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BEAR update: a case of regulatory creep in Australia?

Chris Hamblin, Editor, London, 14 January 2018

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In September Australia's Turnbull Government published a Bill to give the Australian Prudential Regulation Authority fresh powers of enforcement, along with custodianship of the Banking Executive Accountability Regime, the country's hasty answer to the British Senior Managers and Certification Regime. Regulators now want to extend it to the rest of Australia's financial sector.

'BEAR,' as it is known, is to be as swift in its implementation as it was in its conception. The Government allowed only five working days for popular submissions after it published the Bill and now anticipates an effective date of 1 January 2019, come what may.

Power to the prefect

The Treasury Laws Amendment (Banking Executive Accountability and Related Measures) Bill, which is now before Parliament with a view to amending the Banking Act 1959, proposes to arrogate sweeping powers to APRA. If all goes to plan, it will be able to disquality any accountable person at a financial institution at seven days' notice, without issuing a court order and without having to explain itself. The only appeal possible is to be by judicial review, under which a decision by a public authority such as APRA can only be set aside if it exceeds the powers that Parliament has granted to that body. Some Australian lawyers believe that this flies in the face of natural justice.

A person is an accountable person of an authorised deposit-taking institution or subsidiary thereof if he holds a position there and is responsible for the management or control of it or of a substantial part or aspect of its operations.

It is always possible for the stricken person to send APRA a begging note in which he tries to justify his actions during the seven-day period, but APRA then will have no duty to keep his submission confidential and will, if the Bill passes in its present form, be allowed to share it with any member of the public it thinks fit.

Examinations dominate Schedule 2 of the Bill. The term 'examination' in US regulatory parlance refers to a regulatory visit; this is not the meaning of the term in the Bill. Instead, according a new section 61A, APRA will be able to call people in for questioning. This process is to be an 'examination' on oath and the person who appears before the investigator is to be the 'examinee.' Failure to attend or otherwise comply is to be an offence, whose punishment is to be 30 penalty units (Australian judges lost their discretion to set sentences long ago). If the investigator gives a copy of a document to someone under certain circumstances and he misuses it by breaking the conditions, he may go to prison for six months. The Bill does not purport to limit APRA's new powers to the BEAR project, so this is to be a step-change in Australian financial regulation in general.

Insurance against breaking the rules

Clause 37KB, moreover, promises to ban the related body corporate of an authorised deposit-taking institution (whether by agreement or by making a payment and whether directly or through an interposed entity) from indemnifying that institution against the consequences of breaching an obligation under Part 1 of the Bill and/or from paying, or agreeing to pay, a premium for a contract insuring the institution against the consequences of a breach. The now-defunct British Financial Services Authority issued a blanket ban against this form of activity throughout all financial services (or 'investment business,' as the FSMA has it) in 2004.

Vultures gathering

Not only is the BEAR Bill swiftly assembled, arbitrary and significant beyond the area of management accountabililty; it might also be a portent of things to come in the financial world outside banking. This is partly because the British SM&CR, its blueprint, is being extended everywhere else. It is also because influential Australian regulators are keen on its extension. Greg Medcraft, ASIC's outgoing chairman, said in his address to the Parliamentary Joint Committee on Corporations and Financial Services in October that it should be extended to insurance companies and to financial services beyond. In August he told Money Management: “(A)t the moment it is restricted to banks, while in the UK it extends to insurance companies. That might be an area to be thinking about as a next phase. In the UK it has rolled out even beyond that, to financial services entities. When you think about it, fundamentally it is a great concept because it is about individual accountability. I think that is something that has probably been sorely lacking, because often, as you know around the world, institutions and then shareholders get penalised because management behave badly.”

Wayne Byers, the chairman of APRA, told a Parliamentary committee roughly the same thing in September: "Once the new framework is put in place for banks, APRA will consider whether some of the concepts within the regime have wider application. To the extent that they can add to community trust and confidence that all prudentially-regulated institutions are well-governed and prudently managed, then they might have significant benefit more broadly."

Moreover, the Bill calls on firms (as does the UK's Financial Services and Markets Act 2000) to deal openly and co-operatively with the regulator. It is not beyond the bounds of possibility that APRA might take this as a pretext to abrogate legal professional privilige, in which case judicial review would at some time become inevitable.

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