06 December 2021
Guidance for APRA regulated entities
Over the past few years, the financial industry in Australia has been subject to intense scrutiny. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry uncovered cases related to money laundering, fees for no service, statutory reporting issues, impropriety in foreign exchange trading and many others. As a result, banks and other financial institutions have been required to further strengthen their governance and meet even stricter disclosure requirements.
To assist with changes to executive remuneration in the financial sector, APRA recently published its final practice guide on the new Prudential Standard CPS 511 Remuneration (CPS 511), which was released earlier in August 2021. CPS 511 sets out the requirements for regulated entities to design and maintain prudent remuneration arrangements that promote effective risk management, sustainable performance, and long-term soundness.
The Prudential Practice Guide (CPG 511) sets out guidance and good practice examples to assist regulated entities in implementing CPS 511, under a principles-based rather than prescriptive approach. The release of CPG 511 followed a consultation period since April 2021.
In response to submissions during the consultation process, APRA has aligned the guidance with the Government’s proposed Financial Accountability Regime (FAR) and provided additional examples of better practice. This includes examples on:
In addition, last month the Actuaries Institute released a board skill and capability checklist to assist APRA-regulated entities with appointing board directors with the right qualifications to prevent misconduct in the financial services industry, as uncovered by the Hayne Royal Commission. The dialogue paper, The Special Needs of Financial Services Boards, provides a practical toolkit for board appointments and assessments, in recognition of the complexities of financial services organisations that impact their board composition. The paper indicates that “pressure to make short-term profits traded off against the long-term financial commitments that are made to the community has important implications for the capabilities of the board and hence its directors.”
While requirements of CPS 511 will not take effect until 1 January 2023, regulated entities should commence reviewing and updating their remuneration practices as APRA increases its supervisory oversight on the implementation of CPS 511. Given the volume and pace of financial services regulatory reform in general, it is important for companies to plan ahead and ensure they have the appropriate oversight structures in place – including board directors with the requisite skills and capabilities in providing ethical leadership within a complex financial services organisation.
To assist with changes to executive remuneration in the financial sector, APRA recently published its final practice guide on the new Prudential Standard CPS 511 Remuneration (CPS 511), which was released earlier in August 2021. CPS 511 sets out the requirements for regulated entities to design and maintain prudent remuneration arrangements that promote effective risk management, sustainable performance, and long-term soundness.
The Prudential Practice Guide (CPG 511) sets out guidance and good practice examples to assist regulated entities in implementing CPS 511, under a principles-based rather than prescriptive approach. The release of CPG 511 followed a consultation period since April 2021.
In response to submissions during the consultation process, APRA has aligned the guidance with the Government’s proposed Financial Accountability Regime (FAR) and provided additional examples of better practice. This includes examples on:
- applying a material weighting to non-financial measures in variable remuneration;
- strengthening incentives for individuals to prudently manage risks they are responsible for;
- applying consequences for poor risk outcomes; and
- improving oversight, transparency and accountability on remuneration.
In addition, last month the Actuaries Institute released a board skill and capability checklist to assist APRA-regulated entities with appointing board directors with the right qualifications to prevent misconduct in the financial services industry, as uncovered by the Hayne Royal Commission. The dialogue paper, The Special Needs of Financial Services Boards, provides a practical toolkit for board appointments and assessments, in recognition of the complexities of financial services organisations that impact their board composition. The paper indicates that “pressure to make short-term profits traded off against the long-term financial commitments that are made to the community has important implications for the capabilities of the board and hence its directors.”
While requirements of CPS 511 will not take effect until 1 January 2023, regulated entities should commence reviewing and updating their remuneration practices as APRA increases its supervisory oversight on the implementation of CPS 511. Given the volume and pace of financial services regulatory reform in general, it is important for companies to plan ahead and ensure they have the appropriate oversight structures in place – including board directors with the requisite skills and capabilities in providing ethical leadership within a complex financial services organisation.