APRA released an information paper in October to ease the implementation of BEAR for Authorised deposit-taking institutions (ADIs).

The paper clarifies some issues around the identification and notification of accountable persons and the mandatory deferral of a proportion of variable remuneration over a period of four years.

However, the detail on the deferral requirements has not really been fleshed out. Rather, APRA has implied that each ADI should determine its own implementation approach “appropriate to its own remuneration structures and in accordance with APRA’s prudential framework”.

ADIs are expected to follow the spirit of the law rather than the letter.

The guidance from APRA allows banks a lot of room to interpret the legislation that suits their circumstances

“APRA expects ADIs to assess their deferred variable remuneration calculations against the intent of the legislation and to ensure that there is a sufficient pool of deferred remuneration to allow for meaningful downward adjustments should an accountable person fail to comply with his or her accountability obligations.”

And, any implementation of the deferral requirements should encompass a “holistic review of incentive structures”, referencing APRA’s recent review of remuneration in financial services companies (see HERE)

The issues APRA has clarified include:

• From what date is mandatory deferral applicable? Figure 7 on page 22 of APRA’s paper shows that the deferral rules apply to an ADI from either 1 January 2019 or 1 January 2020 depending on the date of the employment contract and the size of organisation (large, medium or small ADI).
• How much of the employee’s variable remuneration should be subject to deferral if an employee works across positions in ADI and non-ADI companies within a group. The amount subject to deferral should be proportionate based on a measure of the ADI’s choosing, within reason.

APRA’s view is that “Irrespective of the methodology used to determine the portion of a person’s time spent on business related to the ADI or ADI group, an ADI must make such determination honestly, in good faith and on reasonable grounds. For example, the apportionment may be based on actual time spent or an approximate calculation of the time spent based on all available information”.

APRA also intends to determine, by legislative instrument, that certain variable remuneration is not variable remuneration for the purposes of the BEAR. (Where it is paid by a related body corporate that is not a non-ADI holding company of the ADI and the variable remuneration does not relate to the accountable person holding a position within the ADI.)

• What to do if the pay of an accountable person does not include a variable component. There is no compulsory deferral required under the legislation. There is also no need to add a variable component. While APRA states that “Remuneration packages should reflect an appropriate incentive structure for the specific role”, there is a disincentive for variable remuneration, or remuneration that is contingent on objectives. Fixed remuneration comprising of cash and equity would not, for example, require deferral.

• No matter how short a tenure, a person who has occupied an accountable person’s position is subject to the same deferral rules.
• Ending deferral before four years has passed. This is possible via an application to APRA in the situation of death, serious incapacity, serious disability or serious illness. An employee encountering a taxation point for deferred remuneration due to cessation of employment is not considered a legitimate reason for reducing deferral.

Some points that were not clarified:

• How and when to calculate the value of remuneration and, therefore, how much should be deferred? (e.g. If options are part of the variable remuneration, what is their value?) The legislation states that unless otherwise determined by APRA, the value is what would have been the value of that remuneration if it had instead been paid to the person at the time the decision to grant it was made. There could be multiple answers to this question.

• Treatment of one-off awards such as sign-on/buy-out awards. Are they considered as deferred remuneration or not?

The BEAR implementation paper can be found HERE

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