The BEAR Roars!

The Treasury released the exposure draft of the Banking Executive Accountability Regime, open for consultation until 29th Sept 2017.

The Bill amends the Banking Act to establish the BEAR: an enhanced accountability framework for ADIs and persons in director and senior executive roles.

  • The BEAR imposes a clearer accountability regime on ADIs and people with significant influence over conduct and behaviour in an ADI. It requires them to conduct themselves with honesty and integrity and to ensure the business activities for which they are responsible are carried out effectively.
  • It does this by creating a new definition of ‘accountable person’. An accountable person is a Board member or senior executive with responsibility for management or control of significant or substantial parts or aspects of the ADI group.
  • The general requirement placed on accountable persons is framed in the context of their particular responsibilities. These will be clearly defined in accountability statements for each accountable person and an accountability map for each ADI group.
  • Accountability maps and statements are designed to give APRA greater visibility of lines of responsibility. The maps will clearly allocate responsibilities throughout the ADI group, to ensure that all parts or elements of the group are covered.
  • An ADI must comply with its BEAR obligations. These include new accountability, remuneration and key personnel obligations. An ADI must ensure that it has a remuneration policy consistent with the BEAR, its accountable person roles are filled and it has given accountability statements and maps to APRA.
  • ADIs must set remuneration policies deferring an accountable person’s variable remuneration to ensure accountable persons do not engage in behaviours inconsistent with BEAR obligations.
  • APRA will have additional powers concerning examination and disqualification to let it implement the BEAR.
  • If an ADI breaches its BEAR obligations, significant civil penalties may be imposed by a court.
  • Recognising there are different business models and group structures in the banking industry, the Bill uses both high level principles as well as prescribed detail. The BEAR will work with existing legislative and regulatory frameworks

The ABA were unimpressed in a statement from Anna Bligh, Australian Bankers’ Association Chief Executive:

“The seven day consultation period announced by the Federal Government on new banking executive accountability laws is grossly inadequate and playing fast and loose with a critical sector of the economy.

“The industry recognises that improving senior executive accountability is crucial for customers to have trust in banks.

“Banks want to work with the Federal Government to get this right, but just seven days to consult is not good enough.

“This is a significant piece of reform that impacts on the integrity of banks and the stability of the financial system and it needs thorough scrutiny.

“It’s an entirely new addition to the system of corporate governance in Australia. The Government’s timeframe risks serious unintended consequences.

“The ABA urges the Government to extend the consultation period and do the proper due diligence to ensure that the objective of improving senior executive accountability is met.”


An affordable housing own goal for Scott Morrison

From The New Daily.

There was considerable shock on Friday when Treasurer Scott Morrison announced legislation that could block billions of dollars of new housing supply – bizarrely enough, in the name of ‘affordable housing’.

Property developers are aghast at Mr Morrison’s draft legislation, because although they see it as giving a small leg-up to the community housing sector, they think it will block literally billions of dollars in investment in mainstream rental dwellings.

Both measures relate to an established way of bringing together large pools of money from institutions or wealthy individuals as ‘managed investment trusts’ (MITs).

Mr Morrison’s draft law is offering MITs a 60 per cent capital gains tax discount for investing in developments run by recognised ‘community housing providers’, rather than the normal 50 per cent discount.

But at the same time the legislation bans MITs from investing in all other residential developments.

The reason that has shocked property developers is that they have been anticipating for some time that MITs would play a major role in the emerging ‘build-to-rent’ housing market.

Two types of build-to-rent

There is some confusion around the term ‘build-to-rent’ at present, because it is being used to describe two quite different kinds of housing, both of which are booming in the UK and US.

The first is a straightforward commercial proposition. A developer might build a 100-dwelling development – be it townhouses, low-rise apartments, or high-rise flats – but instead of selling off each home to speculators or owner-occupiers, it retains ownership and rents them out directly.

The second variation is similar, but involves government subsidies and the input of community housing providers, to keep rents low.

That model, being championed by the likes of shadow housing minister Doug Cameron, would connect large investors such as local super funds or overseas pension funds, with long-term investments that provide secure, good-quality rental properties to lower-income Australians.

So when you read the term ‘build-to-let’, have a look at who is using it – it could mean fancy apartments with swimming pools, gyms or other communal facilities, or just decent housing that cash-strapped people can afford.

A fatal contradiction

What’s so surprising about Mr Morrison’s two new measures, is that they appear to work against each other.

