Bank, super fund, and insurer pay regulation close to finalisation
13/09/2021
mail.png

It has been a long gestation period for CPS511 with many constructive contributions to the two rounds of consultation.  Now that we know the shape of FAR which supersedes the BEAR regime and sits under the umbrella CPS511 (see HERE) finalisation is close.

This article describes the changes.

1. A subtle shift in raison d’être

There was criticism of the early drafts that CPS511 was in itself prescriptive and did not allow the flexibility for Boards to approve remuneration arrangements which were appropriate to the sector, phase of company maturity or current business challenges.

The board is now responsible to have a remuneration framework that is appropriate to the size, business mix and complexity of the company, promoting effective management of financial and non-financial risks (with appropriate consequences for poor risk outcomes).

While the shift may seem subtle, boards now have space to craft remuneration frameworks that are appropriate to the company while meeting the intent of the regulation.

Interestingly the current draft still points to a remuneration structure without variable remuneration (VR) as being beyond the reach of the regulation (deferral, malus, clawback). Hence, as we have said in our submissions and articles, an entity wishing to avoid deferral, malus, or clawback simply need not provide VR.

2. Third-party service provider compensation arrangements – mitigate rather than address inconsistencies with the regulation.
Feedback (including our first submission) pointed out that it would be difficult for a client to effect change to the remuneration frameworks of third party providers. The new wording internalises the challenge of non-compliant third party remuneration arrangements to being one of ‘mitigating’ material conflicts with the APRA regulated entity’s remuneration framework.  How this can be achieved though is unclear although the accompanying Response Paper suggests enhanced monitoring, greater oversight controls, seeking assurances and even changing the variable remuneration of the accountable person (AP) with oversight of a third-party business.  Some may suggest the former will be ineffective and the latter would be seen as punitive by any AP who has no effective control over a third party.

3. SFI thresholds
The SFI ADI total assets threshold has been increased from $15 billion to $20 billion.  In addition, the SFI thresholds for each industry have been confirmed as a set threshold which once hit will trigger the SFI requirements.  APRA did not want to “add complexity to asset thresholds through indexation or averaging” (see HERE) which effectively precludes consideration of entities transitioning to SFI status by organic growth or via M&A. Hence, once the smaller mutuals and superannuation funds decide to merge for the scale necessary to survive, they instantaneously have to have a new remuneration framework.

So once CPS511 is in effect, if you are an entity approaching the SFI threshold for any reason have your SFI compliant remuneration policy at the ready.

The August 2021 draft of the CPS511 can be found HERE.

What is notable by its absence – coverage of asset management firms with which larger superannuation funds have to compete with for talent.

New regulation has been introduced in the EU and the UK’s Financial Conduct Authority (FCA) is in the process of introducing the new Investment Fund Prudential Regime which include the application of VR deferral, malus and clawback to investment firms.  Access the regulation HERE.

Asset management firms are not captured by either the FAR or CPS 511 regulations and their inclusion in the regulator’s response to the Hayne Royal Commission recommendations has not been flagged.

What’s next?

  • CPG511 will be updated with more example of better practice – release date October 2021
  • CPS511 may be tweaked with minor amendments to ensure alignment with the finalised FAR.
  • Consultation on new remuneration disclosure requirements will be in early 2022.
© Guerdon Associates 2021
read more Back to all articles