In May's federal budget, the Australian Government looked forward to the creation of a Banking Executive Accountability Regime, modelled on the British Senior Managers' Regime. Its stated aim was to increase accountability in the financial sector and make it more competitive.

A budgetary document entitled "Banking and Financial Services: A more accountable and competitive banking system" contains two broad policies of which the BEAR is one, the other being a new dispute resolution framework aimed at 'empowering' the customers of banks, pension companies and other financial firms. On the subject of financial firms looking after customers' interests, the Australian Treasurer admits that "too often banks and the sector have not met those expectations."

The BEAR's anatomy

The BEAR is to have five main components.

• The registration of senior executives and directors of authorised deposit-taking institutions (ADIs). These firms include all banks. Not only must each one sign a register kept by the Australian Prudential Regulation Authority (APRA); it will also have to tell APRA about every senior appointment it is about to make.

The paper warns that "where senior executives have been found not to have met expectations, they will no longer be able to be registered or employed in senior roles."

In line with the British model, ADIs will have to provide APRA with "accountability maps" that show senior executives’ jobs and responsibilities. The idea is to help APRA spot any problems that might emerge under their management.

• Stronger powers by which APRA might remove and disqualify senior executives and directors. The Government wants to ensure that anyone who is removed or disqualified by means of these powers can appeal to the Administrative Appeals Tribunal.

• More 'expectations' and more onerous penalties. The new regime will expect ADIs and their executives and directors to act "consistently with good prudential outcomes." It will expect integrity, due skill, care, diligence and prudence to be the order of the day.

A new civil penalty will be created with a maximum penalty of A$200 million (US$158 million) for larger ADIs  that fail to meet these new expectations and of A$50 million (US$39½ million) for smaller ADIs. Here, rather irrelevantly, the Treasurer observes that this ought to "increase incentives for ADIs to put in place processes to ensure they conduct their operations appropriately."

APRA will also be able to impose penalties on ADIs that do not monitor the suitability of their executives to hold senior positions in an appropriate way.

• Rules to govern remuneration. The Government will soon insist on a minimum of 40% of an ADI executive’s 'variable' remuneration (additional payments or benefits depending on performance or, in certain cases, other contractual criteria) – and 60% for certain executives such as the CEO – being deferred for a minimum period of four years. This, it hopes, will increase the financial ramifications for these people of decisions whose consequences may take a long time to materialise. Because of this, the Government trusts, executives will place greater focus on long-term outcomes than they would in the case of shorter deferral periods.

The Government will also give APRA stronger powers to require ADIs to review and adjust their remuneration policies as it sees fit.

• Funding. The Government will give A$4.2 million (US$3⅓ million) to APRA over a period of four years so that it can bring these new measures into force. It will also pay out A$1 million (US$789 million) per annum for a fund to ensure that the regulator has enough resources to "enforce breaches of the new civil penalty provisions."

Other policies

With a phrase that conjures up visions of a misshapen monster with more than one spine, the Australian government refers to the financial services sector as "a backbone of the economy." Its other policy to shake the system up is the creation of a new "one-stop shop" to deal with all financial disputes, including pensions (always known in Australia as superannuation or 'super') and provide access to free, fast and binding dispute resolution. The Australian Securities and Investments Commission (ASIC) will be provided with stronger powers to oversee it. ASIC will have a "general directions" power to make the new body comply with the law and with regulatory requirements.

Retail banking: a review by the industry

Shortly before the Budget in April, a well-trusted independent reviewer by the name of Steve Sedgwick published a report on product sales commissions and product-based payments in retail banking at the behest of the Australian Bankers' Association. It dealt with payments linked to the number or value of products sold, offered, or distributed to retail and small business customers.

The report makes 21 recommendations for change. Although the extent of change the ABA requires of its member-banks will vary, almost every bank will have to change at least some of its practices to comply. The intention is that the relevant retail bank staff (especially mortgage sellers) and their managers:

• no longer receive incentives derived directly or solely from sales performance; and
• instead derive their eligibility to receive any personal incentive payments from assessments of a range of their activities, of which sales (if included at all) will not be the dominant component.

The maximum available payments will be scaled back significantly for some jobs. The report also hopes, somewhat piously, that each bank will look at the issues holistically. This means that many banks should also revise the way they set targets, manage performance, train managers and evolve a 'customer-centric' culture.

The need for change in the mortgage broking sector is reinforced by the Australian Securities & Investments Commission’s (ASIC's) recent report on that sector.

The report says that banks should begin the implementation process as soon as they can 'amend' systems and other processes, with 2020 as the ultimate deadline.