Watchdog warns of BEAR trap for Westpac execs

The banking regulator has confirmed Westpac is the subject of an investigation of governance issues.

Federal Treasurer Josh Frydenberg. Picture: AAP

The banking regulator has confirmed Westpac is being investigated over governance issues and faces potential penalties after action was launched against the bank alleging 23 million legal breaches, including links to child exploitation.

An Australian Prudential Regulation Authority spokesman confirmed on Sunday it was examining “governance issues” at Westpac following Federal Court action against the bank lodged by financial crimes regulator Austrac: “APRA is considering whether the alleged breaches (and any potential penalties) have implications under BEAR, or raise other prudential concerns that require a response from APRA.

“However, as the Treasurer noted, the BEAR (Banking Executive Accountability Regime) is not retrospective, and therefore its potential application may hinge on the timing of the alleged offences.

“In July, APRA applied a $500m capital add-on for identified weaknesses in Westpac’s governance and non-financial risk management. APRA is currently monitoring a major remediation program the bank is carrying out to address identified weaknesses.”

BEAR, which came into effect for major banks on July 1 last year, forces banks to set out and lodge with APRA deferred pay models and clear lines of accountability within executive and management ranks.

Some of the alleged Westpac breaches date back to 2013, meaning BEAR will only be relevant for a much smaller number of transactions that are alleged to have broken the law. The regulator’s confirmation of a Westpac probe comes after Treasurer Josh Frydenberg on Sunday flagged the prospect of the bank’s executives being disqualified by APRA or the bank being slapped with hefty financial penalties.

He also warned there was a lack of “trust and confidence” among the public towards leading financial institutions and stressed the importance of accountability for compliance failings.

Mr Frydenberg confirmed he had spoken to Westpac chief executive Brian Hartzer as well as Westpac chair Lindsay Maxsted, saying he “made very clear the seriousness of these issues”.

APRA’s leadership team is believed to be preparing to have talks with Austrac and the bank’s executives this week.

But Mr Maxsted brushed off the Treasurer’s broadside, saying he interpreted the comments as more of a “statement of fact”, highlighting the BEAR that came into place last year.

He acknowledged that all board members were covered by BEAR, which provided greater clarity over lines of accountability, but said, as chairman, he was just as accountable to shareholders and regulators as before the regime came into play.

“There will be engagement will all the regulators,” he told The Australian about meetings to be held over coming weeks with APRA and the corporate regulator over the Austrac action.

Mr Maxsted also said it was “not unreasonable“ that politicians and regulators wanted the bank and its board and leadership to be accountable for the failings identified by Austrac.

APRA is said to be still gathering relevant information to see if it will invoke penalties on Westpac. Sources said any APRA response would depend, to some extent, on how Westpac dealt with the Austrac allegations and accountability for compliance failings.

APRA can also apply to the Federal Court for civil penalties and fines of up to $500m to be imposed for each organisation, depending on its size.

“In serious cases of noncompliance with accountability obligations, APRA may disqualify an individual from being an accountable person,” the regulator said in a 2018 information paper.

Under BEAR, banks are required to defer a minimum proportion of an accountable person’s variable pay for at least four years.