Banks’ bonus rethink
AUSTRALIA’S biggest banks will be forced to overhaul the way they remunerate executives, the head of the banking regulator says.
It comes after the watchdog found banker bonuses were structured in a way that allowed executives to avoid punishment for bad behaviour, putting financial stability at risk.
Speaking at a banking summit yesterday, Australian Prudential Regulation Authority chairman Wayne Byres revealed the results of a industrywide review of remuneration practices at the nation’s biggest banks, insurers and superannuation companies.
The review found that remuneration frameworks and practices did not consistently and effectively promote sound risk management and longterm financial soundness.
It also found they fell short of the better practices set out in APRA’s existing guidelines.
“Financial organisations are adept at designing financial incentives for staff to say ‘yes’ to taking risk — after all, taking risk is how profits are generated,” Mr Byres said.
“Far less incentive exists to say ‘no’, even when it is the right thing to do for the longterm interests of the company itself.”
Mr Byres said APRA would look to strengthen legallybinding prudential frameworks to ensure bonus payments and accountability measures were right.
The review covered nearly 300 senior roles across the banking, insurance and superannuation sectors between 2014 and 2016.
It comes as banking royal commission reveals widespread misconduct and fraud in the sector, largely driven by sales culture and short-term bonuses.
Mr Byres said it would “be a pity” if the sector saw the government’s new Banking Executive Accountability Regime laws as a “compliance” process, and urged companies to go beyond the letter of the law to holistically overhaul how they paid their senior staff.
“The perception in the community is that in the financial sector, particularly at senior executive level, the carrots are large and the sticks are brittle,” he said.
“It’s no surprise that areas where the financial sector has been dogged by scandal have been areas where the most basic form of incentive — sales or revenue-based rewards — are prevalent: financial advice, broking, mortgage lending, insurance sales, financial markets trading.
“Evidence presented during the opening weeks of the royal commission has only underlined that point.”
“Not only are rewards generous, but there are seemingly few repercussions for poor outcomes.”
That, from a prudential perspective, was “a major concern”, Mr Byres said.
“If there appear to be no consequences at senior levels for poor risk outcomes, it undermines sound risk management and the long term financial health of the institution. Yet there has been limited evidence of financial consequences for executives when risk outcomes have been poor.”