Australian Prudential Regulation Authority-regulated (APRA) entities are making efforts to improve remuneration practices, according to a review by the regulator. 

The regulator conducted the review to understand how entities approached implementation of prudential standard CPS 511 Remuneration (CPS 511), which applied at the start of the year to all significant financial institutions (SFIs). 

Last month APRA finalised new requirements to CPS 511, which will apply to all entities from their first full financial year following January 1 next year. 

The APRA review found early signs of a “step change” in remuneration practices, Chair John Lonsdale says in a letter to regulated entities. 

“APRA was pleased to see entity efforts to strengthen alignment of remuneration and risk management in remuneration frameworks,” he said. 

“This was evident through inclusion of risk measures in variable remuneration design and downward-adjustment processes.” 

However, there are still a few areas where improvements can be made, APRA says. 

The review found insufficient rigour in the proposed processes to ensure remuneration consequences result from poor risk management outcomes and inadequate understanding of how selected non-financial measures will drive desired behaviour, risk outcomes and performance. 

It also found limited progress implementing controls to manage potential conflicts arising from compensation arrangements of third-party service providers. 

The review, carried out in two phases between September 2021 and December last year, followed the implementation journey of 15 entities including IAG, QBE and Allianz. 

APRA says while the 15 entities are mostly significant financial institutions, the findings are relevant to all who must comply with CPS 511. 

CPS 511 commenced on January 1 for authorised deposit-taking institutions that are SFIs, followed by SFI counterparts in the insurance sector on July 1. 

Click here for more from the APRA letter.