One is trying to push rents down for low-income groups squeezed out of the mainstream market, but the other looks to crimp supply in the mainstream market and thereby push rents up.

That would be a big mistake, because both kinds of new dwellings are needed as our increasingly dysfunctional capital cities look for ways to ‘retro-fit’ sprawling suburbs with higher-density housing.

For many years now I have complained that the housing market didn’t have to get to this point – negative gearing and the capital gains tax breaks that have helped push home ownership out of reach of many Australians should have been reined in years ago.

But they were not, and the market, and the economy more generally, has become dangerously unbalanced by the housing credit bubble that those tax breaks created.

If that imbalance is successfully unwound – by wages catching up to house prices – it will be a small miracle, but it will also take a long time.

In the meantime, increasing housing supply in the right areas of our capital cities is a good way to keep a lid on prices, albeit rents rather then purchase prices – though an abundance of good rental properties can lower those, too.

That is what Mr Morrison’s draft legislation is jeopardising.

Labor, as you might expect, has slammed the ban on MIT investments, which shadow treasurer Chris Bowen says “has completely ambushed the property and construction sector”.

Much rarer, is for the Treasurer to be at odds with the Property Council – the lobby group he worked for between 1989 and 1995.

But it has also been scathing of the change.

It said on Friday: “The answer to Australia’s housing problem is more supply. Build to rent has the potential to harness new investment that could deliver tens of thousands of new homes and provide a greater diversity of choice for renters.

“… the unintended consequence of the draft legislation is to completely close down the capacity for Managed Investment Trusts (MITs) to invest in build to rental accommodation. This risks stalling build-to-rent before it starts.”

Given that kind of opposition, it’s hard to see the MIT investment ban becoming law – or if it did, the government that put such a ban in place ever living it down.

Treasury Releases Affordable Housing Measures

As part of the 2017-18 Budget, the Government announced it would be providing tax incentives to increase private and institutional investment in affordable housing. They have now released an exposure draft for comment.

The legislation proposes an additional 10% Capital Gains Tax (CGT) benefit for investors who provide affordable housing via a recognised community housing entity.

It also allows investment for affordable housing to be made via Managed Investment Trusts (MIT).

The purpose of public consultation is to seek stakeholder views on the exposure draft legislation and explanatory material. Deadline for submissions is 28th September.

Changes To CGT.

The Bill encourages investment in affordable housing for members of the community earning low to moderate incomes. This is achieved by allowing investors to have an additional affordable housing capital gains discount of up to 10 percent at the time a CGT event occurs to an ownership interest in a dwelling that is residential premises that has been used to provide affordable housing. By reducing the CGT that is payable upon disposal of affordable housing, it ensures that a greater proportion of the gain realised at disposal is retained by the investor.

The additional capital gains discount applies to investments by individuals directly in affordable housing or investments in affordable housing by individuals through trusts (other than public unit trusts and superannuation funds), including MITs to the extent the distribution or attribution is to the individual and includes such a capital gain.

An individual is eligible for an additional affordable housing capital gains discount (direct investment) on a capital gain if they:

  • make a discount capital gain from a CGT event happening in relation to a CGT asset that is their ownership interest in a dwelling; and
  • used the dwelling to provide affordable housing for at least three years (1095 days) which may be aggregate usage over different periods.

Only dwellings that are residential premises that are not commercial residential premises can be used to provide affordable housing. Therefore this measure does not apply to caravans, mobile homes and houseboats as they are not residential premises.

The tenancy of the  dwelling or its availability for rent to be exclusively managed by an eligible community housing provider. Community housing providers provide rental housing to tenants who are members of the community earning low to moderate incomes. Community housing providers may own some of the dwellings, however they also manage dwellings on behalf of investors, institutions and state and territory governments. Many community housing providers specialise in providing accommodation to particular client groups which may include disability housing, aged tenants and youth housing. Community housing providers are regulated by the states and territories. For the purposes of this measure an eligible community housing provider is an entity that is registered as a community housing provider to provide community housing services under a law of the Commonwealth, state or territory or is registered by an Australian.

Affordable housing through managed investment trusts.

The proposals will amend taxation laws to encourage managed investment trusts (MITs) to invest in affordable housing. They:

  • allow MITs to invest in dwellings that are residential premises (but not commercial residential premises) that are used to provide affordable housing primarily for the purpose of deriving rent; and
  • apply the concessional 15 per cent withholding tax rate to fund payments: – to the extent they consist of affordable housing rental income and certain capital gains from dwelling used to provide affordable housing; and – that are paid or attributed to MIT members who are foreign residents of jurisdictions which Australia has listed as an exchange of information country.

