Remuneration policies of ADI’s and insurers: draft governance standards

The Australian Prudential Regulation Authority (APRA) has released a consultation package on remuneration for authorised deposit‑taking institutions and general and life insurance companies.The consultation package comprises a discussion paper, draft extensions to the governance standards already applying in these industries and a draft prudential practice guide (PPG).

APRA’s proposals on remuneration are designed to give effect to the Financial Stability Forum’s Principles of Sound Compensation Practices by aligning financial institution remuneration with risk management. APRA’s proposals also respond to the Prime Minister’s request in October 2008 that APRA consider the linkages between remuneration practices and the capital adequacy requirements of regulated institutions.

APRA is intending to take a principles‑based approach in this area, by requiring Boards of regulated institutions to have a remuneration policy that aligns remuneration arrangements with the long‑term financial soundness of the institution and its risk management framework; at the same time, Boards would be able to design remuneration arrangements that suit the structure of their own institution.The policy would extend beyond senior executives to all persons who, because of their roles, have the capacity to make decisions that could materially affect the interests of depositors or policyholders, and owners.

APRA also proposes that regulated institutions have a Board Remuneration Committee, comprising only independent directors with the appropriate experience and expertise.

The PPG covers a number of issues, including the use of deferred compensation, the links between incentives and risk, the use of shares in incentive arrangements, the need to link incentive compensation to both forward‑looking and backward‑looking risk measures, and the balance between cash and non‑cash incentives.

APRA is seeking submissions on the draft standards and by 24 July.Subject to consultation, it is expected that the final prudential standards and associated PPG will be released in September 2009 and be effective from 1 January 2010

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