The Australian Prudential Regulation Authority (APRA) has released for consultation a revised remuneration prudential standard designed to strengthen market practice, underpin sound remuneration practices and enhance accountability in the institutions it regulates.
The new draft standard responds to industry feedback from the initial consultation, sets robust minimum standards for APRA-regulated entities and addresses the relevant Royal Commission recommendations.1
The draft standard has moved to a more principles-based approach that is designed to be risk based and proportionate, with more comprehensive requirements for larger, more complex regulated entities (Significant Financial Institutions (SFIs)).
There are a number of revisions to draft Prudential Standard CPS 511 Remuneration (revised CPS 511). The key revisions for SFIs include:
- replacing the 50 per cent cap on financial measures for variable remuneration with a requirement that material weight be assigned to non-financial measures, combined with a risk and conduct modifier that can potentially reduce variable remuneration to zero; and
- a reduction in the minimum deferral periods for variable remuneration from seven to six years for CEOs, from six to five years for senior managers and from six to four years for highly paid material risk takers.
The remuneration requirements for smaller (non-SFI) entities have been streamlined to minimise regulatory burden. Under the revised standard, non-SFIs will not be subject to a number of elements impacting variable remuneration including material weight for non-financial measures, a risk and conduct modifier, minimum deferral periods and clawback. To further ease compliance costs, non-SFIs will not have to conduct annual compliance checks or tri-annual effectiveness reviews of their remuneration frameworks.
Increased transparency is a key component of this reform. Entities will be subject to greater public disclosure of their remuneration practices to demonstrate compliance with APRA requirements. The specific disclosure requirements will be defined through a future consultation process, expected to be conducted in late 2021.
Taken together, the core measures will require SFI boards to strengthen incentives to manage non-financial risks, regularly assess for risk management failings and have deferral arrangements that allow boards to reduce remuneration for poor risk outcomes.
APRA Deputy Chair John Lonsdale said the measures contained in the revised standard reflect APRA’s long-term commitment to transform governance, culture, remuneration and accountability across all regulated institutions.
“APRA’s revised standard on remuneration is deliberately principles-based to provide boards with flexibility to tailor remuneration frameworks to their entities. However, with this flexibility comes an obligation that boards actively oversee remuneration policies for employees and ensure that there are appropriate consequences when people fail to meet expectations.
“The standard is designed to promote effective risk management that aligns the interests of customers, shareholders and the broader community, to deliver high performance in a sustainable manner.
“Once implemented, we expect the standard to deliver stronger incentives for individuals to manage non-financial risk, appropriate financial consequences where material risk incidents occur and increased transparency to drive stronger board accountability for remuneration outcomes,” Mr Lonsdale said.
The consultation period for revised CPS 511 will close on 12 February 2021. It is scheduled to be finalised in mid-2021 and come into effect for SFIs that are authorised deposit-taking institutions (ADIs) on 1 January 2023, for insurance and superannuation SFIs on 1 July 2023, and for non-SFIs on 1 January 2024.
The response paper, revised standard and non-confidential submissions to the previous consultation are available on the APRA website at: Consultation on remuneration requirements for all APRA-regulated entities.
1 The standard seeks to address recommendations 5.1, 5.2 and 5.3 from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.