The Australian Prudential Regulation Authority (APRA) has released for consultation Draft prudential standard CPS 511 Remuneration aimed at increasing prudential requirements for remuneration across all APRA-regulated entities in the banking, insurance and superannuation industries.

APRA’s proposals include:

• To elevate the importance of managing non-financial risks, financial performance measures must make up no more than 50 per cent of the weighting of total performance criteria used to determine variable remuneration, and any individual financial performance measure must comprise no more than 25 per cent of the total measures used. This requirement would apply across the entire organisation and across the total amount of variable remuneration (not individual components);
• Minimum deferral periods for variable remuneration of up to seven years will be introduced for senior executives in larger, more complex entities. Boards will also have scope to recover remuneration for up to four years after it has vested; and
• Boards must approve and actively oversee remuneration policies for all employees, and regularly confirm they are being applied in practice to ensure individual and collective accountability.

APRA is not proposing to cap the amount of variable remuneration either in absolute terms or in relation to fixed salary, or prescribing specific types or forms of variable remuneration.

APRA is proposing a proportional implementation of the new requirements, with certain heightened expectations applied only to large, complex entities and to certain senior executives and other special roles.

APRA proposes to define the group of large, complex entities for these purposes based on asset size: more than $15 billion in total assets for authorised deposit-taking institutions (ADIs); more than $10 billion in total assets for general and life insurers; and more than $30 billion in funds under management for registrable superannuation entities (RSE) licensees.

The proposed reforms address recommendations 5.1 to 5.3 from the Final Report of the Financial Services Royal Commission.

BEAR

Some, but not all, of APRA’s proposals with respect to the design and operation of variable remuneration relate to the requirements set out for ADIs under the BEAR.

APRA intends to work with the Government to seek legislative amendments to the BEAR in implementing the proposed deferral requirements under CPS 511 and will review any other areas where the BEAR and CPS 511 are not fully aligned.

Timetable

APRA intends to release the final prudential standard before the end of 2019, with a view to it taking effect on 1 July 2021.