In her speech to the Financial Services Assurance Forum on 26 November APRA Deputy Chair, Helen Rowell, said that APRA’s recent article on its risk culture survey has become its most widely read. Ms Rowell went on to explain the work APRA has been doing to promote better governance, culture, remuneration and accountability (GCRA) practices through creating a stronger prudential framework, a sharper supervisory focus and sharing insights with industry.

Insofar as APRA will sharpen its supervisory focus on remuneration Ms Rowell made a number of critical points, among others:

• With the new remuneration standard, CPS 511, taking effect from 1 January 2023, APRA expects banks, insurers and superannuation licensees to be preparing to comply with the new requirements.
• Over the next 18 months, APRA will have a strong supervisory focus on implementation of the new CPS 511 requirements. For a subset of entities, APRA will undertake a more detailed review of implementation progress, including benchmarking against peers. APRA will publish thematic findings from that review to help all entities with implementation of the new remuneration standard.
• In early 2022, APRA will also release new reporting and disclosure requirements on remuneration for consultation.
• Ultimately, Ms Rowell said APRA wants to see risk outcomes having a meaningful impact on remuneration outcomes. In the event of adverse risk outcomes, APRA expects to see those responsible being held to account and their remuneration adjusted downwards. APRA will intensify its supervision of remuneration to confirm that this is happening.

APRA’s focus in 2022 will shift from working on policy and tools to how entities are responding to APRA’s enhanced focus on GCRA and whether they are taking steps to embed sound GCRA practices. APRA’s supervisory teams will be looking for evidence that work on risk management and compliance controls has moved beyond design to ensuring operating effectiveness. Boards and senior management are expected to be vigilant to ensure the mistakes of the past are not repeated.

Ms Rowell emphasised the need for boards to be working now to develop non-financial metrics and other changes to remuneration arrangements that will be fit for their organisation. With the policy work complete, APRA will now be shifting to ensure that its new expectations are firmly embedded in the institutions it supervises.

GA comment: So far as remuneration and culture are concerned, APRA has tended to rely on comparative surveys to assess the extent of compliance and the various ways that entities have responded. These initiatives have not been instigated by APRA supervisory teams but APRA’s various policy teams. In fact, APRA supervisors appear ill-equipped to actually assess compliance with remuneration regulations. Irrespective of how well (or poorly, according to many submissions on the draft versions) the regulations are drafted, this does not appear to be in itself a sound model of governance.

There are certainly cohorts in APRA that maintain the key to sound prudential regulation is the maintenance and enforcement of capital and other financial requirements and not remuneration deferral and other mechanisms. This has some recent independent research to back it up (see our article HERE). Practically, proactive APRA remuneration supervision may be difficult, given how some aspects of CPS 511 have been drafted. That is not such a bad thing, as banks and other entities must in effect adopt a loose interpretation of the regulation to make it workable. For now, boards can probably continue to expect comparative surveys as a basis of remuneration and culture assessment.

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