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29 May, 2018
On 7 February, Commonwealth Parliament passed legislation to implement the Banking Executive Accountability Regime (BEAR), to take effect in July for large Authorised Deposit-Taking Institutions (ADIs) and July 2019 for small and medium ADIs. The Australian Prudential Regulation Authority (APRA) will receive new powers to hold senior individuals within ADIs accountable. In parallel, the Australian Government has recently agreed with a recommendation by the ASIC Enforcement Review Taskforce that Australian Securities and Investment Commission (ASIC) be given complementary new powers to ban individuals who are not fit and proper persons from managing financial services businesses.
The expansion of APRA’s powers in relation to individual conduct arguably blurs and confuses the “twin peaks” approach to financial regulation in Australia. The twin peaks approach is the establishment of separate regulators for financial system stability (APRA) and market conduct and consumer protection (ASIC).
What are the implications for regulated entities of the growing duplication of powers and responsibilities between ASIC and APRA?
The expansion of APRA’s power into individual misconduct may create an additional burden on individuals subject to concurrent investigations by ASIC and APRA, and raise doubts about which regulator is responsible for holding individuals to account for misconduct. Ironically, the regime intended to hold individuals more personally accountable may risk making the regulators themselves less accountable. It could also potentially create new challenges for regulated institutions, which may have to deal with multiple regulators.
What are APRA's powers over individual conduct and how is that changing?
APRA already has the power to apply to the Federal Court for a disqualification order on the basis that a person is not a fit and proper person to be a director or senior manager. This power applies in the banking, superannuation and insurance sectors. APRA may also remove a director or senior manager by direction in writing if satisfied that the person is disqualified because of a relevant conviction, insolvency or overseas disqualification or does not meet the requirements for fitness or propriety set out in the prudential standards.
APRA’s Prudential Standard CPS 520 Fit and Proper requires regulated institutions to maintain a Fit and Proper Policy, ensure that fitness and propriety of responsible persons (including senior managers) are assessed and provide each responsible person’s personal details, main responsibilities and whether they have been assessed. The criteria for fitness and propriety are, in essence, that it would be prudent to conclude that the person possesses the competence, character, diligence, honesty, integrity and judgment to perform his or her duties properly, the person is not disqualified, and there is no conflict of interest that will create a material risk.
If APRA removes a director or senior manager under existing provisions, that decision is subject to internal and external administrative review, and ultimately judicial review.
Under the new legislative provisions introduced to implement the Banking Executive Accountability Regime, individuals will be required to act honestly, with due care, to cooperate with APRA and to take reasonable steps to prevent matters arising which could affect the prudential reputation of the ADI. APRA will gain the power to disqualify a person from being or acting as an accountable person if it is satisfied that the person has not complied with these new obligations. Although the exposure draft of the legislation did not provide for merits review of APRA’s disqualification decisions, merits review will be available under the legislation as passed.
How does that overlap with ASIC's powers?
ASIC has the power to make a banning order against a person, which prohibits the person from providing any financial services or specified financial services in specified circumstances or capacities. ASIC may make a banning order if it has reason to believe that the person is not of good fame or character, that the person is not adequately trained, or is not competent to provide financial services.
ASIC may also make a banning order against a person, which prohibits the person from engaging in any credit activities or specified credit activities in specified circumstances or capacities. The order may prohibit the person from engaging in a credit activity permanently or for a specified period.
In addition, the Australian Government is planning to implement changes which will give ASIC the power to ban individuals from performing a certain function in a financial services business, such as acting as a manager or controller, on the grounds that they are not a fit and proper person, not adequately trained or incompetent.
This proposed ASIC banning power would apply to financial services businesses and would not be limited to APRA regulated institutions. Further, unlike APRA’s powers under the BEAR, the power would not be limited to the most senior executives.
Once the Government implements changes to ASIC’s banning power, there is the potential for regulatory overlap with APRA’s powers under the BEAR, given both would involve the concept of ‘fit and proper’ and both apply to management of financial services businesses.
Dealing with two regulators
The current twin peaks model has been regarded as successful in part because the different goals of APRA and ASIC have been well understood. The twin peaks model was replicated after the global financial crisis in other countries including the United Kingdom, which created a Prudential Regulation Authority separate from the Financial Conduct Authority. In the UK, the PRA and the FCA are both involved in the implementation of a Senior Managers Regime (analogous to BEAR).
However, the fact that an individual’s conduct could simultaneously trigger APRA’s disqualification power and ASIC’s banning power gives rise to two risks for individuals who may be the subject of an investigation.
First, an individual could be subject to separate investigations by APRA and ASIC with respect to the same conduct, and those investigations could progress in different manner and at a different pace. Secondly, APRA and ASIC could take inconsistent approaches in the exercise of their powers to disqualify or ban an individual. Whilst APRA and ASIC have a history of cooperation under joint Memoranda of Understanding entered into in 1998, 2004 and 2010, it remains to be seen how they will coordinate their action in this regard.
For further information, please contact:
Andrew Carter, Partner, Ashurst
andrew.carter@ashurst.com
