New remuneration disclosures required for APRA regulated entities

On 1 August 2023, the Australian Prudential Regulation Authority (APRA) released its new requirements for authorised deposit-taking institutions (ADIs), insurers and superannuation entities to publicly disclose information on aspects of their remuneration (see HERE). This is a further update to the requirements of Prudential Standard CPS 511 Remuneration. You can view our prior articles on CPS 511 and updates HERE. CPS 511 requires entities to establish and maintain robust incentive structures to manage risk, to ensure appropriate consequences for poor risk outcomes and to have increased oversight and accountability.

The proposals are designed to provide greater transparency on remuneration practices across APRA-regulated entities by requiring entities to publicly disclose information on their remuneration frameworks, design, governance, and outcomes.

These disclosure requirements are intended to ensure there is transparency on how entities are meeting the objectives of CPS 511, which is believed will raise the bar for remuneration practices across all APRA-regulated industries.

APRA’s disclosure requirements build on the Corporations Act and Superannuation Industry (Supervision) Act requirements, and align with those of the Basel Committee for Banking Supervision, and the disclosure principles of the Financial Stability Board. The requirements will apply to a broader range of entities than those covered by existing legislation and add transparency on remuneration design to explain how risk has influenced remuneration outcomes.

In summary, APRA says the new CPS 511 disclosure requirements provide for:

  • More detail on how remuneration is decided, beyond purely financial performance
  • Insights around reductions in remuneration as a result of risk failures and/or poor conduct
  • Greater comparability of how people are paid across all APRA-regulated entities
  • Additional transparency for those taking material risks or overseeing risks on behalf of the entity.

Significant financial institutions (SFIs) have greater requirements for both qualitative and quantitative disclosures to reflect a complex remuneration framework, which non-SFIs are less likely to have. While listed banks already disclose much of this information, SFI superannuation funds, insurers, and mutuals will be disclosing most of this information for the first time. Some will no doubt be scrambling for their cozzies before the tide goes out.

Non-SFIs are only required to disclose qualitative remuneration arrangements.

Other disclosure requirements imposed on APRA-regulated entities include (but are not limited to):

  • Descriptions of how remuneration outcomes are aligned with performance with an overview of main financial and non-financial performance measures for the entity, key business lines, the CEO, and other specified roles on a cohort basis.
  • Descriptions of how material weight is applied to non-financial measures in determining performance-related variable remuneration.
  • Descriptions of variable remuneration of risk and financial control personnel for the financial year covering remuneration arrangements.
  • Descriptions of how variable remuneration arrangements reflect entities’ independence, authority, and purpose of functions with no undue influence by the performance of the business activities they control.
  • Descriptions of how an entity’s remuneration framework aligns to its business plan, strategic objectives, and risk management framework.
  • Descriptions of how an entity’s remuneration framework promotes management of financial and non-financial risks, sustainable performance, and long-term soundness.
  • Descriptions of positions included in ‘specified roles’ defined in the CPS 511 (See HERE).
  • Descriptions of different variable remuneration offered to employees in ‘specified roles’ and rationale.
  • Descriptions of the ways an entity defers and adjusts variable remuneration to take account of longer-term performance, including risk performance.

These changes are to come into effect from 1 January 2024 and apply to APRA-regulated entities’ first financial year following this date. For June year-end entities, this means their first disclosure would be due after 30 June 2025. This comes in response to concerns over APRA’s original staggered deadline for APRA-regulated entities being too tight for entities to complete new disclosures.

See HERE for the Response Paper.

© Guerdon Associates 2024
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