A MIT is a type of unit trust which investors can use to collectively invest in assets that produce passive income, such as shares, property or fixed interest assets. There also currently is significant uncertainty about the eligibility rules for trusts being MITs if investments are made in dwellings that are residential premises. This is because there is a view that investment in residential property is not made for a primary purpose of earning rental income. It is instead for delivering capital gains from increased property values, and therefore not eligible for the MIT tax concessions.

This measure clarifies the eligibility rules for trusts to be MITs if they invest in dwellings that are residential premises. This will help to provide investors with investment certainty. This change will not, however, affect MITs investing in commercial  residential premises. This means that trusts can invest in commercial residential premises and qualify as MITs provided this investment is primarily for the purpose of deriving rent consistent with the eligible investment business rules.


Credit Card Rules Tightened

The Treasury has released draft legislation for review which is designed to improving consumer outcomes and enhancing competition. The purpose of the amendments is to reduce the likelihood of consumers being granted excessive credit limits, to align the way interest is charged with consumers’ reasonable expectations and to make it easier for consumers to terminate a credit card or reduce a credit limit.

The draft Bill would:

  • require that affordability assessments be based on a consumer’s ability to repay the credit limit within a reasonable period;
  • prohibit unsolicited offers of credit limit increases;
  • simplify how interest is calculated, including prohibiting credit card providers from backdating interest charges; and
  • require credit card providers to have online options to cancel a credit card or to reduce credit limits.

The consultation on the draft Bill will close on Wednesday, 23 August 2017.

Reform 1: tighten responsible lending obligations for credit card contracts

This introduces a new requirement that a consumer’s unsuitability for a credit card contract or credit limit increase be assessed on whether the consumer could repay an amount equivalent to the credit limit of the contract within a period determined by the Australian Securities and Investments Commission (ASIC).

This requirement will apply to licensees that provide credit assistance, and licensees that are credit providers, in relation to both new and existing credit card contracts from 1 January 2019. Existing civil and criminal penalties for breaches of the responsible lending obligations will apply to breaches of the new requirement. Existing infringement notice powers will also apply.

Reform 2: prohibit unsolicited credit limit offers in relation to credit card contracts

This prohibits credit card providers from making any unsolicited credit limit offers by broadening the existing prohibition to all forms of communication and removing the informed consent exemption. These amendments apply in relation to both new and existing credit card contracts from 1 January 2018. Existing civil and criminal penalties for breaches of the prohibition against unsolicited credit limit offers will apply. Existing infringement notice powers will also apply.

Reform 3: simplify the calculation of interest charges under credit card contracts

These amendments will prevent credit card providers from imposing interest charges retrospectively to a credit card balance, or part of a balance, that has had the benefit of an interest-free period. These amendments apply in relation to both new and existing credit card contracts from 1 January 2019.

Failure to comply with this requirement attracts civil penalties of 2,000 penalty units and criminal penalties of 50 penalty units. The infringement notice scheme contained in the Credit Act will also apply.

Reform 4: reducing credit limits and terminating credit card contracts, including by online means

A key amendment is to require credit card contracts entered into on or after 1 January 2019 to allow consumers to request to reduce the limit of their credit card (a ‘credit limit reduction entitlement’) or terminate a credit card contract (a ‘credit card termination requirement’).

Where a credit card contract contains a credit limit reduction entitlement or a credit card termination requirement the amendments also provide for the following:

  • the credit card provider must provide an online means for the consumer to make a request to reduce their credit card limit or terminate their credit card contract;
  • following such a request, the credit card provider must not make a suggestion that is contrary to the consumer’s request; and
  • the credit card provider must take reasonable steps to ensure that the request is given effect to.

These further amendments apply to credit card contracts entered into before, on or after 1 January 2019.

Failure to comply with these requirements attracts civil penalties of 2,000 penalty units and criminal penalties of 50 penalty units. The infringement notice scheme contained in the Credit Act will also apply.


Open Banking May Catalyse Digital Disruption

Last week Treasurer Scott Morrison’s media release on the proposal to introduce an open banking regime in Australia was framed around the requirement for banks to be able and willing (with customer agreement) to share product and customer data with third parties.

