Executive remuneration and accountability – the revised APRA CPS 511 Remuneration

On 12 November 2020, the Australian Prudential Regulation Authority (APRA) released a revised draft Prudential Standard CPS 511 Remuneration for consultation (Revised Draft CPS 511).

The revised standard has moved away from the prescriptive requirements of the initial consultation draft, towards a ‘principles-based approach’, giving banks, superannuation funds and insurers greater latitude to determine and tailor their own remuneration thresholds.

Key takeaways - what does this mean for APRA-regulated entities?

• APRA expects all APRA-regulated entities to review their existing remuneration frameworks and develop an implementation plan within 18 months of the release of the final version of CPS 511, expected in Q2 of 2021. This will essentially be the first key deliverable for implementing CPS 511.
• This review of existing remuneration frameworks should be conducted in conjunction with preparation of a project plan to implement the Financial Accountability Regime (FAR), which may ultimately commence before CPS 511. We explain below why implementing both FAR and CPS 511 in tandem can produce a more effective outcome.
• CPS 511 is proposed to commence:
  • for ADIs that are Significant Financial Institutions (SFIs) (see below) – from 1 January 2023;
  • for general insurers, life companies, private health insurers and RSE licensees and NOHCs that are SFIs, and for all groups headed by an SFI – from 1 July 2023;
  • for all other APRA-regulated entities – from 1 January 2024.
• All new remuneration arrangements will need to comply with CPS 511 from the relevant commencement date.
• CPS 511 should not require a wholesale rewrite of existing governance arrangements for remuneration. Rather, existing governance arrangements can in many cases be updated to ensure that they align with the particular requirements in CPS 511. In particular, consequences for failure to meet expected standards of behaviour should be clear where they are not already.
• CPS 511 will require APRA-regulated entities to review their variable remuneration arrangements, including scorecard metrics. The Revised Draft CPS 511 gives regulated entities the flexibility to tailor their remuneration framework to their business and particular business risks. When designing the remuneration structure, APRA-regulated entities should have regard to the financial and non-financial risks facing their businesses, and seek to reflect these risks in their remuneration structures. In revising variable remuneration and scorecard metrics, it will be important to ensure that the restrictions imposed by the conflicted remuneration regime are also adequately addressed, where relevant.

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