July 23, 2019

APRA is proposing to strengthen prudential requirements for remuneration across all APRA-regulated entities in the banking, insurance, and superannuation industries by issuing CPS 511, a new prudential standard on remuneration. A key feature of the new standard is to promote the use of non-financial performance criteria in designing variable remuneration incentives. This consultation ends on October 23, 2019. APRA intends to publish the final prudential standard in late 2019 or early 2020 and it expects that CPS 511 will come into effect on July 01, 2021. APRA also intends to consult on an updated prudential practice guide in 2020, to support implementation of the new prudential standard, along with the associated reporting standards and disclosure requirements.

The proposed package of measures address recommendations 5.1 to 5.3 from the final report of the Royal Commission into misconduct in the banking, superannuation, and financial services industry—the recommendations that were endorsed by the government in February. The new standard is a key milestone in the broader agenda of APRA to lift industry practices in governance, culture, and remuneration. The objective of CPS 511 is to ensure that the remuneration arrangements of the APRA-regulated entities promote effective management of both financial and non-financial risks, along with sustainable performance and long-term soundness. 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. While certain components of the package may present challenges for different stakeholders, the impact of the reform should be considered as a whole. The core elements of the standard are to: 

  • Strengthen governance of remuneration frameworks and outcomes, particularly through an expanded board role, where the Board needs to be active and have direct oversight
  • Set overarching remuneration objectives that inform design of all remuneration arrangements and influence remuneration outcomes
  • Limit the use of financial performance metrics (share price and profit-based)
  • Set 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

CPS 511 is expected to complement the Banking Executive Accountability Regime, or BEAR, to lift industry standards of accountability and reduce the likelihood of misconduct. These proposals by APRA will place Australia in line with better international practices. APRA intends to conduct a review of the effectiveness of the prudential standard CPS 511 three years after its initial effective date.

 

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Comment Due Date: October 23, 2019

Keywords: Asia Pacific, Australia, Banking, Insurance, Superannuation, Pensions, CPS 511, Remuneration, Operational Risk, Governance, Conduct Risk, BEAR, APRA

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