The Australian Prudential Regulation Authority (APRA) has today released its prudential requirements on remuneration for authorised deposit‑taking institutions (ADIs) and general and life insurance companies.
APRA participated in the Financial Stability Board’s initiative on executive remuneration, which culminated in G20 endorsement in April this year of its Principles for Sound Compensation Practices. APRA’s approach follows these principles.
The relevant industry governance standards (APS 510, GPS 510 and LPS 510) and an associated prudential practice guide (PPG 511) have now been published, along with a response paper to the second round of consultation that explains further modifications made in response to submissions and other feedback.
APRA received 19 submissions during the second consultation period and met with a number of interested parties to explain the proposals and gather feedback. Many submissions again broadly supported APRA’s approach, recognising that poorly structured remuneration practices may result in excessive risk-taking by individuals and can undermine the risk management systems of prudentially regulated institutions.
APRA Executive Member John Trowbridge said that ‘whilst APRA’s approach remains unchanged in principle, we have revised some aspects of the remuneration requirements on the basis of this second round of consultations. For example, some details in relation to foreign branches and to the coverage of different groups of persons have been modified. The changes will assist in the implementation of APRA’s remuneration requirements while still enabling boards to design remuneration arrangements that suit the circumstances of their own institution’.
APRA‑regulated institutions will be expected to conform to the intent and the substance of the remuneration requirements. Where APRA judges that the remuneration arrangements of a regulated institution are likely to encourage excessive risk‑taking, APRA has several supervisory options, including the power to impose additional capital requirements on that institution.
The revised governance standards will come into effect on 1 April 2010. By this date, APRA requires that the Board Remuneration Committee, with appropriate composition and charter, will be established and a suitable Remuneration Policy will be in place. APRA expects regulated institutions to use the period before 1 April 2010 to begin the transition for existing remuneration arrangements that would not meet the revised standards.
The response paper, the prudential standards and the prudential practice guide can be found on the APRA website.