The Australian Prudential Regulation Authority (APRA) has released its final prudential standard designed to strengthen remuneration practices across the banking, insurance and superannuation industries.
Cross-industry Prudential Standard CPS 511 Remuneration (CPS 511) introduces heightened requirements on remuneration and accountability aimed at creating more balanced incentive structures, promoting financial resilience and supporting better outcomes for customers. In doing so, it fulfils three of the key recommendations of the financial services Royal Commission directed towards APRA1.
After an extensive consultation process, APRA today released a response paper confirming that the finalised standard will require:
- entities to apply material weight to non-financial metrics (such as customer complaints, breaches, and regulatory and audit findings) when determining variable remuneration for employees;
- entities to reduce variable remuneration, potentially to zero, when warranted by poor risk conduct;
- new minimum deferral requirements for variable remuneration, coupled with malus and clawback provisions; and
- increased board oversight, transparency and accountability on remuneration outcomes.
Deputy Chair John Lonsdale said the finalised standard was a key milestone in APRA’s drive to transform industry practices in governance, risk culture, remuneration and accountability.
“As the Royal Commission made clear, poorly designed or implemented remuneration practices can incentivise behaviour that is harmful to consumers, and detrimental to long-term financial soundness.
“CPS 511 will impose genuine financial consequences on senior banking, insurance and superannuation executives when their decisions lead to poor risk management or conduct that is contrary to community expectations. It ensures financial performance alone is no longer enough when companies reward employees; companies must also consider their impact on customers and risk management outcomes. Where executives fall short, they now stand at risk of losing their bonus.
“We have been sensitive to minimising the regulatory burden on smaller institutions that typically make limited use of variable remuneration. The sharp end of CPS 511 is deliberately aimed at significant financial institutions (SFIs), where there is a heavier reliance on bonuses.
“In keeping with APRA’s focus on transparency, the standard will be supported by new disclosure requirements that will allow scrutiny of how effectively boards are adhering to the requirements and holding their executives accountable,” Mr Lonsdale said.
APRA began consulting on CPS 511 in 2019, before beginning a second round of consultation on an updated draft standard in November last year. Submissions on the revised standard were broadly supportive, however APRA has made three minor revisions in response to feedback related to third-party service providers, risk and conduct adjustments and the determination of SFIs.
The standard will come into effect from 1 January 2023, with a phased implementation starting with large authorised deposit-taking institutions. APRA expects to finalise Prudential Practice Guide CPG 511 Remuneration in the coming months to assist entities in meeting their new requirements under CPS 511.
The response to submissions paper, public submissions and final CPS 511 are available on the APRA website: Consultation on remuneration requirements for all APRA-regulated entities.
1 Recommendation 5.1 — Supervision of remuneration — principles, standards and guidance; Recommendation 5.2 — Supervision of remuneration — aims; and Recommendation 5.3 — Revised prudential standards and guidance.