APRA consults on executive product responsibility

The Australian Prudential Regulation Authority (APRA) has launched a consultation on its proposed approach to implementing the financial services royal commission’s recommendation for the regulator to determine an end-to-end product responsibility for all authorised deposit-taking institutions (ADIs) that are subject to Banking Executive Accountability Regime (BEAR) obligations.

Following an 11-month long inquiry into financial sector misconduct, commissioner Kenneth Hayne’s report recommended that APRA should “determine an additional prescribed responsibility (which would apply to domestic ADIs only) for all steps in the design, delivery and maintenance of all products offered to customers by the ADI and any necessary remediation of customers in respect of any of those products”. 

In response to recommendation 1.17, APRA issued a letter to ADIs proposing that they identify and register an accountable person, excluding CEOs, to hold “end-to-end product responsibility” for every product that the ADI and its subsidiaries offer to customers.

“APRA considers the core objective of its proposal being ADIs achieving heightened and clarified end-to-end accountability among senior executives for their products offered. Accordingly, APRA does not consider it appropriate that the chief executive officer of an ADI holds the end-to-end accountability for all of its products, except for smaller, less complex ADIs,” the APRA letter stated.

The letter requested input on four key considerations relating to implementing the proposed product responsibility requirements: the scope of accountability, product coverage, the structure of the legal mechanism, and the application of joint accountability within ADIs and ADI groups.

The prudential regulator has proposed that the scope of accountability include steps in the design, delivery and maintenance of all products, as well as matters such as customer remediation, linkages to IT systems and data quality, outsourcing and incentive arrangements. 

“This goes beyond an explicit consideration of processing and administrative errors, and including but not limited to expansion to customer experience and outcomes,” APRA wrote in its letter. 

APRA explained that single-point accountability should be assigned on all products and services, not just retail ones, as they can impact the prudential standing and reputation of an ADI. 

The regulator is proposing that the Banking Act 1959 be amended to reflect this new executive product responsibility.

Specifically, it is suggesting the following legislative instrument: “For the purposes of paragraph 37BA(2)(b)(ii) of the Banking Act 1959, a particular responsibility includes senior executive responsibility for end-to-end product management of a product or product group offered by the ADI or the relevant group of bodies corporate that is constituted by the ADI and its subsidiaries, including but not limiting to all steps in the design, delivery, maintenance and any necessary remediation of customers in respect of any such product or product group.”

APRA added that it expects this responsibility to be reflected in the accountable person’s accountability statement and to have it clearly outlined in the ADI’s accountability map. 

If more than one accountable person is identified as responsible for a product or group of products, the prudential regulator suggested that joint and “equal” accountability be applied to ensure there are “no gaps or dilution in the end-to-end accountability”. It added that joint accountability should not automatically apply across different products or product groups. 

APRA clarified that these obligations do not apply to an Australian branch of a foreign ADI, but that it expects foreign ADIs to consider how they too could apply end-to-end product responsibility to their Australian operations and how the accountability statements could reflect such responsibility. 

APRA has also proposed that these product accountability requirements come into effect on 1 July 2020.

The consultation closes on 23 August 2019 and a draft schedule is expected to be released in October this year, with requirements to be finalised in December. 

In mid-June, the prudential regulator had also finalised how the BEAR applies to variable remuneration arrangements for small and medium-sized ADIs, confirming that “only the portion of the individual’s variable remuneration that relates to the accountable person role would be subject to the deferral requirements” regardless of an ADI’s organisational structure or whether they’re locally or internationally incorporated.

[Related: APRA revises proposed regulatory changes for mortgage lending]