Banks will need to disclose more on their pay under new APRA regulation

It is likely that the pay disclosures of Australia’s banks will soon have to cover not just their top executives and directors (KMP), but also employees considered as material risk takers.


APRA indicated this on Friday 7 October 2011, in a letter to all ADIs.  In effect, APRA indicated that it will implement in full the disclosure regime agreed by the international committee of banking supervisors.


On 1 July 2011, the Basel Committee on Banking Supervision (BCBS) issued Pillar 3 disclosure requirements for remuneration. The remuneration disclosures take account of the Financial Stability Board’s Principles for Sound Compensation Practices (2009).


Fortunately, however, APRA is proposing an adoption date later than the 1 January 2012 commencement date proposed by the BCBS.


Consultation on APRA’s proposed remuneration disclosure requirements is expected to occur in early 2012.


Despite this, APRA is encouraging each locally incorporated ADI to commence reporting on its remuneration practices in a manner consistent with the BCBS document as soon as practicable.


Importantly in the Australian context, the information must be available to the general public, and will include foreign bank subsidiaries. 


Inclusion of such information should be considered as part of an ADI’s annual report or existing Pillar 3 disclosure for the next reporting period.


The required information about remuneration practices and policies covers the following areas:


·    The governance/committee structures

·    The design/operation of remuneration structures, frequency of review

·    The independence of remuneration for risk/compliance staff

·    The risk adjustment methodologies

·    The link between remuneration and performance

·    The long-term performance measures (deferral, malus, clawback)

·    The types of remuneration (cash/equity, fixed/variable).


Unlike Corporations Act requirements, the banks’ remuneration disclosures will also need to describe the ways in which current and future risks are taken into account in the remuneration processes. These disclosures should include:


·    An overview of the key risks that the bank takes into account when implementing remuneration measures

·    An overview of the nature and type of the key measures used to take account of these risks, including risks that are difficult to measure (values need not be disclosed)

·    A discussion of the ways in which these measures affect remuneration

·    A discussion of how the nature and type of these measures has changed over the past year and reasons for the change, as well as the impact of changes on remuneration.


The requirements include qualitative disclosures in relation to remuneration policy and processes and also quantitative disclosures, including information in relation to the remuneration of senior management and other material risk-takers. The objective of these disclosures is to support effective market discipline and allow market participants to assess the quality of a banking institution’s remuneration practices. The requirements will also contribute to greater convergence and consistency of disclosure on remuneration.


The disclosure requirements will require Australian listed banks to disclose more detail than they currently disclose on the extent of pay deferral, as well as new information on the number of employees receiving incentive pay and the proportion of the total workforce this represents.


APRA will expect a proportionate approach to the implementation of these requirements that reflects the nature, size and complexity of ADIs.


APRA acknowledged that some ADIs are currently required to meet the remuneration disclosures set out in the Corporations Act 2001. APRA will take these requirements into account when formulating its Pillar 3 disclosure rules.


It would appear that the BCBS requirements will allow APRA to mandate disclosure of these matters on an aggregate basis, and not require individual pay details to be disclosed.


The BCBS requirements can be seen HERE

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