The Australian Prudential Regulation Authority (APRA) has released its response paper confirming the finalisation of CPS 511, a prudential standard that is designed to strengthen remuneration practices across the insurance, banking, and superannuation industries.

APRA says the standard will be introduced in a phased manner, starting first with authorised deposit-taking institutions from January 1 2023, with the insurance industry to follow six months later from July 1 2023.

The prudential regulator says the finalised standard will require entities to apply material weight to non-financial metrics such as customer complaints, breaches, and regulatory and audit findings when determining variable remuneration for employees.

It will also require entities to reduce variable remuneration, potentially to zero, when warranted by poor risk conduct.

Additionally it will force entities to increase board oversight, transparency and accountability on remuneration outcomes.

“As the [Hayne] royal commission made clear, poorly designed or implemented remuneration practices can incentivise behaviour that is harmful to consumers, and detrimental to long-term financial soundness,” APRA Deputy Chairman John Lonsdale said.

“CPS 511 will impose genuine financial consequences on senior banking, insurance and superannuation executives when their decisions lead to poor risk management or conduct that is contrary to community expectations.

“It ensures financial performance alone is no longer enough when companies reward employees; companies must also consider their impact on customers and risk management outcomes.

“Where executives fall short, they now stand at risk of losing their bonus.”

He says the “sharp end” of CPS 511 is deliberately aimed at significant financial institutions, where there is a heavier reliance on bonuses.

APRA expects to finalise Prudential Practice Guide CPG 511 Remuneration in the coming months to assist entities in meeting their new requirements under the new standard.

Click here for the APRA response paper.