"Remuneration is the key to management of systemic misconduct within the financial services industry. The remuneration recommendations follow the findings of the 2018 Prudential Inquiry into CBA. In particular, the financial services industry can expect APRA to set limits on the use of financial metrics in connection with long-term variable remuneration. Further, boards will be required to exercise enhanced governance over remuneration outcomes and be supported by more sophisticated processes and information to allow this to occur. However, a lack of guidance about how this recommendation fits within the broader system of executive remuneration (particularly the alignment of executives’ interests to shareholders’ interests) may expose listed companies to shareholder backlash and dissatisfaction.

All financial services entities are to implement clawback of vested remuneration (backed by APRA standards). Absent serious law reform, this requirement will be practically difficult to implement and will lead to greater litigation between companies and their current/former senior employees.

The extension of the BEAR to all AFSL and ACL holders, and the emphasis on better quality information to boards about their company’s management of all risks (not just financial risks), will require companies to develop appropriate accountability frameworks, consequence management processes, and remuneration adjustment practices."


Relevance & consequences for industry

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The interim report drew attention to the root cause of the issues in the financial services industry being greed and the observation that “all the conduct identified and criticised in this report [concerns] conduct that provided a financial benefit to the individuals and entities ...”.  The final report recommends changes to the way individuals in the industry are remunerated and rewarded. 

APRA focus on remuneration is not fit for purpose and lags behind international standards

The Commissioner recommends that APRA’s prudential standards and guidance on remuneration should move beyond a focus on prudential risks to more directly address the management of non-financial risks and misconduct.  In particular, APRA’s prudential standards and guidance should be guided by international standards and adopt the guidance prepared by the G20’s Financial Stability Board (FSB).  The FSB’s principles require adjustments to remuneration for all forms of risk and not just financial metrics.

APRA should refocus its efforts on: (a) developing its prudential standards and guidance on remuneration to identify and manage reputational, compliance, conduct and other risks; and (b) requiring boards to assess the effectiveness of remuneration systems by gathering more information about how remuneration systems actually work in practice. These recommendations are consistent with recent APRA initiatives and commentary and do not come as a surprise.

The financial services industry can expect APRA to set limits on the use of financial metrics in long-term variable remuneration.  The Commission has not sought to prescribe specific requirements.

Clawback of variable remuneration

All financial services entities should implement clawback of vested remuneration (backed by APRA standards).  This is a significant step further than the remuneration frameworks utilised by many financial institutions, which operate mechanisms to enable the downward adjustment of in-year short-term variable remuneration, and unvested deferred short-term and long-term variable remuneration.

Unlike the prudential inquiry into the CBA, the final report does not address the practical and legal difficulties associated with clawing back vested remuneration, including:

  • how a company will claw back vested securities;

  • the interaction with limitations in the Fair Work Act 2009 which limit an employer’s ability to make deductions to employees remuneration, and require payments from employees; or

  • the practical reality that the implementation and enforcement of a clawback mechanism can only be achieved through the pursuit of costly litigation.

Absent serious law reform, or the implementation of a statutory regime for the clawing back of remuneration (which the Commissioner does not recommend), significantly increased litigation can be expected where clawback mechanisms are built into existing contractual based remuneration arrangements.

Closed door remuneration adjustments

The Commissioner does not propose public disclosure of remuneration adjustments.  While this avoids imposing further disclosure obligation on companies, it seems at odds with other recommendations designed to increase transparency.

What you should do next

There are two key areas of focus:

BEAR for all!

  • In light of the Government’s proposal to apply an equivalent regime to the BEAR to all entities that hold an AFSL or ACL, consider how you will implement the mandatory forfeiture of variable remuneration, and the extension of variable remuneration deferral periods.

  • Develop an accountability framework that nominates accountable persons and specifies their accountabilities, and develop the principles by which remuneration will be adjusted.

  • Develop consequence management frameworks which clearly articulate the relationship between conduct and other non-financial risks and remuneration outcomes.

Increase governance of the remuneration framework/outcomes

  • Boards should develop non-financial metrics which will support sound risk-management and which are also aligned to shareholders’ expectations.

  • Boards should set clearer expectations through comprehensive guidance on how reductions to variable remuneration will be determined and the factors which will result in an adjustment.

  • Boards should develop a database/library of consequence management options to assist with the implementation of consistent and fair decision making, and set clear expectations for both positive and negative risk outcomes.

  • Boards should expect more comprehensive risk information to allow for sufficient review of issues that could impact remuneration outcomes – comprehensive assessment/report from risk and audit and explanation for adjustments.

  • Increase communication of outcomes (with due regard for confidentiality concerns…) to reinforce the link between accountability and consequence.

  • Start considering how remuneration systems (contractual, policy and otherwise) will allow for the clawback of vested remuneration.

Authored by: Andrew Gray and Daniel Delimihalis.

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