APRA out to change rules

Bank performance, executive pay link in sights

THE prudential regulator is proposing to weaken the link between a bank’s financial performance and how much it pays its executives after the royal commission found existing bonus structures contributed to poor customer treatment.

The Australian Prudential Regulation Authority yesterday released a draft standard aimed at “clarifying and strengthening” remuneration requirements in APRA-regulated entities to reduce the likelihood of misconduct.

Prioritising financial performance over considerations such as conduct, culture and customer wellbeing was regularly cited at last year’s royal commission hearings as a factor in customers losing out financially in dealings with their lenders.

“In the financial sector, APRA has observed an overemphasis on short-term financial performance and a lack of accountability when failures occur, especially among senior management,” APRA deputy chair John Lonsdale (pictured) said. “APRA will not be determining how much employees get paid ... rather, we want to empower boards to more effectively incentivise behaviour that supports the long-term interests of their entities.”

APRA said its proposals mirrored those in royal commissioner Kenneth Hayne’s final report.

The regulator is seeking feedback on its suggestion that financial metrics represent no more than 50 per cent of the criteria for setting bonuses.

“Limiting the influence of financial performance metrics in determining variable remuneration will encourage executives to put greater focus on non-financial risks, such as culture and governance,” Mr Lonsdale said.

APRA also wants to introduce a minimum seven-year deferral period for senior executive bonuses at larger institutions, and to make it possible for boards to claw back bonuses up to four years after they have vested.

APRA flagged its intention to strengthen prudential requirements on remuneration last April following its Review of Remuneration Practices at Large Financial Institutions.

It said the need was underlined by the findings of the financial services royal commission, last year’s prudential inquiry into the Commonwealth Bank, and the recent industry self-assessments on governance, accountability and culture.

A three-month consultation period will close on October 22 and APRA intends to release the final prudential standard by the end of 2019, with a view to it taking effect in 2021.