The timing is interesting given the disruptive rise of FinTechs and the fact there are new entities emerging across the banking value chain. Until recently banks tended to regard their data as a strategic asset (for example not sharing default data) but with positive credit now in force, this is already changing. So this is a logical next step, and should be welcomed.

From our work whit a number of FinTechs we know that access to data is one of the barriers to success, alongside concerns about data security, and identity fraud. Opening the door to data sharing may be laudable, but there are significant technical issues to work through.

If open banking arrives, it would have the potential to increase competition, and perhaps put pressure on bank product pricing, as well as differentiated servicing; but we will see. It may open the door to more automated product switching, as well as better portfolio management and cross-selling. It certainly is another dimension in the wave of digital disruption already in play, which is ultimately being facilitated by the adoption of mobile technologies and devices.

The Turnbull Government has commissioned an independent review to recommend the best approach to implement an Open Banking regime in Australia, with the report due by the end of 2017.

Greater consumer access to their own banking data and data on banking products will allow consumers to seek out products that better suit their circumstances, saving them money and allowing them to better achieve their financial goals. It will also create further opportunities for innovative business models to drive greater competition in banking and contribute to productivity growth.

The review will be ably led by Mr Scott Farrell. Mr Farrell is a Partner at King & Wood Mallesons and has more than 20 years’ experience in financial markets and financial systems law. Mr Farrell has given many years of service to the public and private sector in advising on, and guiding, regulatory and legal change in the financial sector. He has intimate knowledge of the financial technology (FinTech) sector and is a member of the Government’s FinTech Advisory Group.

Mr Farrell will be supported by a secretariat located within Treasury and will draw upon technical expertise from the private sector as required. The review will consult broadly with the banking, consumer advocacy and FinTech sectors and other interested parties in developing the report and recommendations.

The Review terms of reference have been released and an Issues Paper will shortly be made available for interested parties to provide input to the review.

Purpose of the review

The Government will introduce an open banking regime in Australia under which customers will have greater access to and control over their banking data. Open banking will require banks to share product and customer data with customers and third parties with the consent of the customer.

Data sharing will increase price transparency and enable comparison services to accurately assess how much a product would cost a consumer based on their behaviour and recommend the most appropriate products for them.

Open banking will drive competition in financial services by changing the way Australians use, and benefit from, their data. This will deliver increased consumer choice and empower bank customers to seek out banking products that better suit their circumstances.

Terms of reference

  1. The review will make recommendations to the Treasurer on:1.1. The most appropriate model for the operation of open banking in the Australian context clearly setting out the advantages and disadvantages of different data-sharing models.1.2. A regulatory framework under which an open banking regime would operate and the necessary instruments (such as legislation) required to support and enforce a regime.

    1.3. An implementation framework (including roadmap and timeframe) and the ongoing role for the Government in implementing an open banking regime.

  2. The recommendations will include examination of:2.1. The scope of the banking data sets to be shared (and any existing or potential sector standards), the parties which will be required to share the data sets, and the parties to whom the data sets will be provided.2.2. Existing and potential technical data transfer mechanisms for sharing relevant data (and existing or potential sector standards) including customer consent mechanisms.

    2.3. The key issues and risks such as customer usability and trust, security of data, liability, privacy safeguard requirements arising from the adoption of potential data transfer mechanisms and the enforcement of customer rights in relation to data sharing.

    2.4. The costs of implementation of an open banking regime and the means by which costs may be imposed on industry including consideration of industry-funded models.

  3. The review will have regard to:3.1. The Productivity Commission’s final report on Data Availability and Use and any government response to that report.3.2. Best practice developments internationally and in other industry sectors.

    3.3. Competition, fairness, innovation, efficiency, regulatory compliance costs and consumer protection in the financial system.


The review will consult broadly with representatives from the banking, consumer advocacy and financial technology (FinTech) sectors and other interested parties in developing the report and recommendations.

The review will report to the Treasurer by the end of 2017.



When Is a Bank, Not a Bank?

The Treasury has also released draft legislation to enable more entities to be able to use the term “bank”.  The Government announced in the 2017-18 Budget that it will act to reduce regulatory barriers to entry for new and innovative entrants to the banking system, by lifting the prohibition on the use of the word ‘bank’ by authorised deposit-taking institutions (ADIs) with less than $50 million in capital.

In practice this means a wider range of entities can now claim to be a bank, provided they are an ADI. Given the term is widely recognised in the community, it may help to level the playing field a little (though it is probably less important than differential capital rules and other barriers, such as implicit Government guarantees!)

