New APRA team with exclusive focus on remuneration, culture and governance to crack the whip on remuneration in 2016

While the Australian Prudential Regulatory Authority (APRA) is not proposing significant new policy, the newly created team’s work will primarily focus, at least in its early stages, on improving our supervisory scrutiny of the specific requirements set out in existing prudential standards.

APRA’s extra supervisory muscle was disclosed in a speech by Wayne Byers, APRA’s head, is a speech on 4 November 2015 (see HERE).

However, before 2016 begins, APRA’s immediate priority is the area of risk culture, and in particular how banks and insurers are implementing the requirements of CPS220 Risk Management (see HERE). This is also aligned with the ASIC’s priorities for non-prudentially regulated entities (see HERE), and other similar international G20 initiatives (for example, see HERE and HERE).

This standard came into effect at the beginning of this year and, amongst other things, contains the exceedingly difficult (despite APRA indicating it is ostensibly simple) requirement for Boards to form a view of the risk culture in the company, and the extent to which that culture supports the ability of the company to operate consistently within its risk appetite.

APRA’s first step will be to undertake a stocktake of practices that Boards are employing to fulfil this obligation. This stocktake will not only help APRA to refine and hone its supervisory approach to assessing risk culture, but will also hopefully help companies benchmark their own practices and understand a little better how they stack up against their peers.

After the culture stocktake APRA’s next area of priority will be to review the current state of remuneration arrangements within ADIs and insurers. Specific requirements came into force in 2010 with the goal of ensuring personal rewards appropriately take account of risk-taking behaviour. These requirements are no longer new, so APRA will be looking to see that after the initial period of implementation, they are now fully in force and meaningfully applied. While we do not expect to see significant differences in policies, APRA will find a significant range of actual practices among ADIs and insurers, and that several will be found wanting. This is already evident in public filings with APRA to the extent, for example, that companies have actually applied malus provisions to material risk takers.

APRA will also be comparing Australian approaches with current and emerging international thinking – not necessarily to copy what is done offshore, but to at least make sure they are fully aware of differences in industry and regulatory practices and to satisfy themselves that they are not falling ‘behind the game’ due to any inattention to the issue.





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