Do you need to review your executive employment agreements and consultancies?

APRA expects to release its final changes to remuneration issues in the APS 510 governance standards in November 2009.

APRA has announced the standards will come into effect on 1 April 2010 and will not differ substantially from the draft.

By that date, APRA requires regulated institutions to ensure that all contracts negotiated or renegotiated after the release of the final standards, comply with the standards.

Contracts already in force at that time must be fully compliant at the first opportunity for renegotiation, but no later than 31 March 2013.

What contracts are affected?

APRA has identified 3 groups of persons who are affected by the changes:

  1. The first group is ‘responsible persons’,defined in APRA’s ‘fit and proper’prudential standards (APS 520) to include directors, executives and senior managers who make or participate in making decisions that affect the whole, or a substantial part, of the business of the regulated institution. The remuneration standards will exclude non-executive directors from this first group.
  2. The second group are those whose primary role is risk and financial control (including risk management, compliance, internal audit, financial control and actuarial control roles).
  3. The third group are those persons who receive a significant proportion of performance-based remuneration such as through bonuses or commissions.

Could contractors be affected? Yes.

APRA's draft Prudential Practice Guide states:

The persons covered individually or collectively by the Remuneration Policy may not be employees of the regulated institution but may be third party bodies corporate or other contractors who provide services to the regulated institution…

Where third parties perform material functions on behalf of a regulated institution and these functions may expose the regulated institution to risk, the remuneration of such third-parties is subject to the governance standard…

Among other things, contracts regarding third party sales and distribution activities would be expected to be constrained by the same or similar risk adjustment and deferral arrangements that would apply if this business were undertaken in-house by persons employed by the regulated institution.

You should examine your executive agreements and consultancies to identify whether they are affected and, if so, their review and expiry dates to determine when the agreements need to be amended to conform with the standard.

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