Reflections on BEAR! What have we learned from banking accountability?

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Topics: Responsible Manager CPD | Non-financial risk | Conduct and Ethics

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As APRA-regulated organisations brace for yet another major regulatory change, this time in the form of the Financial Accountability Regime (FAR), we take a look at its predecessor to find out what lessons can be taken into the future of financial services.

Introduced in the wake of a series of scandals, the Banking Executive Accountability Regime (or BEAR) was viewed as somewhat of a panacea for the ailing financial sector, intended to raise the bar on conduct and culture across Australia’s banking industry. Three years on and it appears that the effects of the BEAR are largely positive, with minimal side-effects.

A study by Macquarie University, released in February 2021, showed that the BEAR has “resulted in greater clarity around individual accountabilities which has brought about numerous governance benefits by changing behaviours and risk culture in the banks for the better”. 80% of bankers surveyed by Macquarie said they were ‘very clear’ about their responsibilities, and 63% believed that the regime had changed banker behaviour for the better.

According to APRA – which conducted its own review of how the BEAR had been implemented by the Big 4 Banks in early 2020 – the regime has not only improved end-to-end individual accountability, but also sharpened boards’ focus on executive actions.

There is similarly clear evidence to show that compliance, legal and risk teams are playing a greater role in decision-making as a result of the BEAR.

This is good news not only for ADIs but also for the wider financial industry as we prepare for the expansion of the accountability regime later this year. However, there are some learnings from both the APRA review and the Macquarie research which could significantly benefit all APRA-regulated institutions as they begin to implement FAR.

Defining and updating accountabilities

A key element of FAR (as with its predecessor) is the assignment of specific responsibilities to individuals (known as ‘accountable persons’). APRA’s review found that all large ADIs had a well-developed approach to defining accountabilities, with significant investment made prior to the BEAR commencing to create ‘accountability statements’.

The positive effects of clearly defined individual accountabilities include faster decision-making and problem resolution, and greater care and diligence at a directorial level.

However, it is important that robust processes for reviewing and updating accountabilities are also established. Regulatory changes, staff restructuring, industry disruption and new business priorities are all factors that influence the roles – and therefore responsibilities – of senior financial executives. For this reason, APRA recommends organisations centralise their BEAR functions with human resources, so they can ensure accountability statements remain aligned to job descriptions and to manage handover when one executive is replaced with another.

Monitoring behaviours and actions

Not all businesses will discharge their responsibilities in the same way, and APRA has been careful not to dictate how organisations must demonstrate they have taken ‘reasonable steps’ to meet their accountability obligations. This leaves room for individual businesses to determine the best fit for their compliance framework, based on things like size, business priorities and level of skill.

That said, it is advisable that routine monitoring of the practices accountable persons are employing to meet their obligations is undertaken. This is because one of the primary objectives of an accountability regime is to empower boards to challenge the actions being taken by senior executives. Without visibility of the steps taken to reach a particular decision, it is difficult for boards to identify non-financial risks or to take action against misconduct.

APRA recommends that organisations have a clearly defined process as to how a person must demonstrate they have taken ‘reasonable steps’ (for example, retaining emails or detailed notes). This will not only improve reporting on behaviours but also provides opportunities for best practise examples to be shared across the organisation.

Aligning management’s skills

The success of any executive accountability regime is also reliant on the capability of senior staff to manage and delegate responsibility effectively. We have talked previously about the need to appropriately align the skills of key staff against their compliance responsibilities and to maintain ongoing training to ensure that capability remains up to date. In organisations where accountable persons cascade certain responsibilities to their direct reports, it is vital that those managers do so effectively, in order to minimise risk. For this reason, all organisations would do well to formally review the leadership skills of their accountable persons and implement training programs where appropriate.

As Macquarie Professor Elizabeth Sheedy notes, “It is a big commitment, but if you are going to earn the big bucks and take on senior roles, most people in the country would say you have to have the skills and be able to handle the pressure.”

Ultimately, the rewards of embracing the BEAR seem to have well out-weighed the negatives in Australia’s banking sector. By getting on the front foot and taking steps now to instil a culture of responsibility, your organisation can also enjoy the benefits of greater executive accountability.

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