One of the most significant obligations under CPS 511 is the triennial effectiveness review. Every APRA‑regulated significant financial institution (SFI) must conduct an independent review of its remuneration framework at least once every three years.

CPS 511 was phased in:

• For Authorised Deposit Taking SFIs effective 1 January 2023.
• For insurer and superannuation SFIs effective 1 July 2023.
• Other APRA‑regulated entities (non‑SFIs): effective 1 January 2024.

This means companies are now coming up on three years since the start date of the regulation. If independent effectiveness reviews are expected every three years, most companies should either have already completed one or should be getting ready to have one.

Reviews test whether the remuneration framework:

1. is appropriate and fit for purpose, aligning with the business plan, strategic objectives and risk management framework;
2. promotes effective management of financial and non-financial risks, sustainable performance and the entity’s long-term soundness;
3. for superannuation organisations, promotes the performance of duties and exercise of powers in the best financial interests of beneficiaries;
4. supports the prevention and mitigation of conduct risk; and
5. operates as intended, including that remuneration outcomes are aligned with the performance and risk outcomes achieved.

For most it appears that the triennial review has been simply a box‑ticking exercise. Many “operationally independent” external advisers hired for this purpose utilise relatively inexperienced staff reliant on standardised templates. We understand that APRA expects external advisers undertaking the review not be the board’s regular adviser, otherwise they would be marking their own homework, this is rarely the case.

Few apply more relevant reviews that involve an understanding of risk management, behavioural economics, and incentives as they consult with stakeholders to test the remuneration framework’s effectiveness on a factual, strategic and risk management basis. Alas, it requires higher level, and more expensive people to conduct such a review, and therefore rarely gets through banks’ procurement processes. This may change as APRA gears up to minimise adverse risk events .

There is still a window for some to conduct the review. In response to the Council of Financial Regulators’ Review into Small and Medium-sized banks, APRA is raising the asset bar defining which ADIs are SFIs from $20 billion to $30 billion and will give ADIs transitioning to SFIs a minimum of 12 months to comply with the increased regulations (including an independent remuneration effectiveness review). A special tier is under consideration for very small ADIs that will be subject to a lighter form of regulation. APRA will be considering similar “proportionate” regulation for the insurers and superannuation organisations next.

Unfortunately for the largest ADIs, APRA is also proposing a tier above SFIs for Most Significant Financial Institutions (MSFI) with higher capital requirements than the other tiers and likely also more intense scrutiny and higher expectations of governance practices and risk management.

An MSFI might be well served by a more robust effectiveness review methodology.

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