The draft standard, Prudential Standard CPS 511 Remuneration, has responded to industry feedback from its initial consultation, setting standards for APRA-regulated entities and addressing relevant royal commission recommendations.
The revised rule has moved to a more principles-based approach, designed to be risk-based and proportionate, with more comprehensive requirements for larger, more complex regulated entities.
The key revisions for significant financial institutions 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 bonuses to zero.
It also has reduced the minimum deferral periods for variable remuneration from seven to six years for chief executives, from six to five years for senior managers and from six to four years for highly paid material risk takers. The deferral arrangement standards have aimed to allow boards to be able to shrink pay packets for poor risk outcomes.
For smaller financial institutions, remuneration requirements are supposed to be streamlined, to minimise regulatory burden.
Under the revised standard, “non-significant financial institutions” will not be subject to a number of elements, including material weight for non-financial measures, a risk and conduct modifier, minimum deferral periods and clawback.
They will also not have to conduct annual compliance checks or tri-effectiveness reviews of their remuneration frameworks, in an effort to further ease compliance costs.
APRA has highlighted increased transparency as a key component of the reform, with entities to be subject to tougher compliance requirements for remuneration practice disclosure.
The specific reporting standards are yet to be defined through a consultation process, expected to be conducted in late 2021.
APRA deputy chair John Lonsdale said the measures reflect APRA’s long-term commitment to transform governance, culture, remuneration and accountability across institutions.
“APRA’s revised standard on remuneration is deliberately principles-based to provide boards with flexibility to tailor remuneration frameworks to their entities,” Mr Lonsdale said.
“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.”
He added that once implemented, the standard is expected to deliver appropriate consequences where material risk incidents occur.
“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,” Mr Lonsdale said.
The consultation period for the revised standard will close on 12 February 2021. It is scheduled to be finalised mid-year and will come into effect for significant financial institutions that are ADIs on 1 January 2023, before being rolled out for insurance and superannuation significant financial institutions on 1 July 2023.
Non-significant financial institutions will see the standard take effect from 1 January 2024.
