3.5 Culture, governance and remuneration

Remuneration

Recommendation 5.1 – Supervision of remuneration – principles, standards and guidance

In conducting prudential supervision of remuneration systems, and revising its prudential standards and guidance about remuneration, APRA should give effect to the principles, standards and guidance set out in the Financial Stability Board’s publications concerning sound compensation principles and practices.

Recommendations 5.2 and 5.3 explain and amplify aspects of this Recommendation.

Recommendation 5.2 – Supervision of remuneration – aims

In conducting prudential supervision of the design and implementation of remuneration systems, and revising its prudential standards and guidance about remuneration, APRA should have, as one of its aims, the sound management by APRA‑regulated institutions of not only financial risk but also misconduct, compliance and other non‑financial risks.

Recommendation 5.3 – Revised prudential standards and guidance

In revising its prudential standards and guidance about the design and implementation of remuneration systems, APRA should:

  • require APRA-regulated institutions to design their remuneration systems to encourage sound management of non-financial risks, and to reduce the risk of misconduct;
  • require the board of an APRA-regulated institution (whether through its remuneration committee or otherwise) to make regular assessments of the effectiveness of the remuneration system in encouraging sound management of non-financial risks, and reducing the risk of misconduct;
  • set limits on the use of financial metrics in connection with long-term variable remuneration;
  • require APRA-regulated institutions to provide for the entity, in appropriate circumstances, to claw back remuneration that has vested; and
  • encourage APRA-regulated institutions to improve the quality of information being provided to boards and their committees about risk management performance and remuneration decisions.

Recommendation 5.4 – Remuneration of front line staff

All financial services entities should review at least once each year the design and implementation of their remuneration systems for front line staff to ensure that the design and implementation of those systems focus on not only what staff do, but also how they do it.

Recommendation 5.5 – The Sedgwick Review

Banks should implement fully the recommendations of the Sedgwick Review.

Culture and governance

Recommendation 5.6 – Changing culture and governance

All financial services entities should, as often as reasonably possible, take proper steps to:

  • assess the entity’s culture and its governance;
  • identify any problems with that culture and governance;
  • deal with those problems; and
  • determine whether the changes it has made have been effective.

Recommendation 5.7 – Supervision of culture and governance

In conducting its prudential supervision of APRA‑regulated institutions and in revising its prudential standards and guidance, APRA should:

  • build a supervisory program focused on building culture that will mitigate the risk of misconduct;
  • use a riskbased approach to its reviews;
  • assess the cultural drivers of misconduct in entities; and
  • encourage entities to give proper attention to sound management of conduct risk and improving entity governance.

 

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