APRA submissions on the proposed disclosure (CPS 511) and reporting (CRS 511) requirements in support of its remuneration governance regulation (CPS 511) were due last Friday, 7 October.
This is the latest in a long series of prudential regulation initiatives on remuneration stemming from the 2010 global financial crisis (GFC) and more recently the Financial Services Royal Commission. Some of these initiatives made good governance sense, such as incentive deferral and malus, and have spilled over to become standard practice in the non-APRA regulated space.
The latest regulatory amendments and consultation concern the nature and extent of data that banks, insurers and superannuation funds regularly report to APRA, as well as the information they need to publicly disclose.
APRA has committed to publish statistics on remuneration outcomes across all APRA-regulated industries, providing aggregated information about Specified Roles at an entity-level on eligibility, quantum, and year-on-year increase in fixed, variable and total remuneration.
Within 4 months of the end of the entity’s financial year, regulated entities must report:
- A description of how the board governs the entity’s remuneration practices, including input provided by the board risk and remuneration committees and CRO;
- For entities that offer variable remuneration to Specified Roles, the incentive plan design and incentive adjustment triggers and mechanisms;
- For entities that offer variable remuneration to Specified Roles, details of variable remuneration outcomes on a cohort basis.
Disclosures are also required to be publicly disclosed on an entity’s website within 4 months of the end of an entity’s financial year. These include:
- Summary of board remuneration governance practices;
- Key design features of remuneration frameworks such as criteria for assessment, deferral and vesting; and
- A description of the method used to assess risk management outcomes, and any application of consequence management in the event of material breach or misconduct.
Additional disclosures are required for the Significant Financial Institutions (SFIs) include:
- Findings from remuneration framework reviews i.e. compliance and effectiveness reviews;
- Application of material weight for non-financial measures and overview of variable remuneration for Specified Roles;
- Deferral and vesting policy;
- Adjustment tools to ensure alignment of remuneration outcomes with performance and risk; and
- Quantitative remuneration disclosures for CEOs on an individual basis and for Specified Roles on a cohort basis.
What prudential supervision reason does public disclosure serve? This was asked at a meeting we and others had with APRA. The inference in APRA’s response at the meeting is that public disclosure permits market discipline to be applied. That is, external stakeholders will provide capital to, and purchase services from, providers on the basis that remuneration is well governed.
Some may have a problem with this. There is little evidence to support the contention that remuneration disclosures will be a primary driver of market behaviour. Bank customers are attracted by high deposit and low loan interest rates and availability. RSE customers are attracted to superannuation fund returns. Insurance customers are attracted by good coverage for low costs. Investors are attracted to high risk-adjusted returns and TSR. While remuneration governance may factor into investment algorithms for the latter, they are not primary drivers of investment decision making.
In comparison to the Basel Committee of Banking Supervision’s agreed requirements APRA goes much further. It has been suggested that the APRA requirements be pared back to this international standard.
See our submission HERE.© Guerdon Associates 2023 Back to all articles