APRA has dared financial institutions bitter about tightened remuneration standards to produce alternative solutions for cultural and governance change, saying the sector needs to be held accountable in response to industry and investor rumblings.
The prudential regulator has an agenda in its four-year plan to tackle financial institutions’ shortcomings across governance, culture, remuneration and accountability (GCRA, as APRA calls it shorthand), following the fallout from the Hayne royal commission.
In an address to the Australian Banking Association National Economic Series in Sydney, APRA chairman Wayne Byres noted the goal of “transforming” GCRA across the sector is an ambitious one, and must result in long-lasting change.
APRA has proposed updates to the prudential framework, looking to strengthen remuneration standards by holding executives to specific limits, such as a maximum cap on the use of financial metrics, in contrast to the current guidelines containing no quantitative requirements.
Other changes include a more prescriptive tone and specified minimum deferral periods.
“Unsurprisingly, our proposals have not been warmly welcomed. Various stakeholders – managers, directors, investors, shareholders – have each found something to seriously dislike,” Mr Byres said in his speech.
“My challenge to those engaging in the debate is to provide us with an alternative to our proposals that isn’t just the status quo, because outcomes from the status quo have been found unacceptable.
“There are two broad ways change can be achieved: more prescription by APRA, or a material change in industry practice, particularly in the use of discretion by boards when considering remuneration outcomes. The most efficient approach would undoubtedly be the latter, but the evidence suggests that will be very difficult, if not impossible, without some form of regulatory backing.”
The regulator has also sought to update its standards across governance and risk management, aiming to more clearly articulate its expectations of effective board oversight and obligations to risk culture. Mr Byres pointed to a need to bolster “relatively weak” compliance and audit requirements.
Self-assessments tipped to be regular but they won’t be enough
In the wake of the royal commission, APRA asked a number of the major banks, superannuation funds and insurance companies to each complete a self-assessment, examining their own behaviour and operations.
Out of the big four banks, all three but ANZ have published their self-assessments.
Mr Byres hinted the practice of self-evaluation could become a more regular requirement, with annual declarations on GCRA and supplementary periodic self-assessments and reviews.
“We agree with the panel that conducted the Capability Review that embedding self-assessments in a structured way into APRA’s supervisory processes will lead to a positive and sustained uplift in GCRA practices by all financial institutions,” he commented.
“It will also rightly put the onus on institutions to keep these issues under constant review, rather than relying on APRA to identify and call out issues through its own supervision activities.
“However, we don’t think declarations and self-assessments themselves will be sufficient: as they say, trust but verify.”
GCRA department to be bolstered
Going forward, APRA is using additional funding from the government to expand its GCRA-dedicated team with under 10 staff to at least 20, to be led by a new senior executive at general manager level.
The accountability unit will be part of the regulator’s new structure, along with separate divisions overlooking super, insurance and banking.
Some of the funding will be deployed to external experts, from other regulators, academia and the private sector and the regulator is also looking to technology such as natural language processing.
The watchdog’s Probability and Impact Rating System (PAIRS) model, which has been in place to assess risk for more than 15 years is being overhauled – going beyond GCRA-related matters, Mr Byres reported.
The new model is expected to be rolled out in the first half of next year.
APRA has indicated it will explore industry surveys, following the work of the UK Banking Standards Board, to measure and monitor changes in behaviour.
Treasury is also working with both ASIC and APRA to extend the Banking Executive Accountability Regime (BEAR) beyond authorised deposit-taking institutions and to encapsulate conduct-related matters.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].