The Australian Prudential Regulation Authority (APRA) has released its final version of prudential requirements on remuneration for authorised deposit‑taking institutions (ADIs) and general and life insurance companies.
APRA’s approach follows the Financial Stability Board’s “Principles for Sound Compensation Practices” (see HERE).
The relevant industry governance standards (APS 510, GPS 510 and LPS 510) and an associated prudential practice guide (PPG 511) can be found HERE).
APRA received 19 submissions during the second consultation period. These, and feedback from other consultations, resulted in some revisions.
The key modifications are:
1. narrowing the group of ‘responsible persons’ for whom the board remuneration committee must make individual recommendations to the board;
2. removing the requirement that the board of a foreign branch approve the remuneration policy. Instead, the senior officer outside Australia with delegated authority from the board may approve the remuneration policy;
3. clarifying in the prudential practice guidelines that basing the remuneration of risk and financial control executives on the performance of the institution is acceptable where there are proper safeguards to ensure that the integrity of their functions is not compromised; and
4. excluding contractual arrangements with third parties from the coverage of the remuneration policy where the risk from incentive payments is explicitly addressed in the institution’s risk management framework and overseen by another board committee.
While the changes could be said to be a softening of APRA’s stance, they are better construed as being pragmatic.
The revised governance standards will come into effect on 1 April 2010. By this date, APRA requires that the board remuneration committee will be established and a suitable remuneration policy will be in place. APRA expects regulated institutions to use the period before 1 April 2010 to begin the transition for existing remuneration policies that would not meet the revised standards. This does not mean that all executives in APRA regulated institutions will have their pay turned upside down. APRA has allowed time for individual contracts to be renegotiated, and expects these to be revised and in place by 1 April 2013.
While APRA has managed the consultation process well compared to the shemozzle in some overseas centres, and flagged the nature of its regulations in several drafts before finalisation, many APRA regulated institutions will be scrambling to fully comply by 1 April 2010.© Guerdon Associates 2022 Back to all articles