Following the release of the revised CPS 511 draft by APRA in November 2020, there has been an expectant air among Australia’s financial institutions who were waiting for the other major financial services industry regulation – FAR – to drop. It now has, with draft legislation released on Friday, 16 July.
CPS 511 and FAR both regulate the remuneration of all APRA-regulated entities, with overlapping requirements. FAR replaces existing BEAR regulation (see HERE). FAR applies to all APRA regulated entities including insurers and superannuation entities. The BEAR only applies to ADIs (e.g. banks).
The most contentious aspect of FAR is that:
- it requires a proportion of variable remuneration to be deferred and subject to malus, but in the event that there is little or no variable remuneration is does not require a proportion of total remuneration to be deferred. Its predecessor, BEAR, did.
- the explanatory notes accompanying the draft confirm that accountable persons not in receipt of variable remuneration do not have any deferral requirements
In effect, entities striving for competitive advantage in attraction and retention need only provide higher fixed pay and no incentive pay. This practice would, apparently, be condoned by APRA, given paragraph 38 of their prudential practice guide (see HERE).
Therefore, one may ask, what is the point of regulation for better prudential behaviour and accountability if it is so easily circumvented?
Here is a summary to provide you with some context.
- BEAR captured only Approved Deposit-taking Institutions (ADIs) and introduced accountability maps and statements as a way to articulate and sheet home individual executive accountability for the core functions including risks within ADIs.In addition to a new and costly administrative industry managing the accountability requirements (best not covered here), BEAR also introduced:
- a penalty regime for transgressions; and
- a tiered remuneration deferral regime (based on ADI scale and role – CEOs versus senior executives).
- The proposed FAR (22 January 2020, see HERE) extended the BEAR principles to all APRA -regulated entities (ADIs, insurers and super funds). FAR removed the tiered approach to remuneration deferrals. It also introduced a penalty regime with real bite where boards and management failed to comply with their obligations. The penalty regime captures individuals as well as the company as a whole.FAR, once commenced, will supersede BEAR.
- The latest draft of CPS 511 was released in November 2020 (see HERE and draft guidance on the regulation HERE). CPS 511 also requires deferral and accountability mapping. But the positions it covers and thresholds for what is a large company are not the same. It has its own penalty regime. It also imposes additional remuneration framework requirements, such as balancing financial and non-financial metrics in performance incentive plans and appropriately adjusting remuneration outcomes.
BEAR will disappear once FAR is in place.
In essence, APRA-regulated entities will need to comply with both FAR and CPS 511, which have different purposes and focus. FAR focuses on ensuring ASIC has a stick to wield when malpractice is uncovered (forfeiture of deferred remuneration) and it is clear who is responsible for that malpractice (accountability mapping). CPS 511 focuses on guiding APRA-regulated entities to implement an effective remuneration framework that acts to mitigate risks.
While proposals outlining how FAR would work had been introduced earlier, the overlap with CPS 511 triggered a review to ensure that the two regulations and regulators (being APRA and ASIC) worked in better harmony.
So what do you need to know about the new FAR draft?
1. It will come into effect for:
a. ADIs on the later of 1 July 2022 or six months after commencement of the Regime (when the BEAR will be repealed); and
b. Insurers (general, life and private health) and RSEs 1 year later – the later of 1 July 2023 or 18 months after commencement of the Regime is proposed. The Minister may nominate another day via a declaration.
Submissions on the legislation close 13 August 2021. For the July 2022 date to be met, Treasury will need to have final legislation ready for the Parliament sessions before Christmas 2021.
Regardless, with its choice of dates, Treasury has signalled FAR is to be implemented prior to or at the same time as CPS 511 (which has intended effective date of 1 January 2023 for ADI SFIs, 1 July 2023 for SFIs that are general insurers, life insurers, private health insurers or RSEs) and for all other APRA-regulated entities – from 1 January 2024.
2. Completing accountability maps and statements will be dropped for smaller entities. The 2020 draft provided a scale (total assets) as the threshold for enhanced compliance. In its place the current draft states ‘The Minister rules will outline the threshold’. Current proposed thresholds are:
|Entity type||Metrics – Total Assets|
|General Insurers||> $2b|
|Life Insurers||> $4b|
|Private Health Insurers||> $2b|
|RSE Licensees||> $10b (cumulative where multiple RSEs under trusteeship with one licensee)|
3. The 2020 draft provided a definition for variable remuneration (VR) (remuneration conditional on achievement of pre-determined objectives and not guaranteed) which has been changed in the current draft. This release has specified that deferral requirements will apply to remuneration subject to service and performance but will not apply to ordinary salary and wages (see Exposure Draft Explanatory Materials S1.81 page 15). This differs from APRA CPS 511 which refers also to time vested deferred remuneration, but did not carve out an exemption for salary and wages.
4. The VR deferral requirement has not changed with a blanket 40% of VR (where VR is $50,000 or greater) to be deferred for at least four years for accountable persons.
5. Interestingly the FAR (like BEAR) does not use the term malus. CPS 511 does. If CPS 511 and FAR regulations are to work in harmony the use of a common term for malus would be logical. The revised draft does though stipulate that there should be a remuneration policy in force that allows for VR to be reduced by an amount proportionate to the failure in the event that a person has failed to comply with their accountability obligations (to zero if appropriate). The remuneration reduction does not need to relate to the period in which the failure occurred.
6. The concept of clawback is also avoided, though excluded obliquely by stipulating if there has been an accountability failure any adjustment ‘need not be a reduction of variable remuneration relating to a period in which the failure occurred (see Exposure Draft Financial Accountability regime Bill 2021 S 23 (2) (a) page 25).
7. There is a parallel consultation process which will assist in the definition of prescribed responsibilities and positions which will underpin the identification of an Accountable Person – see HERE. Consultation on this, and the thresholds for enhanced notification will start in September/October.
8. This draft of FAR also provides more colour as to what constitutes ‘reasonable steps’ to ensure compliance with obligations under the legislation, and is clear that if an entity reasonably believes it has breached its key personnel obligations the regulator must be notified (generally within 30 days).
9. Perhaps as a result of recent breaches and enforceable undertakings, the majority of the FAR draft provides detail as to investigations, examinations, information requests, evidentiary use of material, directions, non-compliance, civil penalties etc (over half of the 102 pages!). Not for the faint hearted.
The exposure draft legislation and explanatory materials can be found HERE.© Guerdon Associates 2023 Back to all articles