investor daily logo

Emboldened regulator to hit banker pay

By James Mitchell
3 minute read

APRA will soon be handing down new prudential standards around remuneration following the damning results of an inquiry into 36 of Australia’s financial institutions.

The regulator has taken a relatively dim view of the banking, insurance and superannuation industry’s self-assessment on some of the major themes impacting the space today. Namely, governance, accountability and culture. 

APRA’s information paper released on 22 May outlined that many institutions have not fully identified the root causes of their failings, resulting in the risk that actions to address weaknesses may not be effective or sustainable.

APRA’s final report on CBA, released in May 2018 and known as the Prudential Inquiry Final Report, made 35 recommendations for change, including exacting accountability standards reinforced by remuneration practices.

“Although it was positive to see institutions’ commitment to the self-assessments, APRA observed that self-assessments generally contained less detail on remuneration frameworks,” the regulator said.

“While most self-assessments focused on remuneration design, few commented on the effectiveness of the framework as a whole. This included a lack of coverage of implementation, the use of board discretion in the remuneration process, the link between risk, conduct and customer outcomes and whether remuneration outcomes reflect policy intent.”

In APRA’s view, strong governance and risk management frameworks would typically exhibit accountability and remuneration frameworks that incentivise delivery of sound outcomes, in particular executive remuneration that is designed to better align rewards with a holistic view of performance.

“Most institutions are yet to address fully the findings from APRA’s 2018 information paper ‘Remuneration Practices at Large Financial Institutions’ or incorporate the Financial Stability Board’s Principles and Standards on Sound Compensation Practices (including the Supplementary Guidance addressing misconduct risk),” the regulator noted. 

“While some institutions have started to address these findings, progress appears slow and some material gaps remain.”

In response to the self-assessment repot findings and in line with its policy agenda for the next 12 months, APRA will be revealing its new prudential standard for remuneration later this year. 

“APRA will update its requirements for remuneration to focus on better alignment of remuneration, prudent risk management outcomes and long-term financial soundness, recognising the need to ensure incentives within financial institutions promote high standards of conduct and management of non-financial risks,” the regulation said. 

“APRA will consult on a new prudential standard on remuneration in mid-2019.”

The latest Hays Salary Guide, released this week, found that 63 per cent of financial services employers are intending to raise their staff’s salaries by 3 per cent or less this year, up from 58 per cent who did so in their last review.

At the higher end of the wage scale, 4 per cent of employers, down from 10 per cent, were said to intend to grant pay increases of more than 6 per cent.

However, more than half (57 per cent) of employees say a salary increase is their top priority this year.

Around 46 per cent of professionals intend to achieve this by asking for a pay rise, while others are looking elsewhere. The report noted 41 per cent of jobseekers in the industry said their current uncompetitive salary provoked their search.