Currently APRA  only permit ADIs with Tier 1 capital exceeding $50 million to use the terms ‘bank’, ‘banker’ and ‘banking’. However, there are a number of smaller ADIs which are prudentially regulated by APRA who would benefit from the use of these terms. The proposed amendment will allow all ADIs to use the terms will create a more level playing field in the banking sector.

The current restriction on the use of the words ‘bank’, ‘banker’ and ‘banking’ under section 66 of the Banking Act will be removed to the effect that where an entity is an ADI, that entity will be able to use those terms in its business. This will allow a range of ADIs to use the term ‘bank’.

APRA will retain its ability to restrict the use of the term ‘bank’ in certain circumstances; for example, where a purchase payment facility is an ADI but does not conduct traditional ‘banking’ business.

It is important that APRA retains the ability to determine that some ADIs may not use the restricted terms. Therefore, APRA will continue to be able to restrict the use of the terms ‘bank’, ‘banker’ and ‘banking’ through providing an affected ADI with a written determination restricting that ADI from use of the terms. [Item 5, subsection 66AA(3) of the Banking Act]

Determinations made by APRA to restrict the use of these terms may apply to a single ADI or to a class or classes of ADI. It is expected that APRA would use the power to prohibit certain ADIs which do not have the ordinary characteristics of banks from utilising the term ‘bank’ (for example, purchase payment facilities). This power may also be used to deny the use of the term where serious or unusual circumstances warrant APRA making this determination.

APRA may still receive applications from non-ADI financial businesses for permission to use the term ‘bank’, or from ADIs who wish to apply for the use of other restricted terms, such as ‘credit union’ (non-mutual ADIs are separately prohibited from inaccurately describing themselves as ‘credit unions’ or like terms). The latter approval is not automatically granted in the same way as ‘bank’ given that these terms convey the concept of mutuality, which is not relevant to all ADIs.

However, given APRA will no longer receive applications from many ADIs, it is no longer desirable that the remainder of the decisions to be made under section 66 be reviewable. This more appropriately reflects the Government’s intent to limit the use of the term ‘bank’ by financial businesses other than ADIs to very rare and unusual circumstances. This approach is consistent with Recommendation 35 of the Financial System
Inquiry to clearly differentiate the investment products financial companies and similar entities offer retail consumers from ADI deposits.

The Customer Owned Banking Association welcomed the move:

COBA congratulates the Government on moving quickly to allow all credit unions and building societies to use the term ‘bank’.

Credit unions and building societies are Authorised Deposit-taking Institutions (ADIs), like banks, and are subject to the same prudential regulatory framework as banks and the Government’s deposit guarantee under the Financial Claims Scheme.

“It makes sense that all ADIs should be able to choose to use the term ‘bank’ to explain what they do – which is banking,” said COBA CEO Mark Degotardi.

“The historic restriction on use of the term bank by ADIs with more than $50 million in capital is out of date and no longer relevant.

“We welcome the Government’s move to level the playing field.

“There are already 18 customer owned banks providing competition and choice in the retail banking market. These former credit unions and building societies are likely to be joined by many of the 60 other customer owned banking institutions currently trading as credit unions and building societies.

“Some credit unions and building societies may prefer not to rebrand but at least now they will have a choice.

“This draft legislation is the latest installment of the Government’s agenda to promote competition in banking. COBA congratulates the Government on its commitment to this agenda and its delivery of positive reform.

“We look forward to engaging with the Government on the draft legislation.”


Property Investors Lose Tax Breaks

The Treasury has released its exposure draft for consultation on the plans announced in the budget to disallow travel expense deductions and limit depreciation for plant and equipment used in relation to residential investment property.

Closing date for submissions: Thursday, 10 August 201.

As part of the 2017-18 Budget, the Government announced it would disallow travel expense deductions relating to residential investment properties and limit depreciation deductions for plant and equipment used in relation to residential investment properties.

Travel deductions

From 1 July 2017, all travel expenditure relating to residential investment properties, including inspecting and maintaining residential investment properties will no longer be deductible.

This change will not prevent investors from engaging third parties such as real estate agents to provide property management services for investment properties. These expenses will remain deductible.

Plant and equipment depreciation deductions

From 1 July 2017, the Government will limit plant and equipment depreciation deductions for investors in residential investment properties to assets not previously used. Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans.

Plant and equipment used or installed in residential investment properties as of 9 May 2017 (or acquired under contracts already entered into at 7:30PM (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life.

