After an “extensive consultation process” which began in 2019, the prudential regulator has confirmed that its Prudential Standard CPS 511 Remuneration (CPS 511) 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
- Increased board oversight, transparency and accountability on remuneration outcomes
On Friday, APRA deputy chair John Lonsdale said the finalised standard is a “milestone” in strengthening remuneration practices across the banking, insurance and superannuation sectors.
“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,” he said.
“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.”
The standard will come into effect from 1 January 2023.
