APRA has released Findings from its CPS 511 pre-implementation review which covered a total of 39 entities, the majority of which were Significant Financial Institutions (SFIs).
While the review predominantly involved SFIS, the findings are relevant to all APRA-regulated entities. Consideration of the findings is important in ensuring appropriate and consistent application of the new standard (effective 1 Jan 2024 for non-SFIs).
Key findings
- Remuneration Design was identified as being the area requiring the greatest uplift to existing practices, with remuneration governance requiring a lower level of change.
- The review found organisations moving to inclusion of risk measures in variable remuneration design and downward- adjustment processes with improved levels of board engagement evident.
- The following common gaps should be considered by entities with respect to CPS 511:
- Implementation of controls to manage potential conflicts arising from compensation arrangements of third-party service providers;
- Clear understanding of how non-financial measures will drive desired behaviour, risk outcomes and performance; and
- High level of rigour to ensure that poor risk management outcomes are linked appropriately to remuneration outcomes.
Compensation Arrangements of third-party service providers
- Material conflicts need to be clearly defined in relation to remuneration framework objectives. Focusing on the services provided (e.g.: mortgage broking) and the payment structure of the arrangement may assist in determining materiality of conflicts.
- Oversight of providers and effective controls is a developing area with the focus on risk control self-assessments, attestations and periodic review of existing, new and renewed service providers.
Governance
- Further consideration is needed to ensure active board challenge regarding recommended remuneration outcomes. The linkage between Risk Committee and RemCo is another important consideration and should go beyond verbal input and / or cross-committee membership.
Design
- Examples of more effective approaches to link non-financial measures to desired behaviours included alignment to overall business strategy and risk profile (tailored to specific business issues such as ESG risk); a balance of measures that provide a holistic view of customer outcomes.
- A two-pronged approach is necessary to achieve a balanced outcome. This includes both rewarding positive risk outcomes as a result of NFMs and addressing poor risk outcomes through downward- adjustment. Examples of good practice in this respect include clarity on incentives with specific and measurable criteria including quantifiable targets and tangible expected qualitative outcomes. (Identification of clear connections between a measure and a desired behaviour).
- Reliance on a discretionary approach to performance and risk outcomes is not appropriate.
Consequence Management
- A more robust approach to consequence management will include alignment with BEAR (and incoming FAR) obligations, clear accountabilities for incident monitoring, escalation and investigation and clear employee guidance and communications plans regarding ramifications of poor risk managements.
- Consequence management is also being achieved – especially by entities with limited or no variable remuneration – through other methods, including restrictions on fixed remuneration increases, training, coaching and performance improvement plans.
A proactive approach to CPS 511 will seek to address any potential gaps early. The new standard presents a key opportunity for entities (including non-SFIs) to review the approach to remuneration and overall linkage to risk management, strategy, and business objectives. It can also seek to act as a mechanism for talent attraction and retention in an increasingly competitive workforce. We can expect to see more scrutiny on compliance from APRA over time.
Learn more about how our Financial Services services can help you
