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Tapestry
Alert: Financial Services - Australia
Proposed
Remuneration Regulations
October 2017
Dear Client
New
regulations in Australia will introduce a brand new regulatory
regime for the financial services sector similar to the UK’s regime
to by 1 July next year.
The Australian government has published proposals for a Banking Executive
Accountability Regime Bill (the BEAR!) which is intended to
strengthen accountability, compliance and discourage excessive risk
taking in the banking sector. A helpful executive summary was published alongside the
proposals.
Which firms
are in scope?
These new
rules apply to ‘authorised deposit-taking institutions’ (ADIs) in
Australia that are authorised as such by the Australian Prudential
Regulation Authority (APRA)
and subsidiaries of ADIs in Australia and overseas. This does not
include a foreign ADI, unless it operate a branch in Australia
which will be caught. Exemptions from compliance with certain
aspects of BEAR can be given to a particular ADI or class of ADIs
although it is unclear in what circumstances such exemptions would
be given. ADIs are classified as either small, medium or large
depending on the value of their assets.
Which staff
are covered by the regs?
The BEAR
imposes a stronger accountability framework on ‘accountable persons’
in ADIs. These are people that hold a position in the ADI or its
subsidiary and have actual or effective management or control of
the ADI or its subsidiary or a significant part of the ADI or
subsidiary. There are various roles and responsibilities which
automatically designate someone as an accountable person (e.g.
being a Board member or having management responsibility).
Accountable person includes the head of an Australian branch of a
foreign ADI.
What are
the key features of the BEAR?
- Clearly defined accountability statements
and accountability maps for ADI groups;
- A register kept by APRA of all accountable
persons (ADI’s must apply to APRA to register their senior
people as accountable persons);
- Adoption of a remuneration policy
consistent with the BEAR;
- Deferral of 10, 20, 40 or 60% of variable
remuneration for accountable persons for a minimum of 4 years
(dependent on if it is a small, medium or large ADI and
whether the accountable person is the CEO) - an ADI can apply
to APRA for approval of a shorter deferral period;
- Anti-avoidance rules relating to the BEAR
obligations; and
- Significant civil penalties for
non-compliance (including up to AUD210 million fines);
- Expanded regulatory and investigatory
powers for the APRA.
When will
the BEAR come into force?
A 7 day
consultation period ended on 30 September 2017. The BEAR will now
proceed through the legislative approval process and may be subject
to amendment. In its current draft, the BEAR will come into force
on 1 July
2018, although the rules applying to variable
remuneration will only apply to awards granted on or after 1 January 2019.
There will however be numerous compliance requirements before 1
January 2019.
Tapestry
Comment
The BEAR is an
ambitious revamp of the Australian FS landscape. It proposes an
entirely new regulatory framework. The reaction from local industry
and stakeholders has been mixed. The 7 day consultation period has
been criticised as being insufficient to allow proper responses.
The Australian
Bankers Association has raised various concerns (in general that
the bill is too wide reaching and lacking in detail many areas).
Concerns include that 1 July 2018 is too soon a deadline for
commencement, the BEAR applies to all subsidiaries of an ADI group
without distinguishing which subsidiaries are of significance to
the group, the accountable persons definition catches too many
people, the definition of remuneration is too wide and catches
retention awards and buy out awards and there is no detail about
when exemptions from the BEAR may be granted.
July 2018 may
not give affected organisations as much time as they would wish to
become compliant. By way of comparison, the UK’s regulatory
framework was rolled out over several years during which time
numerous guidance notes and statements were released.
The BEAR uses
the UK framework as its template and so many of its requirements
will be familiar to UK regulated entities. There are clear
similarities, particularly with regard to the requirements to
produce accountability statements and maps. Groups caught by the UK
and Australian rules may wish to use experiences from the
implementation of UK requirements when implementing the new
Australian rules.
As the 4 year
deferral may be longer than currently used, with a 3 year deferral
being the global standard, with the notable exception of UK
regulated firms which are often subject to longer deferral periods,
it will be important for firms to communicate these changes to
participants well in advance.
The proposals
provide for some transitional arrangements, with reference to
existing employment contracts being required to comply with the
BEAR’s deferred remuneration requirements by 1 January 2020.
However, as, for example, deferred remuneration is usually dealt
with separately to the employment contract, we hope that further
guidance is published to clarify the position ahead of the 1 July
2018 implementation date.
These rules
are currently in draft and are subject to change. Once the
proposals are final, we will publish a detailed newsletter
identifying the key final rules.
If you
have any questions about this, or anything else, please do ask - we
are delighted to help!
Jordan & Jessica
Jordan Levy
Jessica Mitchell
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