1

being made

• Requirement to complete accountability maps for senior executives

and directors that have been found not to have met the new

expectations

such as conducting business with integrity, due skill, care and

diligence and acting in a prudent manner

• Introduction of civil penalties for ADIs who fail to meet the new

expectations (e.g. hiding misconduct), or do not appropriately

monitor suitability of executives to hold senior positions

deferred for a minimum period of four years, increasing to 60%

deferral for certain executives such as the CEO

• APRA will also be given stronger powers to require ADIs to review

and adjust their remuneration policies when APRA believes such

policies are not appropriate

sector has been coming from a wide range of voices across the

community. A key area of concern is the perception that banking

executives have not been held to account for the various scandals

regarding the mistreatment of customers

through the introduction of the Banking Executive Accountability

Regime (‘BEAR’ or the ‘Regime’) - which is part of a number of

budget measures that impact Authorised Deposit-taking

Institutions (ADIs), including banks. The Regime appears to echo

the Senior Manager and Certification Regime (SM&CR) in the UK,

which came into force last year

• In addition, the recently released Sedgwick Retail Banking

Remuneration Review Report, initiated by the Australian Bankers’

Association, made 21 remuneration and governance related

recommendations designed to improve the culture of the banks

through ensuring an increased focus on customer and a reduced

focus on sales outcomes

• The announcements also come at a time while APRA is reviewing

the implementation of the existing remuneration requirements

contained in CPS510 1

Remuneration is just one element of the Regime, all of which are designed to make it easier

to “hold executives to account”.

We believe that trust needs to be rebuilt, and pay design and quantum plays an important role in this. There is little doubt that BEAR, in conjunction with the

Sedgwick recommendations, will result in significant changes in remuneration approaches at ADIs but it remains to be seen whether this will lead to a material increase in trust.

The current Government proposal is light on detail, and we can expect further information when the Government puts forward a bill containing the Banking

Executive Accountability Regime.

There are significant implications from a remuneration perspective. We consider these issues on the following pages.

2

• There are a number of key details that will need to be confirmed to

determine the impact of the deferral requirements:

- What is included in the definition of ‘variable’ pay, with a

critical issue being if long term incentive (LTI) awards are

included, whether they are captured at grant date or vesting,

and how they are valued

- What are the restraints on the vesting schedule, and if it can

occur on a pro-rata basis over the minimum period of four years

- If there will be a requirement for deferral to be in equity

instruments, cash or a combination of both

- If there will be a de minimis rule where variable pay below a

certain threshold could be excluded from the deferral rules.

This could be appropriate, for example, in years where bonus

payments are low, or LTIs do not vest

- The interaction with leaver provisions, and whether deferral is

expected to remain in place after an individual has left an organisation

• For senior executives in the large Australian banks the impact may be

minimal, with deferral rates typically being 50% of annual incentives,

and higher if LTIs are included. However, deferral periods will, in

most cases, need to be extended to four years

• It is potentially a greater concern for smaller Australian and foreign

owned ADIs, who may have lower levels of deferred incentives and

smaller LTI grants

• Competitiveness for talent where individuals can easily move between

FS or other industries, or other jurisdictions

• Potential barriers to entry and competitiveness issues for smaller

banks, branches of foreign banks, building societies, and credit

unions. Other jurisdictions have allowed a proportionate approach to

be taken, considering the size and complexity of the institution, with

respect of deferral requirements

• Greater levels of deferral into equity will aid executives in achieving

minimum shareholding guidelines

• The objective of the deferral is to stop executives being paid for bad

decisions which take a long time to materialise

• However, it is not clear if the intention is to extend the current

regulatory requirements to adjust performance-based components of

pay downwards (where appropriate)

