A recent report from the world regulatory body on banking, the Financial Stability Board (FSB), has reinforced the view that differences between he more highly prescriptive country regulators, and the more flexible principle-based regulators, remain to be resolved (see HERE).
Australia, along with Canada, Hong Kong, Switzerland, and the US are in the more flexible principle-based group, while the U.K., France, Germany, the Netherlands, Italy, Spain and Singapore, belong to the more prescriptive, inflexible group. There is a third group, comprising Japan, China and Brazil, among others, that insist that pay does not constitute a systemic risk issue in their countries.
These differences continue to be keenly felt within the FSB. Various political strategies are at work to resolve differences in order to have all countries singing from the same hymn book, and short circuit the potential for further systemic banking meltdowns. Bank board remuneration committees should therefore be prepared for further action, via either new regulations or new methods for enforcing existing regulations.
In order to strengthen its monitoring in this area (perhaps with the subtext to determine which groups’ methods work best), the FSB has recently established the Compensation Monitoring Contact Group (CMCG), a network of national experts from member jurisdictions with regulatory or supervisory responsibility on compensation practices. The CMCG is responsible for monitoring and reporting to the FSB on national implementation of the Principles and Standards.
In addition, the FSB has established a mechanism for national supervisors from FSB member jurisdictions to bilaterally report, verify and, if necessary, address specific compensation-related complaints by financial institutions that they are not able to compete on a level playing field. The objectives of the Bilateral Complaint Handling Process(BCHP) are to:
- Address evidence-based complaints raised by firms to their home supervisors that document a competitive disadvantage as a result of the inconsistent implementation of the Principles and Standards by firms headquartered in other jurisdictions.
- Produce and report information to the FSB on the nature and outcomes of such complaints so as to inform the scope and intensity of the ongoing monitoring.
The press release re the monitoring process is HERE.
Locally, APRA has been working hard to show progress on executive remuneration. In a speech given on 11 May 2012, the head of APRA, Dr John Laker, indicated that progress, while good, has been uneven across ADIs.
APRA’s supervisors have been monitoring progress on implementation, conducting peer comparisons for a number of selected institutions and, more recently, have met with a number of Board Remuneration Committees for more detailed review.
Four principal themes emerged from these meetings.
- The first centred on the governance and operation of the Remuneration Committee itself. All of the boards APRA met with had well-established Remuneration Committees, with reasonably clear and robust governance arrangements and strong linkages to the Board Risk Committee. In a limited number of cases, however, there seemed to be a degree of tension between the roles of the board and the Chief Executive Officer. While APRA considered the latter should be a source of advice and input, ultimately the structure and outcomes of remuneration arrangements for senior executives are decisions that lie with the board alone.
- The second centred on the coverage of the remuneration policy. There appeared to be some inconsistencies across the institutions on the extent to which board approval is required for the remuneration of material risk-takers below the senior executive level. There were also cases where the remuneration arrangements of executives in a group subsidiary were not receiving scrutiny at board level.
- Thirdly, approaches to the use of performance scorecards to determine remuneration varied widely. The design and application of scorecards is critical to ensuring risk and reward are properly aligned. A scorecard based solely on judgment does not provide a sound basis for remuneration decisions, while an entirely mechanical or formulaic approach prevents Remuneration Committees from providing a sensible overlay where key performance indicators do not present a true measure of an individual’s performance. APRA favours a balanced approach, combining both clear metrics and judgment, and taking risk-related considerations explicitly into account. APRA’s view is that this can work best where the Risk Committee or the Chief Risk Officer has direct input into Remuneration Committee decisions.
- The fourth theme centred on the structure of remuneration arrangements. Almost all institutions that APRA met with use a combination of short-term and long-term incentives for senior executives. For both types of incentives, there was welcome progress in extending deferment terms, consistent with the intent of APRA’s remuneration requirements. However, the ability to claw back unvested payments was not always evident. For some institutions, the scope for withholding unvested payments if, for example, there was subsequent evidence of financial misconduct was very restricted.
See Dr Laker’s speech HERE.
Interestingly, the same concerns were echoed recently in another APRA speech, but this time regarding insurers. Global regulation of insurer remuneration is considerably behind that of banks. Insurers are still fighting rear guard actions to challenge the need for regulation. In fact, despite the overwhelming evidence that it was the collapse of AIG that triggered the GFC rout more so than the collapse of Lehman Brothers, insurers are arguing that there are no global systemic insurers, so why regulate?
Ian Loughlin’s insurance regulation speech can be found HERE.© Guerdon Associates 2023 Back to all articles