APRA has published an Information Paper which sets out its approach to strengthening and intensifying its approach to overseeing governance, culture, remuneration and accountability (GCRA) by regulated entities in response to the recommendations from the Financial Services Royal Commission and the Final Report of the Australian Prudential Regulation Authority Capability Review.
The Information Paper specifically sets out its progress in responding to those recommendations.
The key elements of APRA’s GCRA approach are:
- Strengthening the prudential framework through clarifying expectations of boards and senior managers, and consulting with industry on plans to embed risk governance self-assessments in the prudential framework. APRA is strengthening the current principles-based prudential requirements for remuneration to provide clearer and more-readily enforceable expectations for remuneration arrangements, particularly for senior executives.
- Sharpening APRA’s supervisory focus on GCRA outcomes, through additional resourcing to intensify supervision, investment in new tools to assess and benchmark GCRA practices, and a clear intent to hold entities accountable for promptly addressing deficiencies.
APRA has highlighted its approach to risk culture and remuneration.
APRA’s plans to review the effectiveness of board obligations with respect to risk culture in CPS 220 to ensure it remains fit for purpose. It will conduct deep-dive risk culture reviews. Initially, this will be set at three per year from 2020 onwards, with one expected to be completed in 2019. It will develop and establish an industry-wide tool to benchmark risk culture across industry sectors and cohorts of entities.
APRA plans to implement more prescriptive remuneration requirements to align with international better practice and address the recommendations of the Royal Commission. The key changes proposed include strengthening the role of the board, requiring specific consideration of non-financial risk when determining variable remuneration, and ensuring that robust consequence management mechanisms are available to align risk with variable remuneration (e.g. malus and clawback). APRA plans to respond to the feedback on the draft prudential standard in early 2020. It will assess implementation plans from a sample of regulated entities once the final standard is released. An information paper will be published based on the findings to reinforce APRA’s expectations on implementation to the broader industry. It will carry out ‘deep dive’ effectiveness reviews once the final standard is implemented that will focus on the design, implementation and outcomes of remuneration frameworks.