• The requirements for malus is not new for the industry, however the

government may expect ‘malus’ to be used more frequently. This is in

contrast to the current approach taken by many institutions, that any

action that warrants the application of malus warrants dismissal, but

does not often also lead to the use of malus

• APRA will also be given stronger powers to require ADIs to review

and adjust their remuneration policies when APRA believes such

policies are not appropriate

• It is not yet clear how APRA’s new powers will interact with the

existing responsibilities and rights of Boards and shareholders. For

example, will APRA’s powers override shareholders rights with

respect of approving equity grants to executive directors? The BEAR

Bill will need to provide clarity about how these powers interact

• Coupled with the the Sedgwick recommendations this places

significant restrictions on remuneration design

• Added complexity and confusion to the already blurred sharing of

responsibility for executive remuneration between policy makers,

regulators, shareholders and boards

• Regulation has the potential to drive homogeneity in reward design,

and this will force organisations to consider how they emphasis other

elements of the employee experience when they look to develop a

unique and compelling employee value proposition

At first glance, the proposed changes may not necessarily appear that onerous. However, their implementation, in combination with the Sedgwick

recommendations, are likely to result in significant changes to structures, potentially more so for small to medium banks and other ADIs.

3

remuneration. However, ARPA’s review of the implementation of

CPS510 may well consider how the quantum of variable pay relates to

prudential risk taking, and how effective bonus caps have been in

other jurisdictions

• While not specifically aimed at executives, the Sedgwick review did

call for a reduction in variable pay

• Increased deferral requirements will reduce the perceived value of

incentives - and if anything place upward pressure on incentive

• The increased regulatory and community scrutiny is going to make

any increase is variable pay difficult, which would, in a competitive

market, put pressure on fixed pay

• The introduction of the bank levy follows a number of other

regulatory interventions that have impacted the banks’ profitability

• This is coupled with Sedgwick’s recommendations that performance

has to be more holistic, and take into account a wide range of measures

• Banks may review the use of profitability measures, and consider

what is included or excluded in the definition

• It will be increasingly difficult to set financial performance targets

(especially over the long term)

• Boards, remuneration committees and employees are going to need to

become more comfortable using their judgement when making

performance assessment and determining bonus outcomes. Boards

and remuneration committees will need to stand behind their

decisions when applying discretion, and can expect even more

scrutiny by shareholders and shareholder advisory bodies

The intent of the remuneration restraints are to ensure ADIs can adjust bonuses down when the consequences of decisions materialise, even if this is a

number of years after the decision was made and the associated bonus awarded. Although a simple concept, a significant amount of detail needs to be

finalised before the measures can be implemented. The current remuneration models adopted by the major banks already align with the intention, and will

likely satisfy many aspects of the proposed requirements. It is likely to be a greater concern for smaller Australian and foreign ADIs.

The Government’s proposal to give APRA additional powers to require ADIs to review and adjust their remuneration policies when APRA believes such

policies are not appropriate is very significant. APRA’s new powers will have the potential to add more confusion to the already blurred sharing of

responsibility for executive remuneration between policy makers, regulators shareholders and boards. Pressure will also continue to build on aligning

remuneration, performance and the shareholder experience.

Identifying the most appropriate performance measures and the setting of targets will remain a key focus area, as will implementing these changes in light

of the Sedgwick recommendations and its focus on conduct and culture.

Notwithstanding the proposed remuneration requirements, we believe that there is an opportunity to review remuneration strategies from a first principles

standing, to ensure that they are best-fit and tailored to the specific needs and circumstances of each organisation. Measures to rebuild trust are also vital.

This may include improving oversight of pay fairness throughout the organisation (not just a focus on the top), more meaningful disclosures of pay and its

link to performance, prudential risk and good customer outcomes, and a greater need for judgement and discretion when making remuneration decisions.

4

The SM&CR and Senior Insurance Managers Regime (SIMR) came into force on 7

March 2016, replacing the Approved Persons Regime, with the primary objective of

strengthening accountability to support a change in culture at all levels in banks,

building societies, credit unions and PRA-designated investment firms. SM&CR and

SIMR require firms to assess the fitness and propriety of certain employees who

could pose a risk of significant harm to the firm or any of its customers; require firms

to allocate Prescribed Responsibilities across their Senior Managers, forming part of

a governance map; and meet the Conduct Rules with notification requirements in

certain circumstances.

