The prudential regulator has released its standard to strengthen remuneration practices across the insurance, superannuation, and banking industries which will come into effect on 1 January, 2023.
The Australian Prudential Regulation Authority (APRA) released its Cross-industry Prudential Standard CPS 511 Remuneration as part of the three Royal Commission recommendations directed at the regulator.
APRA said the standard heightened requirements on remuneration and accountability aimed at creating more balanced incentive structures, promoted financial resilience, and supported better outcomes for customers.
The standard would require:
- Entities to apply material weight to non-financial metrics (such as customer complaints, breaches, and regulatory and audit findings) when determining variable remuneration for employees;
- Entities to reduce variable remuneration, potentially to zero, when warranted by poor risk conduct;
- New minimum deferral requirements for variable remuneration, coupled with malus and clawback provisions; and
- Increased board oversight, transparency and accountability on remuneration outcomes.
APRA deputy chair, John Lonsdale, said: “CPS 511 will impose genuine financial consequences on senior banking, insurance and superannuation executives when their decisions lead to poor risk management or conduct that is contrary to community expectations.
“It ensures financial performance alone is no longer enough when companies reward employees; companies must also consider their impact on customers and risk management outcomes. Where executives fall short, they now stand at risk of losing their bonus.
“We have been sensitive to minimising the regulatory burden on smaller institutions that typically make limited use of variable remuneration. The sharp end of CPS 511 is deliberately aimed at significant financial institution, where there is a heavier reliance on bonuses.
“In keeping with APRA’s focus on transparency, the standard will be supported by new disclosure requirements that will allow scrutiny of how effectively boards are adhering to the requirements and holding their executives accountable.”
