APRA undertakes additional consultation on remuneration

The Australian Prudential Regulation Authority (APRA) has today released a second consultation package on remuneration for authorised deposit‑taking institutions (ADIs) and general and life insurance companies.

APRA received 51 submissions during the initial eight-week public consultation period earlier this year. For the most part, submissions agreed that risks could arise through unsound remuneration practices at financial institutions and supported a principles-based framework to encourage alignment of remuneration practices with prudent risk-taking. As such, APRA is satisfied that the underlying principles of its remuneration proposals are appropriate.

This second package comprises a response paper to the submissions, together with revised draft versions of the relevant governance standards and an associated draft prudential practice guide (PPG).

APRA Executive Member John Trowbridge said that 'while the intent of the proposals has not changed, APRA has amended some details and has clarified the wording to ensure the proposals are better understood. One example is making it clear that the remuneration requirements extend to Australian foreign branches.'

Mr Trowbridge also noted that 'APRA's principles‑based approach requires Boards of regulated institutions to have a remuneration policy that aligns remuneration arrangements with the long‑term financial soundness of the institution and its risk management framework. Boards of regulated institutions will be held accountable for compliance with APRA's prudential requirements for remuneration through APRA's normal supervision processes.'

APRA participated in the Financial Stability Board's (FSB) initiative on executive remuneration, which culminated in G20 endorsement in April this year of the FSB's Principles of Sound Compensation Practices. On 5 September in London, the G20 Finance Ministers reiterated the need for clear and identifiable progress on these principles. APRA's proposals follow these principles and also address the Prime Minister's request in October 2008 that APRA consider linkages between remuneration practices and the capital adequacy requirements of regulated institutions.

APRA is seeking submissions on the revised draft standards and PPG by 5 October 2009. It is expected that the final prudential standards and associated PPG will be released in November 2009 and be effective from 1 April 2010.

The consultation package can be found on the APRA website.