The Australian Prudential Regulation Authority (APRA) has released revised Prudential Standard CPS 511 Remuneration (CP 511), in response to industry feedback. The standard applies a more principles-based approach designed to be risk-based and proportionate, with comprehensive requirements for larger, more complex regulated entities known as Significant Financial Institutions (SFIs). The revised standard also aligns with international better practice, incorporating standards and guidance produced by the Financial Stability Board. CP 511 will take effect from 1 Jan 2023, with a phased-in implementation starting with large authorized deposit-taking institutions. To support the transition process to the new requirements, APRA expects to finalize the Prudential Practice Guide CPG 511 Remuneration in October 2021.
Governance. Boards will have explicit responsibility for an entity’s remuneration framework and policies, and effective application will be required to approve remuneration outcomes. Entities must review compliance of the remuneration framework against the requirements of the Prudential Standard every year at a minimum. Every three years at a minimum, entities must ensure a review is conducted by those who are independent, experienced and competent.
Nonfinancial measures. The 50% cap on financial measures for variable remuneration will be replaced with a requirement that material weight be assigned to nonfinancial measures. SFI boards will be required to ensure that short- and long-term incentive arrangements give material weight to nonfinancial measures to encourage a more balanced approach to risk management and financial performance. According to APRA, this will represent the biggest change from current practices.
Risk adjustment. Variable remuneration will have to reflect risk outcomes using tools such as the risk and conduct modifier, malus and clawback. Entities will have to adjust remuneration outcomes of individuals — to zero if appropriate — if they were responsible for risk and conduct incidents. Organizations will have to ensure effective and consistent application of these measures.
Deferral. SFI boards across all industries will be required to increase minimum four-year deferral periods that strengthen incentives to focus on the long-term, and pro rata vesting will allow for a gradual distribution of payments. The revised deferral periods will be six years for a chief executive officer (CEO), five years for a senior manager and executive director, and four years for a highly-paid material risk-taker (HPMRT). Pro rata vesting will allow the payment of deferred amounts to begin in year four for a CEO, senior manager and executive director, and from year two for an HPMRT.
Disclosure. To reinforce accountability and transparency, APRA says that entities must demonstrate publicly how they satisfy the key principles in the standard. APRA plans to strengthen disclosure requirements and is considering proposals that would require entities to publish aggregated details of remuneration outcomes and adjustments for material risk incidents. The specific disclosure requirements will follow a future consultation process early in 2022.
Non-SFIs will not be subject to a number of elements impacting variable remuneration, including material weight for nonfinancial measures, a risk and conduct modifier, minimum deferral periods and clawback. Also, they will not have to conduct annual compliance checks or triennial effectiveness reviews of their remuneration frameworks.
In early 2020, the Government released a paper outlining proposals to extend the Banking Executive Accountability Regime to all APRA-regulated entities, under the Financial Accountability Regime (FAR). FAR includes proposed minimum deferral requirements and adjustments to the variable remuneration of all “accountable persons” who will also be captured by CPS511. APRA is working with the Treasury to ensure appropriate alignment with CPS 511 and FAR, and upon finalization of the FAR legislation, APRA will review whether additional minor changes to CPS 511 are required.