Governance Institute provides feedback on APRA’s Draft Prudential Standard on Remuneration
Recently, the banking and financial royal commission made recommendations around remuneration to APRA. As a result of these recommendations, APRA issued a new draft prudential standard on remuneration (CPS 511) and asked for stakeholder feedback.
The core elements of the new standard, which APRA states are materially more prescriptive than its existing remuneration requirements, are aimed at:
- Strengthening governance of remuneration frameworks and outcomes, in particular through an expanded board role.
- Setting overarching remuneration objectives.
- Limiting the use of financial metrics.
- Setting minimum deferral periods (up to seven years) for senior executives to provide more ‘skin-in-the-game’ through better alignment to the time horizon of risk and performance outcomes.
Governance Institute lodged a submission in response to the proposed new standard on 23 October 2019.
Our members consider that a number of aspects of the standard will bring improvements to accountability and remuneration governance and assist in addressing issues identified by the Final Report of the Prudential Inquiry into the Commonwealth Bank of Australia and Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
In our view the proposed standard takes a ‘one-size fits all’ approach to remuneration in APRA-regulated entities which may be appropriate for large Australian listed entities with the resources to implement it, but may prove more difficult for smaller APRA-regulated entities. We consider that an ‘if-not, why not’ approach, particularly for smaller entities with less complex governance arrangements, is preferable.
We also consider that the standard adds a further layer of complexity to an already overly complicated remuneration regulatory regime, particularly for listed entities. One significant issue with the standard identified by our members is how its requirements interact with the Banking Executive Accountability Regime (BEAR) which will ultimately extend to all APRA-regulated entities.
We recommended that the alignment of the BEAR with the standard be settled and agreed before the standard commences.
Our submission also considered the issue of the timing of the implementation of the standard. We argued that it would be preferable for the implementation date of the new requirements to align with entities’ financial years, rather than the ‘hard’ start date currently contemplated by APRA. Alignment with an entity’s financial year will allow a smoother start to the new requirements. Our submission also pointed out that there may need to be some grandfathering of existing arrangements given the potential disruption created by implementing APRA’s requirements during the course of an incentive plan.
We also mentioned the unintended impact the deferral and other requirements may have on the ability of APRA-regulated entities to attract suitably skilled staff and for the Australian financial services sector to remain globally competitive.
The remuneration requirements imposed by the standard, particularly the lengthy deferral periods for incentives, potentially make the financial services sector less attractive for employees. Candidates are likely to favour industries not operating under these constraints.
Governance Institute argues that it would be undesirable if one of the consequences of the standard were to make Australia a less attractive option for those working in financial services, especially at the senior executive level, due to the competitive employment market, particularly in significant financial institutions.
Governance Institute also met with representatives of APRA to discuss our members’ concerns about the proposed standard.
APRA intends to publish the final standard in late 2019 or early 2020. It expects the new standard to come into effect on 1 July 2021 but will consider any feedback received as part of this consultation before finalising the start date.