Bank reform to hold top execs accountable for breaches

The Australian 12:00am March 20, 2017

Richard Gluyas

It was revealed in The Australian last month that Scott Morrison had held talks with the major-bank chairs earlier this year about measures to combat the industry’s recurring governance and conduct lapses. The chairs are likely to meet with the Treasurer again before the proposed reforms are unveiled in the pre-budget period.

Both Treasury and the industry have been working on a local version of the so-called senior managers’ regime in Britain, which facilitates enforcement action against senior bank executives by requiring them to attest to their specific responsibilities.

The British rules require senior executives to sign off that they have taken reasonable steps to prevent regulatory breaches from occurring or continuing to occur in their area of responsibility.

Details of the local version are being kept tight. However, a senior banker told The Australian that there were “quite a lot of discussions” going on between Treasury and the major banks.

“The SMR (senior managers regime) is the model that the government is looking at,” he said.

Another industry leader said he was “not averse” to an senior managers regime, although he opposed some aspects of the British model because they “don’t work”.

A reversal of the onus of proof has caused particular concern, with executives held accountable for governance and conduct failures on their watch unless they can show they took adequate steps to prevent any wrongdoing.

Locally, some banks would also prefer the prudential watchdog APRA rather than Australian Securities & Investments Commission to be the responsible regulator, given that the Greg Medcraft-chaired ASIC has recently found its teeth in relation to the banks and had its budget restored.

Even so, ASIC is considered the frontrunner, given its status as the conduct regulator.

The senior managers regime, which took effect in Britain in March last year, is designed to trap executives in the enforcement net who had previously escaped due to vague reporting structures and ill-defined responsibilities.

Mr Morrison visited the Financial Conduct Authority in London in January to familiarise himself with the British approach.

The industry’s poor level of executive accountability has also been a strong focus of the House economics committee chaired by Liberal Party MP David Coleman. He quizzed the major-bank CEOs earlier this month on his proposal to name and shame the senior executives responsible for any area of the company where a significant breach of a licence condition had occurred.

The proposal would require the banks to publicly name the executive within five days of the incident being reported to ASIC, and disclose any relevant penalty including termination.

Despite a long list of recent transgressions in their banks, the CEOs were forced to reveal that no senior executive had been terminated.

All the CEOs objected strongly to the five-day reporting window proposed by Mr Coleman.

They also said the accountable executive had often left the bank by the time the particular problem had emerged, and in many cases the executive was only notionally responsible with no involvement in the misconduct.

Mr Coleman highlighted the view of ASIC chair Greg Medcraft that the major banks had a “poor compliance culture” and had repeatedly failed to protect the interests of their customers.

The committee’s report after the first CEO hearings in October pointed to an APRA information paper on risk culture that blamed the industry’s senior executives for its poor compliance culture.

“It is a culture that they need to be held accountable for,” the report said.

It said, as well, that the committee was aware of potential problems with the senior managers regime in the Britain. “In particular, concerns that parts of the regime may undermine businesses’ internal accountability structures, and that the SMR runs counter to traditional concepts of criminal and civil liability,” the committee said.