was written by Jonathan Tapp, Partner.

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