The Australian Prudential Regulation Authority (APRA) finalized the prudential standard (CPS 511) to strengthen remuneration practices across the banking, insurance, and superannuation industries. APRA published a response paper that sets out its response on feedback received on the consultation for CPS 511. The prudential standard on remuneration practices will come into effect from January 01, 2023, with a phased implementation starting with large authorized deposit-taking institutions. To support entities in transitioning to the new CPS 511 requirements, APRA is in the process of finalizing CPG 511, the Prudential Practice Guide on remuneration. CPG 511 outlines examples of better practices to assist entities in meeting the requirements of CPS 511. The consultation on the draft Guide closed on July 23, 2021, with the final Guide expected to be released in October 2021.
CPS 511 introduces heightened requirements on remuneration and accountability, with the aim to create more balanced incentive structures, promote financial resilience, and support better outcomes for customers. The requirements in this standard fulfil three of the key recommendations of the Financial Services Royal Commission to APRA. This prudential standard is expected to raise the bar for remuneration practices across all APRA-regulated industries. The final version of the prudential standard incorporates three minor revisions in response to the feedback received on the proposal:
- Remuneration arrangements of service providers. APRA amended CPS 511 to clarify that a regulated entity must identify and mitigate material conflicts to the objectives of its remuneration framework that may result from third-party service provider compensation arrangements. APRA plans to include examples of better practices in CPG 511.
- Downward adjustments to variable remuneration. APRA revised the approach for linking the severity of risks to particular adjustment tools. The final CPS 511 clarifies that downward adjustments to variable remuneration must be proportionate to the severity of adverse risk and conduct outcomes. An entity can use in-period adjustments, such as a modifier, malus, and clawback, to ensure that the adjustment to variable remuneration appropriately reflects severity. CPG 511 will provide better practice examples to assist entities in assessing severity.
- Significant Financial Institutions thresholds. With respect to the significant institution thresholds, APRA increased the quantitative asset threshold to AUD 20 billion from AUD 15 billion. This aligns with proportionality thresholds used in other parts of the authorized deposit taking institution prudential framework.
APRA will ensure there is appropriate alignment between the design and implementation of CPS 511 and the proposed Financial Accountability Regime of the government. The proposed Financial Accountability Regime will set minimum requirements for deferral of variable remuneration by all regulated entities. APRA is working closely with the Australian Treasury and may amend CPS 511, where appropriate, once the proposed Financial Accountability Regime is finalized. To reinforce accountability for effective implementation, APRA plans to also consult on the disclosure requirements for remuneration early next year. The regulated entities should publicly demonstrate how they have strengthened their remuneration arrangements in line with CPS 511 requirements and the disclosure requirements will better enable stakeholders to hold entities to account for prudent management of remuneration.
Effective Date: January 01, 2023
Keywords: Asia Pacific, Australia, Banking, Remuneration, CPS 511, CPG 511, Disclosures, Governance, Operational Risk, Proportionality, Financial Accountability Regime, ESG, APRA
Previous ArticleMAS Announces Finalists for Global CBDC Challenge
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.
At the global level, supervisory efforts are increasingly focused on addressing climate risks via better quality data and innovative use of technologies such as generative artificial intelligence (AI) and blockchain.
The finalization of the IFRS sustainability disclosure standards in late June 2023 has brought to the forefront the themes of the harmonization of sustainability disclosures
The European Banking Authority (EBA) recently issued several regulatory publications impacting the banking sector.
The Basel Committee on Banking Supervision (BCBS) launched a consultation on revisions to the core principles for effective banking supervision, with the comment period ending on October 06, 2023.
The U.S. banking agencies (FDIC, FED, and OCC) recently proposed rules implementing the final Basel III reforms, also known as the Basel III Endgame.
The Financial Stability Board (FSB) recently published the second annual progress report on the July 2021 roadmap to address climate-related financial risks.
The recognition of climate change as a systemic risk to the global economy has further intensified regulatory and supervisory focus on monitoring of the environmental, social, and governance (ESG) risks.