The Australian Greens
In January 2020—before the pandemic hit and while the memories of the banking Royal Commission were still fresh—Treasury released a Proposal Paper on the establishment of a Financial Accountability Regime (FAR). In line with the recommendations of the Royal Commission, the Proposal Paper outlined the extension of the Banking Executive Accountability Regime (BEAR) to the entire financial sector.
The Proposal Paper also said that the previous government intended to introduce additional measures such that “individuals will be subject to civil penalties for breaches of their accountability obligations”. The Proposal Paper went on to say that this would be “consistent with the newly-introduced maximum penalties for individuals” under other Acts—namely 5,000 penalty units (currently just over $1 million) or three times the benefit derived.
Then the pandemic hit, the lobbyists got to work, and the commitment to introduce civil penalties for individual executives was quietly shelved. As disappointing as this was, this was simply a Coalition Government reverting to type.
Far more disappointing is that the new Labor Government has adopted the policy of the previous Tory Government and has decided to spare finance sector executives the ignominy of being held personally accountable.
The foundation of the FAR is that accountable persons—executives—are required to take reasonable steps to ensure that the bank, insurer or superannuation fund that they run acts with “honesty and integrity, and with due skill, care and diligence”.
The whole premise of the regime is that firms and the individuals who run them not only need to avoid engaging in deliberate misconduct—for which there are existing laws and punishment—but also need to establish “risk and governance cultures” that seek to avoid misconduct as well.
But if the individuals involved are not able to be held financially accountable for their failure to ensure reasonable steps are taken, then the likelihood of the FAR succeeding in its aims is greatly diminished.
As Alan Kirkland, Chief Executive Officer of CHOICE, told the inquiry:
If we don't have civil penalties attached to this regime, it sends a message that the obligations are less important than other legal obligations that apply to financial sector firms and executives.
The provisions to withhold up to 40 per cent of executive bonuses for four years as a security are not sufficient. As the Royal Commission demonstrated only too well, it often takes a lot longer than four years for the regulators to do something about misconduct, if ever.
This Bill is all carrot, no stick.
Allowing negligent behaviour to go unpunished has broader consequences. When asked about the impact of the failure to impose penalties on executives within the FAR, Dr Schmulow said that personal accountability regimes began:
…as a reaction to the global financial crisis and to the excessive risk taking that had been evident before that crisis—the excessive risk taking which, in the academic literature, has come to be called 'bet the firm' behaviour. So directors would pursue short-term profits at the expense of the long-term sustainability of the firm, and, where those firms are systemically important, that can precipitate a financial crisis. It's a classic case of moral hazard.
The initial Proposal Paper regarding the introduction of the FAR had it right. The Labor Government can surely recognise this. They should show some gumption, stand up to the banking lobbyists and ensure that the Bill includes civil penalties for individuals who breach their accountability responsibilities.
Recommendation 1
That individuals be subject to civil penalties for breaches of their accountability obligations, and that the maximum penalties be the greater of the following: 5,000 penalty units; or if the court can determine—the benefit derived or detriment avoided because of the contravention, multiplied by three.
Senator Nick McKim
Member
Greens Senator for Tasmania