In the wake of a series of misconduct scandals in the banking industry including shonky financial advice, mis-selling of financial products and charging fees for no service, the Banking Executive Accountability Regime, or the BEAR as it is more commonly referred to, was introduced in mid-2018.
Buck stops here: Under the BEAR, banks are required to allocate specific responsibilities to senior executives and directors, in order to stop them hiding behind ignorance and group decision-making.
Public anger at the absence of any consequences for senior executives who engaged in egregious behaviour prompted the government to act by introducing the BEAR and establishing the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Under the BEAR, banks are required to allocate specific responsibilities to ‘accountable persons’ (senior executives and directors). In so doing, it is designed to stop executives from hiding behind ignorance and group decision-making processes and to enable ‘heads on sticks’ when bankers engage in misconduct.
One of the significant recommendations from the Hayne Royal Commission was for the extension of the BEAR more widely across the financial services sector.
Public anger at the absence of any consequences for senior executives who engaged in egregious behaviour prompted the government to act.
The Government has since committed to implementing these recommendations in the form of the Financial Accountability Regime (FAR) that will also cover insurance and superannuation companies.
With the impending introduction of the FAR, it is timely to examine the impacts of the BEAR and whether efforts to regulate for accountability has made a difference.
BEAR changes behaviour and risk culture
From Macquarie Business School, Professor Elizabeth Sheedy and I have conducted research involving 41 bankers on their experience of implementing the BEAR across 15 banks in Australia.
Our research found that the BEAR has resulted in greater clarity around individual accountabilities that has brought about numerous governance benefits by changing behaviours and risk culture in the banks for the better. In particular, reported benefits of the BEAR included:
- Individual accountability has had an empowering effect – decisions get made, problems get resolved and there is greater care and diligence being exercised.
- There is evidence of diminished groupthink in committee settings with the greater awareness that individuals, and not committees, are accountable.
- Risk and compliance functions are getting a bigger say as senior management consult them more.
- Directors and assurance teams also find it easier to do their jobs because they can ascertain who is ‘on the hook’ when things go awry.
When it came to the drawbacks of the regime, the evidence suggests that these were less important in reality than had been anticipated prior to the introduction of the BEAR.
The most commonly cited unfavourable consequence was the increased administrative burden in documenting reasonable steps to meet accountability obligations under the BEAR.
There was little evidence of the BEAR causing excessive fear or stress, difficulties in recruiting and retaining senior executives, or leading to potential siloed approaches to management and loss of collegiality.
Not all banks are the same
Overall, the BEAR appears to be having the intended effect of advancing executive accountability and risk culture, although its benefits did not accrue uniformly across the participating banks.
Fear factor: When the anti-money laundering (AML) scandal broke in Westpac in late 2019, it drove peer organisations to review processes and invest more in this complex area.
Those that took a more enthusiastic approach to implementing the BEAR took the opportunity to drive accountability through the organisation and saw a bigger uplift in risk governance.
The success of the BEAR is also reliant on the capability of senior executives to manage and delegate responsibility effectively. In one sense this might seem like ‘Management 101’ but capability in this area cannot be assumed; some financial institutions have not done enough to coach and train executives in these areas.
When executives see their industry peers facing both shame and financial consequences, it invokes a powerful fear response.
The researchers also noted that the BEAR was introduced during a tumultuous time for the Australian financial services industry with various scandals happening across the industry at the time.
The BEAR has had the effect of amplifying the response of the banks to these scandals.
When executives see their industry peers facing both shame and financial consequences, it invokes a powerful fear response because of their own accountabilities. For example, when the anti-money laundering (AML) scandal broke in Westpac in late 2019, it drove peer organisations to review AML processes and invest more in this complex area.
Fear of facing similar consequences means that investments in risk governance that may not have been approved in the pre-BEAR era are now possible.
Maintaining the momentum
As memories of the major regulatory events of the past few years begin to fade, it is possible that the BEAR effect may also start to fade.
There has yet to be enforcement action brought under the BEAR by the Australian Prudential Regulation Authority, and there are concerns that the design of the BEAR might make it difficult to enforce.
But it is worth noting that under the BEAR, accountability is intended to come primarily from the board of directors.
Between the BEAR and the current environment in which institutional investors are actively supporting executive accountability, boards appear to be willing to impose executive accountability themselves, as we have seen in the case of Westpac with the departure of the CEO and chairman following the AML scandal.
Professor Elizabeth Sheedy (pictured) is a risk governance expert based in the Department of Applied Finance of Macquarie Business School.
Dr Dominic Canestrari-Soh is a Lecturer in the Department of Accounting and Corporate Governance at Macquarie Business School.
