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 that existing bonus structures contributed to poor treatment of customers.
The Australian Prudential Regulation Authority on Tuesday 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 over-emphasis on short-term financial performance and a lack of accountability when failures occur, especially among senior management,” APRA deputy chair John Lonsdale 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.”
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APRA, which first flagged its intention to change remuneration requirements more than a year ago, 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.
This will ensure executives have “skin in the game” for longer.
APRA flagged its intention to strengthen prudential requirements on remuneration in April last year 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.
Executive bonuses were slashed at each of the big four banks, as well as fallen wealth giant AMP, after the royal commission took a blowtorch to poor systemic attitudes and practices.
CBA’s top brass has taken a collective $100 million-plus pay cut since 2017 following a raft of scandals, while in October last year NAB said it would was instigating changes that would reduce executive rewards by about 15 per cent.
In November, senior ANZ executives had their bonuses cut by a combined $2 million, while in December Westpac cut short-term cash bonuses and top-tier staff saw an average 25 per cent drop in rewards.
AMP also scrapped short-term cash bonuses and cut directors’ fees in a bid to avoid a second strike at its May AGM.
Boards must also approve and actively oversee remuneration policies for all employees, and regularly confirm they are being applied in practice to ensure individual and collective accountability.
A three-month consultation period will close on October 22 and APRA intends to release the final prudential standard before the end of 2019, with a view to it taking effect in 2021.
“We recognise that some aspects of this proposal are far-reaching and will require major changes to industry practices,” Mr Lonsdale said.
“APRA will listen closely to feedback from impacted stakeholders to determine if our proposed approach is correctly calibrated to achieve its intended outcomes.”