Since the GFC there have been more than 17 Inquiries and Reviews into the AFS, with an emphasis on poor bank behaviour and bank culture.
There is a constant flurry of commentary in the media regarding our banks - scandal about banks manufacturing defaults under customer loans; changing the goal posts on customers without any proper basis whatsoever; inherent banking culture issues; remuneration of executives; and the nature of statements and submissions made by the CEOs of the Big 4 banks at recent parliamentary Inquiries and Reviews.
Why is this happening, and what is being done about it?
Since the GFC there has been an intense focus on our banking sector. There have been more than 17 Inquiries and Reviews into the Australian Financial Sector (AFS) with an emphasis on poor bank behaviour and bank culture. Bankwest and CBA became a focal point of certain Inquiries due to their post GFC conduct – there were numerous allegations of these banks manufacturing defaults and impairing their customer loans to reduce their risk profile in certain parts of their lending portfolio. Since then we have seen the Inquiry into the Impairment of Customer Loans, the Financial System Inquiry, Inquiry into the Post-Global Financial Crisis Banking Sector, to name a few. Bankwest and CBA, it seems, were not alone acting inappropriately.
The volume of recommendations made by the various Inquiries and Reviews is astonishing when compared to those recommendations that have actually been implemented. Disappointment has been rife within the community because the change that was expected to follow the Inquiries and Reviews was not delivered. A wide range of voices across the community have called for government intervention, and the government has hit back with several measures announced as part of the 2017 Federal Budget.
In its Budget this year the government has undertaken to execute an ‘overhaul of the financial system’ in Australia, which it says will ‘bring forward a comprehensive package of reforms to strengthen accountability and competition’ within the banking industry. Of the measures to be implement is the highly topical and controversial Banking Executive Accountability Regime, referred to as BEAR. BEAR aims to improve accountability in the financial sector by:
- Establishing expectations of Authorised Deposit-Taking Institutions (ADIs) and their senior executives and directors; where ADIs do not meet these expectations, civil penalties will apply;
- Increasing powers of the Australian Prudential Regulation Authority (APRA), the prudential regulator of the Australian financial services industry, to remove directors and senior executives from APRA-regulated institutions;
- Introducing powers to enable APRA to impose penalties on ADIs appropriately, monitoring the suitability of executives;
- introducing a requirement that senior executives and directors of ADIs be registered with APRA prior to appointment, and maps of their roles and responsibilities be provided to APRA; and
APRA will have stronger power to require ADIs to review and adjust remuneration policies, and variable remuneration for ADI senior executives will be deferred for at least four years to ensure accountability for their decisions.
There has been some criticism of BEAR from the banks and the Australian Bankers’ Association (ABA) with the approach taken by the government – some suggesting that the increase in APRA’s powers will interfere with corporate governance of the banks; a level of confusion as to what duties will override existing duties; how reporting is intended to take place; and whether adequate interest in senior executive and director roles in banks will be able to be maintained.
On the other hand, many have welcomed the government’s unprecedented approach to deal with the fundamental issues in the banking sector, finally placing the interests and treatment of consumers ‘front and centre’ which is where they should be. If the banks conduct themselves appropriately and meet the new set of expectations to be set by APRA, then arguably any intervention by APRA in respect of senior executives, directors, remuneration and penalties will not be necessary.
Of course, it is far too early to make an assessment as to the likelihood of BEAR achieving the Government’s objectives. The Consultation Paper was only released a few weeks ago and the consultation period has just closed. Far greater detail needs to be understood and assessed.