When the CPS511 regulation was released, APRA telegraphed in its consultation response paper that it would be ‘…consulting on new disclosure requirements for remuneration early next year. It is important that entities publicly demonstrate how they have strengthened their remuneration arrangements in line with CPS 511 requirements. APRA’s disclosure requirements will better enable stakeholders to hold entities to account for prudently managing remuneration…’ (see HERE.)
So here it is. APRA have expanded the CPS511 regulation extensively with the rationale outlined in an accompanying discussion paper.
Just how extensive can be seen from the marked-up draft of the revised CPS511 regulation which can be accessed HERE.
It also goes way beyond the standards of Australia’s international peers, and what Financial Stability Board (FSB) reviews suggest are needed.
There are major issues arising from the proposal. These can be grouped into two themes:
- The extent that the proposal meets APRA objectives of (a) financial safety and long term soundness of the regulated entities, and (b) financial system stability.
- The implications for regulated entities’ competitiveness.
On the face of it, it is doubtful that the proposal meets APRA’s objectives. The primary reasons are that it focuses on disclosure of the management of non-financial risk, how this is integrated into an entity’s remuneration system, and the governance process for applying consequences if there is a failure in non-financial risk management. So, what is wrong with this? After all, it is consistent with the CPS 511 regulation of remuneration.
The reason is simple enough. While there is emphasis on non-financial risk, there is none on financial risk. For example, the CPS 511 regulation requires variable remuneration to be contingent on a material weighting of non-financial risk factors. It does not suggest there should be any consideration of financial risk factors. Surely prudential supervision and management has to ensure a regulated entity addresses financial risk in a material way. As it stands, a regulated entity can vary remuneration 100% for non-financial risk management and 0% for financial risk management and be fully complying.
An entity could also choose to not have any variable remuneration, and hence not to vary remuneration for poor risk outcomes, and be fully complying. Prior submissions have put this to APRA, but there has been no change to approach.
This oversight has been pointed out to APRA before. Guerdon Associates will keep plugging away. But while it is unlikely there will a re-visit to correct the flaws in the CPS 511 regulation, there is hope that the undue weight on non-financial risk management and the absence of recognition of financial risk management can be addressed in disclosure requirements.
The competitiveness issue is one that will need to be considered by unlisted Significant Financial Institution (SFI) entities.
Listed SFI entities are used to disclosing remuneration outcomes; that is $’s including the value of vested variable remuneration (VR) outcomes. However for those unlisted SFIs and in particular PHIs the disclosure of remuneration frameworks and actual outcomes for the CEO and key cohorts will be confronting as the information has remained out of the public domain until now.
For all SFI entities the heightened focus on transparency of the remuneration framework, the rationale behind its design, who governs remuneration and how remuneration outcomes are arrived at will be challenging remembering that CPS511 also requires the board to test its effectiveness.
If you are an SFI that that has chosen to opt out of VR, you will have to describe how consequence management is applied in the event of a material breach or misconduct. When there is no opportunity for VR adjustment or clawback the tools available to the board are limited, and typically applied to tenure of employment, career and promotion prospects, development opportunities, and future salary increases.
APRA’s expectation is that companies will be concise, cost effective and efficient in meeting collective disclosure obligations and for example use a single document to meet Corporations or SIS Act and CPS511 disclosure requirements. Most listed companies would probably not choose to add the quantitative information including cohort data tables for senior managers, material risk takers etc to the Remuneration Report. This has already been the practice with current APRA remuneration disclosures for APS 330. Such disclosures will not assist major shareholders and proxies in their review, and set a precedent that may be expected in future years even if regulatory reporting requirements change. Remuneration reports are already long and difficult to read without the addition of 4 supplementary tables including aggregated data. Auditors may have issues signing off the remuneration report containing data proposed in the discussion paper and the CPS511 cohort tables.
Non SFIs will not have to make the quantitative disclosures, rather the focus will be on how the remuneration framework promotes ‘effective management of financial and non-financial risks’.
The required qualitative material is another matter and is complementary to the existing Corporations Act disclosure narratives. We expect that the remuneration report narratives will therefore expand to address CPS511 rather than the material sitting in a separate document.
- Detailed description of the remuneration framework including how non-financial measure weighting is applied
- Reporting of remuneration outcomes using a regulated format. The tables currently provided in remuneration reports are voluntary and inconsistent.
- Individual quantitative data required for the CEO only
- Aggregate cohort remuneration required for: other senior managers; Highly paid material risk-takers; other material risk takers; and risk and financial control personnel.
- Special payments (guaranteed bonus, sign-on award and severance payments) to be reported separately.
- Quantification of outstanding deferred VR and VR adjustments
Guerdon Associates will be formulating a response to the new regulations and will circulate our submission.
Submissions due 7 October 2022
Regulation finalised last Q 2022
Come into effect from 1 Jan 2023 and reporting requirements occur 4 months after end of company FY i.e. 4 months after full financial year following CPS511 implementation.
- Discussion paper: Enhancing ADI Public Disclosures HERE
- The new reporting standard CRS511.0 HERE
- Prudential Standard APS330 Public Disclosure HERE