The Government has released exposure draft legislation and explanatory material for amendments to give effect to the Budget announcements outlined above.

Public consultation on the exposure draft legislation and explanatory material will run for four weeks, closing on Thursday, 10 August 2017. The purpose of public consultation is to seek stakeholder views on the exposure draft legislation and explanatory material.

Superannuation Guarantee Compliance Reforms Ahead

Despite not being able to estimate the true amount of superannuation guarantee non-compliance, the Government is proposing a number of reforms to protect employees and strength compliance.  They say it is mostly small businesses who are non-compliant, and this is often caused by cash-flow issues. We have summarised their recommendations.

On 31 March 2017, the Superannuation Guarantee Cross-Agency Working Group provided its report on Superannuation Guarantee Non-Compliance to the Minister for Revenue and Financial Services. This Working Group, established in December 2016– comprised officials from the Australian Taxation Office (Chair), the Treasury, the Department of Employment, the Australian Securities & Investments Commission and the Australian Prudential Regulation Authority.

There are currently no robust estimates of superannuation guarantee non-compliance.

In December 2016, Industry Super Australia (ISA) estimated non-compliance in 2013-14 to be $2.8 billion (affecting an estimated 2.15 million employees). In March 2017 this estimate increased to $5.6 billion (affecting an estimated 3 million employees).

The Working Group believes this estimate should be considered in the context of the $89.6 billion in total employer contributions made in 2015-16. From the analysis of ISA’s methodology, the Working Group considers that the $5.6 billion estimate is likely to substantially overstate the actual size of the superannuation guarantee gap. The data is inconsistent with experiences and observations from the ATO’s
compliance program.

A review of ATO case data indicates that small businesses account for around 70 per cent of reported superannuation guarantee non-compliance. Cash flow problems are often the major reason small business employers provide as to why they did not pay their employees’ superannuation guarantee contributions.

The Working Group recognises that while there is, overall, a high level of voluntary compliance by the majority of employers there is scope to improve compliance to better safeguard employee entitlements.

The Working Group has identified two key barriers to maintaining or improving superannuation guarantee compliance.

The first barrier is that the ATO does not currently have any visibility over an employer’s superannuation guarantee obligations to their employees. The second barrier is that the ATO only receives information on superannuation guarantee payments received by superannuation funds on an annual basis so there can be a lag of up to 14 months in the reporting of contributions that employers have paid. This delay further reduces the effectiveness of the ATO’s compliance work.

The Working Group proposed changes that would improve substantially the ATO’s capacity to monitor superannuation guarantee compliance:

  • All employers should report superannuation guarantee obligation information to the ATO in a more timely manner. One way this will be achieved is to leverage the Government’s introduction of Single Touch Payroll legislation. Single Touch Payroll will commence for businesses with 20 or more employees from 1 July 2018. The Working Group considers that Single Touch Payroll should be extended to businesses with 19 or fewer employees as soon as practicable. Subject to more detailed design and consultation, it is believed that this change may be able to be implemented from 1 July 2018.
  • The regime should be more flexible so that penalties can be tailored to reflect different levels of employer behaviour and culpability. The current penalty regime within which the ATO operates is not consistent with the settings of other areas of taxation administration. The superannuation guarantee charge regime operates largely on a one-size-fits-all basis and does not distinguish between deliberate or repeated non-compliance and inadvertent mistakes.
  • Employers display to avoid superannuation guarantee obligations are closely related to characteristics that are seen in phoenix activity – the Phoenix Taskforce, which may recommend widening the manner in which the ATO is able to use Security Bonds and more readily securing outstanding superannuation guarantee charge debts through Director Penalty Notices.
  • The Government should clarify the law on how salary sacrifice agreements affect an employer’s superannuation guarantee obligations. In particular to, firstly, ensure that employers cannot use an amount an employee salary sacrifices to superannuation to satisfy the employer’s superannuation guarantee obligation; and secondly, to ensure that the ordinary time earnings base used to calculate an employer’s superannuation guarantee obligation includes those salary or wages sacrificed to superannuation. This will ensure that employees receive the full benefit of voluntary contributions.
  • At present, superannuation guarantee is required to be paid by employers within 28 days of the end of each quarter. The Working Group considers that improvements to data visibility are the main priority after which payment frequency could be reviewed.
  • There is merit in departments working more closely to promote conformance with, and performance of, the superannuation guarantee system drawing from the respective roles and expertise of each agency. So some information sharing arrangements will be changed.


