The Australian Prudential Regulation Authority (APRA) has provided an update on the implementation of banking royal commission recommendations, noting that it is on track with all 10 recommendations that were made by commissioner Kenneth Hayne and supported by the federal government.
In relation to recommendation 1.12, which suggested that APRA amend its prudential standard around land valuations (APS 220), the prudential regulator said it expects to release the final version of the standard by the end of 2019.
Executive product responsibility
Likewise, APRA said it is on track to release its new requirements for product accountability under the Banking Executive Accountability Regime (BEAR) by the end of this year. This is in response to recommendation 1.17, which states that APRA should “determine an additional prescribed responsibility (which would apply to domestic ADIs only) for all steps in the design, delivery and maintenance of all products offered to customers by the ADI and any necessary remediation of customers in respect of any of those products”.
The regulator had launched a consultation on executive product responsibility in July, proposing that ADIs identify and register an accountable person, excluding CEOs, to hold “end-to-end product responsibility” for every product that the ADI and its subsidiaries offer to customers.
Commissioner Hayne was also in favour of the Financial Stability Board’s (FSB) toolkit, presented in its Strengthening Governance Frameworks to Mitigate Misconduct Risks: A Toolkit for Firms and Supervisors report, recommending that APRA implement the FSB’s recommendations (recommendation 5.1).
APRA had launched a consultation on its proposed standards for executive remuneration in July, with the final standard (CPS 511) expected to be released in early 2020.
“The draft standards encapsulate the Financial Stability Board’s guidance in relation to sound compensation principles and practices, including in relation to misconduct, compliance and other non-financial risks,” the regulator said in its update.
APRA’s proposed standards on remuneration require regulated entities to:
- design their remuneration systems to encourage sound management of non-financial risks and to reduce the risk of misconduct;
- make regular assessments of the effectiveness of the remuneration system in encouraging sound management of non-financial risks and reducing the risk of misconduct;
- limit to 50 per cent the use of financial metrics in connection with variable remuneration;
- provide for the entity, in appropriate circumstances, to claw back remuneration that has vested; and
- improve the quality of information being provided to boards and their committees about risk management performance and remuneration decisions.
In response to recommendations 5.2 and 5.3, which relate to the prudential supervision of the design and implementation of remuneration systems, APRA also mentioned that it is working on devising new information collections that would allow the regulator to better assess how ADI remuneration frameworks work in practice.
Culture and governance
While culture, governance and remuneration are the responsibility of financial services entities, commissioner Hayne noted that regulators, such as APRA and the Australian Securities and Investments Commission (ASIC), have an important role to play in the supervision of these areas. He noted that until quite recently, “there has only been limited overt attention given in Australia, by entities or by regulators, to issues about conduct and culture”.
As such, in relation to recommendation 5.7, the prudential regulator said it is on track with developing an “enhanced approach” to the supervision of governance, culture, remuneration and accountability within regulated entities, with its approach to be revealed by the end of 2019.
Cooperation between regulators
In addition, APRA said it is working with ASIC on an updated memorandum of understanding – to be realised by the end of this year – to improve inter-agency coordination.
Commissioner Hayne had stressed the importance of information-sharing between the corporate and prudential regulators in his final report, warning that not doing so could result in further enforcement failings.
“The need for ASIC and APRA to co-regulate the BEAR means that the two regulators will have to work more closely than ever across a range of entities and subject matters,” he wrote in the final report.
“Failure to share information, coordinate approaches and act with a consistent purpose will result in duplication of effort or, worse, regulatory failings.”
As such, in response to recommendation 6.10, APRA noted that “more formal arrangements” are being established by the regulators to ensure “maximum alignment of activities in areas of common interest”.
The prudential regulator also mentioned that it is working on accountability statements, similar to those that are required under the BEAR, to apply to its staff members once its new organisational structure is finalised. The royal commission had recommended that both APRA and ASIC formulate their own management accountability principles.
In relation to recommendation 4.14, APRA said it plans to consult on proposed changes to SPS 250 – which include stronger requirements on trustees when selecting an insurer – later this year. It expects to finalise the changes in 2020.
[Related: APRA to crack down on remuneration]