The final Prudential Standard CPS 511 Remuneration (CPS 511) will be applied to all APRA-regulated industries and has followed an industry consultation earlier in the year.
APRA has aimed to combat past behaviour from institutions prioritising profit above customer outcomes and financial soundness, as displayed during the royal commission and more recent reviews from the regulator.
The new standard will require significant financial institutions (SFIs) (entities with a minimum asset threshold of $20 billion in banking) to establish and maintain:
- Stronger incentives for individuals to manage the risks they are responsible for
Companies will need to consider both financial and non-financial measures when assessing performance – material weight will have to be assigned to non-financial metrics when determining bonuses and they must have risk adjustment mechanisms that can reduce variable remuneration down to zero, where warranted.
- Appropriate consequences for poor risk outcomes
Senior executive bonuses will be subject to longer deferral, combined with provisions for in-year and clawback adjustments.
“Senior executives will now have more ‘skin in the game’ for a longer period of time,” APRA’s response stated.
“This will ensure that short-term rewards cannot be enjoyed without regard to longer term-outcomes.”
- Increased oversight, transparency and accountability on remuneration
The new standards require more active board involvement for determining remuneration outcomes.
Meanwhile, non-SFIs will be subject to simpler requirements for remuneration design, governance arrangements and framework reviews – with APRA aiming to reduce the impact for smaller and less complex organisations.
However, foreign banks and insurer branches will not be considered SFIs, unless otherwise clarified by APRA.
The new standard will be implemented under a phased approach, beginning from 1 January 2023 with the largest and most complex banks.
The regulator has also said it will ensure there is alignment between the standard and the government’s proposed Financial Accountability Regime (FAR), which will set minimum requirements for the deferral of variable remuneration by all APRA-regulated entities.
APRA will consult on new disclosure standards for remuneration early in 2022.
Meanwhile, Mortgage Business understands that NAB has alerted 12,000 frontline bankers that they will move to a fortnightly fixed pay, with the major bank to remove bonuses from their pay structure in the coming months.
The variable remuneration scrap will be implemented under a phased process, with customer-facing staff across the personal bank, business and private bank, and corporate and institutional bank to see the effects next year.
The proportion of staff affected is around 45 per cent of the group’s employees.
Speaking at an Australian British Chamber of Commerce event last week, NAB chief executive Ross McEwan stated the bank was in the middle of “changing the remuneration structure of pretty much every banker”, although it had no intention of docking their pay.
“There are lots of our bankers that I don’t think they should be getting a bonus because when they’re sitting front of a customer in a branch of in a contact centre, they should be having a conversation of what’s the interest of the customer, not ‘if I sell them this, will this make a difference to my pay,’” Mr McEwan said.
“We’re going to wipe that out.”
[Related: NAB ordered to pay $18.5m for fee failures]
Sarah Simpkins is the news editor across Mortgage Business and The Adviser.
Previously, she reported on banking, financial services and wealth management for InvestorDaily and ifa.