Special alert – new regulation of bank executive remuneration in federal budget papers

The Australian federal government has flagged new regulation of banker pay, requiring 60% (CEO), or 40% (executive) of variable pay, to be deferred for at least four years. For most Australians, this will bring to mind the major bank executives who are perceived to be highly rewarded. However, there are over 140 ADIs in Australia, 42% of which are mutuals (credit unions or building societies) and 35% are foreign banks.


The large banks will only have to make relatively minor adjustments to comply with the new deferral requirement. However, smaller banks, and especially mutuals, will have to make significant changes to their current remuneration arrangements.


The most likely response of mutuals will be to either to significantly increase their current modest variable pay arrangements in order to defer a significant proportion of it, or, to roll variable pay back into fixed pay and have no performance-related pay at all. These are probably not what the government intended and neither appear to be in the best interests of members.


It is unclear how the changes will impact foreign ADIs. We await the release of the draft legislation to see which executives will be subject to the regulation. For example, is the local CEO of a foreign bank subject to the CEO deferral requirement, or the broader executive requirement?


In detail, a new Banking Executive Accountability Regime will be introduced under the supervision of APRA. This new legislative regime is one part of the government’s response to the Coleman parliamentary inquiry into banks. There are three significant components of the regime that herald an extension of the regulation of executive remuneration:


  • Registration: prior to appointing senior executives and directors, authorised deposit-taking institutions (ADIs) will need to advise APRA. Once appointed, these people must be registered with APRA and a map of the role and responsibilities of the senior executive must be provided to APRA.
  • New powers and penalties: new requirements will be established for the way in which banks and their executives conduct their business consistent with good prudential outcomes. There will be a new civil penalty enforced by APRA for ADIs that fail to meet these requirements. APRA will be given the power to remove and disqualify senior executives and directors from all APRA-regulated institutions. APRA will also be able to impose penalties if ADIs do not appropriately monitor the suitability of their executives to hold senior positions.
  • Remuneration: ADI’s will be required to defer a minimum of 40% of an executive’s variable pay – and 60% for certain executives such as the CEO – for a minimum period of four years. APRA is to be given stronger powers to require ADIs to review and adjust their remuneration policies when APRA believes such policies are producing inappropriate outcomes.


Banks will also be held to account if they try and hide misconduct by executives with new mandatory reporting requirements.


If banks breach the misconduct rules, they will face new and bigger fines starting at $50m for small banks and $200m for large banks.




Various media reports suggest that the government was influenced by UK practice. While it can be argued that the UK probably over-reacted with regulation in response to ineffective supervision just prior to the GFC, UK regulators and supervisors (the PRA and FCA) have limited prescribing remuneration requirements that are on top of the EU’s controversial and counter-intuitive rules on capping banker bonuses (see HERE). The UK, like Australia, has preferred the application of guidelines and principles, rather than prescriptive legislation.


The proposed prescriptions will be a marked departure from decades of government that has tended to set principle based rules for governance by owners and their representatives, but not actually prescribe how companies should be run. Prescribing a one size fits all remuneration framework also seems counter to another government objective that is to foster competition among banks.

To date APRA has consistently shied away from being prescriptive. Given that they have charge of drafting the law, it will be interesting to see what they come up with.


Whatever form it takes, the government will require legislation to see these proposals through. To this end, the Government will provide $4.2m over four years from 2017-18 to APRA to implement the new measures. APRA will also be given a further $1m per annum for a fund to enforce breaches of the new penalty provisions where banks fail to meet the expected standards.


The budget papers can be found HERE.

© Guerdon Associates 2024
read more Back to all articles