APRA-regulated entities will be required to apply “material weight” to non-financial metrics when determining variable remuneration for employees.
This is the key feature of the financial regulator’s new prudential standard on remuneration (CPS 511), which has been in the works since 2019.
In its initial round of consultation, APRA proposed setting a 50 per cent limit on the use of financial performance measures to determine remuneration outcomes. Its aim was to increase the focus on incentives for management of non-financial risks.
There was strong industry opposition to this move, on the grounds that it was too prescriptive and that it limited remuneration design.
APRA dropped the hard limit but still expects variable remuneration to be adjusted for adverse outcomes in areas such as customer complaints, compliance breaches, regulatory findings and audit findings.
Other features of the new standard, which takes effect in January 2023, include longer deferral periods, clawback provisions and increased board transparency and accountability on remuneration outcomes. There will be new disclosure requirements.
In designing the new standard, APRA took its lead from the Hayne royal commission, which said poorly designed remuneration practices could incentivise behaviour harmful to consumers and detrimental to long-term financial soundness.
APRA said in a statement that it has tried to minimise the regulatory burden on small institutions that typically make limited use of variable remuneration. “The sharp end of CPS 511 is deliberately aimed at significant financial institutions, where there is a heavier reliance on bonuses.”
In response to submissions, APRA has increased the asset threshold for an ADI classified as a “significant financial institution” from A$15 billion to $20 billion. The threshold for an SFI in the superannuation industry is $30 billion, private health insurers $3 billion and general and life insurers $10 billion. Foreign ADIs and insurer branches will not be SFIs.
APRA has also clarified the remuneration arrangements of service providers. APRA regulated entities must identify and mitigate material conflicts to the objectives of their remuneration frameworks that may result from third-party service provider compensation arrangements.
Submissions pointed out that licensees can have limited influence over how a service provider, such as a mortgage broker, remunerates its employees.
In response, APRA has outlined “possible mitigants”, including incentivising the management of non-financial risks through tighter approval criteria and more frequent monitoring.
APRA said it was working with Treasury to ensure there are no inconsistencies between CPS 511 and the new Financial Accountability Regime.