The BEAR Roars!

The Government has released the Banking Executive Accountability Regime (BEAR) Consultation Paper for comment. We now get to see how these measures may be implemented, and it is the consequence of a significant “fail” across the industry in terms of appropriate behaviour over many years, especially given the special yet unequal place financial services companies have in the economy.

Of course, the question is – will these measures help tackle the cultural shortcomings endemic to the sector?

In the 2017-18 Budget the Government brought forward a comprehensive package of reforms to strengthen accountability and competition in the banking system. As part of this package, the Government announced that it will legislate to introduce a new Banking Executive Accountability Regime (BEAR).

The intention of the BEAR is to enhance the responsibility and accountability of ADIs and their directors and senior executives. The BEAR will provide greater clarity regarding their responsibilities and impose on them heightened expectations of behaviour in line with community expectations.

Where these expectations are not met, APRA will be empowered to more easily remove or disqualify individuals, ensure ADIs’ remuneration policies result in financial consequences for individuals, and impose substantial fines on ADIs. ADIs will be required to register individuals with APRA before appointing them as senior executives and directors.

The Government is now releasing this consultation paper, which outlines the key features of the BEAR and the proposed approach for implementation.

All interested parties are encouraged to make a submission by 3 August 2017.

Here are the main points.

All ADI’s are included.

ADIs are in scope of the BEAR due to the critical role they play in the economy and in response to community concern regarding recent poor behaviour. It is imperative that they maintain the trust of financial sector participants and depositors in particular.

The scope of the BEAR is also intended to include all entities within a group with an ADI parent. This will include subsidiaries of ADIs, including those that provide non-banking services and those that are foreign subsidiaries. Where an ADI exists within a group with a non-ADI or overseas parent company, the scope of the BEAR is intended to apply only to the subgroup of entities for which the ADI is the parent.

Senior Management and Board are included.

An objective in defining accountable persons for the purpose of the BEAR is to provide greater clarity in relation to the responsibilities of the most senior individuals within an ADI. The BEAR should make it easier to hold senior individuals to account for their behaviour in carrying out their responsibilities.

The net should not be cast so wide that responsibility can be deflected and accountability avoided. The risk is that if everybody is responsible, nobody will be accountable. On the other hand, the definition of accountable persons should not be cast too narrowly so as to exclude individuals with effective responsibility for management and control.

The definition of accountable persons is intended to clearly identify the most senior directors and executives who will be held to a heightened standard of responsibility and accountability. It is intended to build on, rather than replace, existing concepts of responsibility and accountability, such as definitions of ‘responsible persons’, ‘directors’ and ‘senior managers’ under APRA’s Fit and Proper framework.

Specific Behaviour Expectations Are Defined.

The new expectations are intended to identify a heightened standard of conduct or behaviour rather than replacing existing concepts such as contained in APRA’s Fit and Proper framework.

The BEAR will apply where there is poor conduct or behaviour that is of a systemic and prudential nature.

ASIC will remain responsible in its role as conduct regulator.
One potential approach in identifying the new expectations for ADI groups and accountable persons is to draw upon the expectations of behaviour contained in the SMR and the Fundamental Rules in the United Kingdom, as outlined in Appendix A, but keeping the focus on systemic and prudential matters.

Using this approach, an ADI would be expected to:
• conduct its business with integrity;
• conduct its business with due skill, care and diligence;
• deal with APRA in an open and cooperative way; and
• take reasonable steps to:
– act in a prudent manner, including by meeting all of the requirements of APRA’s prudential standards, and maintaining a culture which supports adherence to the letter and spirit of these standards;
– organise and control its affairs responsibly and effectively; and
– ensure that these expectations and accountabilities of the BEAR are applied and met throughout the group or subgroup of which the ADI is parent.

An accountable person would be expected to:
• act with integrity, due skill, care and diligence and be open and co-operative with APRA; and
• take reasonable steps to ensure that:
– the activities or business of the ADI for which they are responsible are controlled effectively;
– the activities or business of the ADI for which they are responsible comply with relevant regulatory requirements and standards;
– any delegations of responsibilities are to an appropriate person and those delegated responsibilities are discharged effectively; and
– these expectations and accountabilities of the BEAR are applied and met in the activities or business of the ADI group or subgroup for which they are responsible.

Includes Variable Remuneration Deferment.

