Superannuation funds face the prospect of much more onerous regulation, following commissioner Kenneth Hayne’s recommendation that Canberra’s senior management accountability regime should be expanded across the financial system, bringing Australia in line with the UK.

Last year, the government unveiled the Banking Executive Accountability Regime (BEAR) legislation, which currently applies only to the major banks. But a key plank of the final report of the Hayne royal commission, released on Monday, was that BEAR be broadened to apply to all Australian Prudential Regulation Authority-regulated entities.

“The accountability of executives was called out in the commission hearings but the significant expansion of BEAR wasn’t anticipated by the market,” Deloitte regulatory adviser Kevin Nixon said.

After watching the launch of a similar regime in the UK, Nixon warned that implementing BEAR would be onerous for super funds and that the new rules would have a major impact on the industry.

Like the UK regime, implementing BEAR will prove to be a mammoth exercise but Nixon is convinced there will be benefits for both local industry and regulators.

Fund will need an ‘accountability map’

For a start, he argued implementing BEAR would require super funds to create an ‘accountability map’ assigning responsibility for certain areas of the business.

“While it is onerous, accountability ‘mapping’ is a useful exercise, since it sharpens focus on where a decision is made, how it is made and who is ultimately responsible for that decision.”

If this Hayne recommendation is adopted, Australia will be following the UK, whose senior managers regime (SMR) requires firms to assign responsibility for certain areas of the business and checks suitability for a senior role. Westminster’s program of banking reform following the financial crisis in 2008 has this year been extended to the rest of the financial services sector.

Nixon says: “UK was the first country to introduce an accountability regime for senior managers and at the time there was much concern it would impact on decision-making as well as on hiring. There is no question that accountability regimes increase risk for entities but it was found that being held accountable led to more robust decision-making.”

Responsive to accountability concerns

He said the expansion of BEAR would bring Australia closer to the UK regime, thus responding to concerns that accountability issues can arise anywhere in the financial system

“Bringing the conduct regulator into the frame is also a logical outcome,” he says.

In the UK, the Financial Conduct Authority runs the equivalent of BEAR.

In contrast, the Australian Government had chosen APRA to run the new regime, even though ASIC is the conduct regulator, responsible for ensuring that financial institutions act fairly.

Critics have long complained that, in so doing, Treasury has adjusted the legislation to suit APRA’s existing role and capabilities and, as a result, has seriously compromised the objective of the legislation, which is to go after conduct that harms customers, such as that exposed at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

Nixon noted the royal commission proposed retaining the regulatory structure and sticking to the “Twin Peaks” model, whereby the corporate cop would be responsible for the parts of BEAR that relate to consumer protection and market conduct and APRA would handle the regime as it relates to prudential matters.

“All this will change the way the industry works with the regulators – we will see an active but arm’s length regulator who will be more prone to take stronger action as a result of the report.”

Elizabeth Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.