In the Royal Commission’s final report, Commissioner Hayne has advised the Australian Prudential Regulation Authority (APRA) to conduct supervision of remuneration systems and review its current standards and guidance on the matter.
He recommended the regulatory body give effect to the principles, standards and guidance set out in the Financial Stability Board’s publications concerning sound compensation principles and practices.
In conducting its supervision of remuneration systems, APRA should aim to have sound management by APRA-regulated institutions of not only financial risk but also misconduct, compliance and other non-financial risks.
In revising its standards, Hayne recommended that APRA should require its regulated institutions to design their remuneration systems to encourage sound management of non-financial risks and reduce the risk of misconduct.
It should also require the board of such institutions to make regular assessments of the effectiveness of the remuneration system in encouraging sound management of non-financial risks and reducing the risk of misconduct, and set limits on the use of financial metrics in connection with long-term variable remuneration.
As well, Hayne said APRA should require APRA-regulated institutions to provide for the entity to claw back remuneration that has vested and encourage them to improve the quality of information being provided to boards and their committees about risk management performance and remuneration decisions.
Those institutions should at least once per year review the design and implementation of their remuneration systems for front line staff to ensure it focuses not on what they do but how they do it.
He also stressed the importance of financial services entities reflecting on their inner workings, taking proper steps to assess their culture and governance procedures and rectifying any problems.