The Certified Regime (CR), applying to banking institutions, captures ‘material

risk-takers’. Firms are required to identify individuals, assess and re-assess the

fitness and propriety of certified staff on an annual basis, and meet the Conduct Rules.

• It is not yet clear how the Regime will apply to Groups that contain

an ADI and have other operations and permissions, or international

banking groups with subsidiaries or branches operating in Australia

• Competitiveness for talent where individuals could more easily move

between FS or other industries

• Political implications within diversified groups with a ADI

• We expect some flexibility for ADIs to undertake an accountability

mapping exercise. It is not clear which accountabilities should be

included in this mapping, and therefore which senior executives

and/or directors are likely to be in-scope of BEAR

• For example, APRA’s current definition of Responsible Persons, and

possibly the broader set of individuals covered by the Remuneration

Policy (i.e. select Responsible Persons, risk and financial control

staff, and material risk takers)1 could be a starting point.

• Identifying the right individuals will be highly personal, political and

impactful. Individuals identified will have very personal

accountabilities, be subject to remuneration requirements, and

specific conduct expectations

• Review of organisational structures to understand where authority

and accountabilities fall. Where matrix structures are used, consider

how the necessary clarity and alignment be achieved

with integrity, due skill, care and diligence and acting in a prudent

manner) will apply to senior executive and directors in addition to the accountabilities

• Requires embedding these conduct expectations in internal

processes, systems and governance to reinforce

• Potential extension to cover staff broadly across the ADI

review/assurance may be required, although we expect this will form

part of APRA’s requirements for BEAR

• Internal processes will needed to be designed and documented in a

way that enables obligations to be properly carried out, embedded

and remain fit for purpose in a way that can be reported on and

subject to independent review

The introduction of a senior executive and director accountability regime is significant and appears to echo the Senior Manager and Certification Regime

(SM&CR) in the UK, which came into force last year. Our experience with SM&CR has shown that it is highly personal, and has a significant cultural

dimension. For this reason, it offers many opportunities to empower people to do the right thing.

1 We note that APRA’s review of CPS 510, includes the coverage of individuals in each of the segments prescribed.

The introduction of a senior executive and director accountability regime is

significant and recognises that leadership is key to driving cultural change. We

believe that by placing clear accountability on leaders, individuals will respond,

taking steps to carry out their remit and, where necessary, improve the quality of

governance and systems that support them in decision making.

However, at face value the proposed Regime appears to be less reaching than

SM&CR in the UK. For example, the proposed Regime allows for firms to advise the

regulatory of senior appointments, whereas the SM&CR requires regulatory

pre-approval of certain senior managers and directors, as well as certification of

employees in ‘material’ risk-taking positions. Furthermore, while the threat of civil

penalties provides a significant stick, the proposed Regime does not threaten the

possibility of criminal proceedings.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You

should not act upon the information contained in this publication without obtaining specific professional advice. No representation or

warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the

extent permitted by law, PricewaterhouseCoopers, its members, employees and agents do not accept or assume any liability,

responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information

contained in this publication or for any decision based on it.

© 2017 PricewaterhouseCoopers. All rights reserved.

PwC refers to the Australian member firm, and may sometimes refer to the PwC network.

Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

PwC Australia helps organisations and individuals create the value they're looking for. We're a member firm of network of firms in 157

countries with more than 184,000 people who are committed to delivering quality in assurance, advisory, tax & legal, and private clients services.

To have a deeper discussion about these issues, please contact:

• Workplace law

• Organisational design

• Global equity solutions

• HR due diligence and people integration

Ph: (02) 8266 2420

Email: emma.grogan@pwc.com

Ph: (02) 8266 9034

Email: debra.eckersley@pwc.com

Ph: (02) 8266 0725

Email: daniel.geard@pwc.com

Ph: (02) 8266 2183

Email: cassandra.fung@pwc.com

Ph: (02) 8266 0273

Email: katie.williams@pwc.com

Partner

Ph: (03) 8603 1685

Email: andrew.curcio@pwc.com

Ph:(03) 8603 0018

Email: james.orr@pwc.com

Ph:(03) 8603 4835

Email: michael.bierwirth@pwc.com