In the 2017-18 Budget, the Government announced that:
• a minimum of 40 per cent of an ADI executive’s variable remuneration — and 60 per cent for certain ADI executives such as the CEO — will be deferred for a minimum period of four years; and
• APRA will have stronger powers to require ADIs to review and adjust remuneration policies when APRA believes these policies are producing inappropriate outcomes.

Remuneration policy should be aligned with sound and effective risk management and should not incentivise a short-term focus or excessive risk-taking. Deferring variable remuneration is aimed at providing an appropriate period of time for risks to crystallise and for variable remuneration to be adjusted downwards as a result. The intention is to better align the realisation of risk with reward.

Accountable Persons to be Registered.

ADIs will be required to register accountable persons with APRA. This mechanism will operate by requiring ADIs, prior to appointing an individual as an accountable person, to advise APRA of the potential appointment and provide APRA with information regarding the candidate’s suitability.

Upon notification, APRA would consult its register of accountable persons and advise the ADI if the candidate has previously been removed or disqualified by APRA, or if APRA is aware of any other issues that that could affect the candidate’s suitability for the role. It is not intended that ADIs be able to consult the register themselves. In order to ensure that the register is internal to APRA it may be necessary to provide exceptions from information law regimes, such as the Freedom of Information Act and the Privacy Act.

From The Introduction.

In recent years, there has been growing community concern regarding a number of examples of poor culture and behaviour in banks and the financial sector generally. There have been too many instances where participants have been treated inappropriately by banks and related financial institutions.

The House of Representatives Standing Committee on Economics Review of the four major banks (the Coleman Report) found that no individuals have had their employment terminated as a result of recent scandals, noting that:

‘The major banks have a ‘poor compliance culture’ and have repeatedly failed to protect the interests of consumers. This is a culture that senior executives have created. It is a culture that they need to be accountable for.’

The Australian financial system is the backbone of the economy and plays an essential role in promoting economic growth. In order for it to operate in an efficient, stable and fair way, it is imperative that participants have trust in the system. It must operate at the highest standards and meet the needs and expectations of Australian consumers and businesses.

Participants need to be confident that financial firms will balance risk and reward appropriately and serve their interests. As the Financial System Inquiry noted:

‘Without a culture supporting appropriate risk taking and the fair treatment of consumers, financial firms will continue to fall short of community expectations.’

Banks, as authorised deposit-taking institutions (ADIs), play a critical role in the financial system, including through their deposit-taking, payments and lending activities. ADIs enjoy a privileged position of trust, with prudential regulation designed to provide consumers with confidence in the safety of their deposits.

In the 2017-18 Budget the Government brought forward a comprehensive package of reforms to address the recommendations of the Coleman Report and strengthen accountability and competition in the banking system. As part of this package, the Government announced that it will legislate to introduce a new Banking Executive Accountability Regime (the BEAR).

Scott Morrison is cracking down on credit cards

From Business Insider.

Australians have around $52 billion in debt outstanding on credit cards and the federal government is going after this lucrative part of the banking sector with four tough new measures in a crackdown on card debt.

Treasurer Scott Morrison has announced plans to change the way eligibility for a credit card is assessed, shifting it from the ability to pay the minimum repayment to being able “to repay the credit limit within a reasonable period”.

Before the end of the year, Morrison has pledged to pass legislation banning unsolicited offers of credit limit increases. The ban follows on from changes in 2011 which stopped card issuers offering written offers to increase credit limits unless the customer had already given consent. Banks switched to verbal offers as a way around the laws.

The remaining changes will see interest calculations simplified and force providers to offer online options to cancel cards or to reduce credit limits.

Morrison argues that under the current arrangements, people enticed to a card by an interest-free period have no way of calculating the cost and interest charges if they do not pay off the balance in full when the offer period ends.

Such are the technicalities and complications, most consumers have no idea how interest charges apply, and therefore incur heavy interest charges after the interest-free period when their balance is not paid in full.

Morrison said the government was targeting “unfair and predatory practices” by credit card providers.

“These measures will deliver the first phase of reforms outlined in the Government’s response to the Senate Inquiry into the credit card market,” he said.

“The reforms will substantially reduce the incidence of consumers being granted excessive credit limits and building up unsustainable debts across multiple credit cards.

“Collectively, these measures will help prevent the debt cycle that many Australians find themselves in.”

Of the $52 billion owed on 16.7 million credit cards in Australia, which often attracts interest charges of around 20%, the average outstanding balance is $4,730.