Culture-related Regulatory Enforcement: Where might the Australian ‘BEAR’ go hunting?

This two-part briefing has been prepared for in-house legal, risk and compliance professionals in financial services firms, including insurance and superannuation entities.

Part one of this briefing covers the following matters:

• Introduction to the “Banking Executive Accountability Regime” (BEAR)

• What is required under the regime and penalties for individuals and companies

• BEAR’s imminent expansion to all financial services entities.

Part two of this briefing covers the following matters:

• Recent culture-related enforcement action under the United Kingdom’s Senior Managers & Certification Regime, upon which the BEAR is modelled

• How the UK experience may inform how BEAR will evolve in the Australian enforcement context

• Practical steps for entities to take now to mitigate their risk.

Introduction

Australia is being hit by a regulatory wave in the wake of the Hayne Royal Commission’s findings of widespread misconduct in the financial services industry, characterised by numerous new laws and increasingly hawkish enforcement regulators. The expansion of the BEAR, which was purposively designed to drive up standards of culture in financial services, forms the backbone of Commissioner Hayne’s recommendations for improvement. That is not surprising.

In the wake of the global financial crisis, problematic corporate culture has been identified by policymakers and regulators as a key driver of poor conduct.[1] BEAR is a direct response within the financial services sector. However, while improving financial services culture is a commendable objective, there is rising concern given BEAR is formed of broadly constructed principles-based laws which are yet to be applied. There are very serious consequences, especially for individuals, for getting it wrong.

The Australian financial services industry does not know enough of what the future holds to efficiently mitigate the potential for breaching offences which are inherently subjective and difficult to define.

The issue is arguably not confined to the private sector alone; first, BEAR is about to be expanded across nearly the entire financial services sector, i.e. not just banks; and second, there are many Federal and State Government entities who are likely to be caught by this expansion, including public sector investment corporations with subsidiaries who hold financial services licences and publicly owned superannuation funds.

Fortunately, the United Kingdom offers some tea leaves which can be read by the legal, risk and compliance functions in Australian financial services entities to enable them to best advise their executives and board members. This is because BEAR is modelled on the UK Senior Managers & Certification Regime (SMCR), and the UK Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) are further along in their journey of culture-related enforcement actions. Examining their recent actions and key statements offers an insight for the Australian financial services industry as to the direction our regulators may take imminently. We cover this in part two of our briefing.

[1] See, for example, a speech by John Price, Commissioner, Australian Securities and Investments Commission at the AICD Directors’ Forum: Regulators’ Insights on Risk Culture (Sydney, Australia), 19 July 2017.

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