On the 9th of April APRA released a consultation paper and draft prudential standard for remuneration disclosures by banks, building societies and credit unions (known collectively as Authorised Deposit-taking Institutions, or ADIs)). The disclosures go beyond what a bank currently puts in its remuneration report.
Given the proposed new standards are to apply for the first balance sheet date occurring on or after 30 June 2013, banks and building societies had better get their two bobs’ worth in quickly.
Not that this is sudden. We first reported APRA’s plans 18 months ago (see HERE). APRA did not have much choice. As a good global prudential citizen, it needed to adhere to the Basel Committee Pillar 3 Disclosure Requirements for Remuneration. These remuneration disclosures took account of the Financial Stability Board’s Principles for Sound Compensation Practices we described on their release 4 years ago (see HERE).
The objective of these disclosures is to support effective market discipline and allow market participants to assess the quality of a bank’s remuneration practices.
APRA’s requirements include qualitative disclosures in relation to remuneration policy and processes and also quantitative disclosures, including aggregate information in relation to the remuneration of a bank’s senior management and other material risk-takers.
The requirements apply only to locally incorporated banks, credit unions and building societies. Foreign banks are excluded from the proposed remuneration disclosure requirements on the basis that their parent entities will make these disclosures through requirements imposed by their home supervisors. There has also been no hint that the standard to apply to banks will be extended to insurers, although insurers have been already brought into the net with bankers in regard to regulations covering how executives and risk takers are paid (see HERE and HERE).
The disclosure requirements are broader in scope than requirements for current remuneration reports. In addition to “KMP”, it encompasses senior managers, material risk-takers and risk and management personnel. This would mean that, at a minimum, an ADI’s quantitative disclosures should cover:
· an executive director;
· a senior manager, being a person (other than a director) who:
– makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the regulated institution;
– has the capacity to affect significantly the regulated institution’s financial standing;
– may materially affect the whole, or a substantial part, of the business of the regulated institution or its financial standing through their responsibility for:
o enforcing policies and implementing strategies approved by the Board of the regulated institution;
o the development and implementation of systems used to identify, assess, manage or monitor risks in relation to the business of the regulated institution; or
o monitoring the appropriateness, adequacy and effectiveness of risk management systems;
· a person who performs activities for a subsidiary of the regulated institution where those activities could materially affect the whole, or a substantial part, of the business of the regulated institution or its financial standing; and
· all other persons for whom a significant portion of total remuneration is based on performance and whose activities, individually or collectively, may affect the financial soundness of the regulated institution.
APRA says it is open to a listed bank incorporating the additional APS 330 remuneration disclosure requirements into its Remuneration Report, provided that the disclosures made in relation to ‘key management personnel’ under the Corporations Act are clearly distinguished from the disclosures made under APS 330 for ‘senior managers’ and ‘material risk-takers’. Otherwise, a bank could disclose the information separately on its website or in a separate, publicly accessible document.
After considering the detail required, we suggest that most ASX listed banks will choose to separately report the additional requirements via their web sites rather than load it all into the remuneration report. If in doubt, look at the detail required in Appendix E on pages 46 to 48 of draft APS 330 (see HERE).
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