Has the regulator implemented rules in relation to remuneration paid by banks to its staff?

The Australian Prudential Regulation Authority (APRA) is responsible for the licensing and prudential regulation of certain categories of banks and other financial institutions in Australia, including deposit taking institutions (ADIs), life and general insurance companies and superannuation funds (regulated institution). Remuneration practices of these entities are regulated through APRA’s prudential standards on governance.

This includes Prudential Standard CPS 510 Governance (Prudential Standard) which sets out APRA’s minimum requirements for remuneration of a regulated institution, and APRA’s Prudential Practice Guide PPG 511 Remuneration (Practice Guide). The Prudential Standard and the Practice Guide were developed having regard to the Financial Stability Board’s (FBS) Principles for Sound Compensation Practices released on 2 April 2009, and the FSB’s Principles for Sound Compensation Practices – Implementation Standards released on 25 September 2009. These are also consistent with, but not limited to, the requirements of the Corporations Act 2001 (the Act) relating to disclosure, Principle 8 of the ASX Corporate Governance Principles and Recommendations (2nd Edition) and the guidelines published by the Australian Institute of Company Directors (AICD) in February 2009.

The Prudential Standard and the Practice Guide describe a multi-layered prudential framework that sets out specific requirements to which regulated institutions must adhere and guidance notes designed to clarify APRA’s expectations with regard to prudential requirements.

What categories of staff are caught by the regulator’s rules?

The Prudential Standard states that a remuneration policy must cover as a minimum:

  • each responsible person1 (as defined in Prudential Standard CPS 520 Fit and Proper), excluding:
  1. non-executive directors;
  2. auditors (including an ‘appointed auditor’ in APS 001, ‘appointed auditor’ in GPS 001, an ‘auditor’ in Prudential Standard LPS 310, ‘responsible auditor’ in GSP 001 and ‘appointed auditor’ in Prudential Standard 3PS 310);
  3. for foreign ADIs, the senior officer outside Australia;
  4. for Category C insurers2, the senior officer outside Australia, and non-executive directors of the Category C insurer’s agent in Australia where the agent in Australia is a corporate agent;
  5. for life companies, external Appointed Actuaries3; and
  6. in the case of an Eligible Foreign Life Insurance Company, members of the Compliance Committee;
  • persons whose primary role is risk management, compliance, internal audit, financial control or actuarial control (risk and financial control personnel); and
  • all other persons for whom a significant portion of total remuneration is based on performance and whose activities, individually or collectively, may affect the financial soundness of the institution or group.
  • A person will be included within one of the above categories if that person is: employed directly by the regulated institution; retained directly by the regulated institution under contract; employed by, or a contractor of, a body corporate (including a service company) that is a related body corporate of the regulated institution; or, subject to paragraph 60 of the Prudential Standard, an entity that is not a related body corporate of that institution.
  • APRA may determine that an individual or class of individuals must be covered by the regulated institution’s remuneration policy.

What are the key regulatory rules?

These requirements consist of four core components.

Governance process

A regulated institution should have in place a Board Remuneration Committee. The Remuneration Policy must be approved by the Board, the Senior Officer Outside Australia (SOOA) or the Compliance Committee. The Prudential Standard discusses in further detail the specific requirements with respect to Board size and composition, the requirement that the chairperson of the Board of Directors is an independent director and the Board’s requirement to have a policy in place on Board renewal and procedures for assessing Board performance. Further, it elaborates on the requirement that the Board Remuneration Committee, once established, must have a remuneration policy that aligns remuneration and risk management and which will be reviewed at least every three years. It also specifies that there should be a Board Audit Committee and Board Risk Committee.

A regulated institution must establish and maintain a documented remuneration policy outlining the remuneration objectives and the structure of the remuneration arrangements, including, but not limited to, the performance-based remuneration components of the regulated institution.

A regulated institution that is part of a corporate group can utilise a group remuneration policy provided that the group policy as a whole meets the requirements of the APRA governance standards. A regulated institution that is a subsidiary in a corporate group, with either an Australian-based or overseas-based parent company, may rely on a group remuneration policy, as long as it complies with APRA’s requirements.

For a foreign branch of a regulated institution, the APRA governance standards require the SOOA with delegated authority from the Board to establish, maintain and approve the remuneration policy. If a foreign branch is covered by a group remuneration policy, it may rely on that policy, in which case the SOOA, as the Board’s Representative, will be required to ensure that the policy satisfies APRA’s requirements.



The remuneration policy should specifically address remuneration and performance hurdles applicable to three classes of employee (for more information see question 2 on those classes of employees).


Performance measures

The performance-based components of remuneration must be designed to encourage behaviour that supports the regulated institution's long-term financial soundness and the risk management framework of the regulated institution. The performance-based components of the regulated institution’s remuneration arrangements must be designed to align remuneration with prudent risk-taking. The remuneration policy must provide for the Board, the SOOA or the Compliance Committee, to adjust performance-based components of remuneration downwards, to zero, if appropriate, to protect the financial soundness of the regulated institution or in response to a significant unexpected or unintended event.


Risk adjustment

Given that not all risks can be identified with complete foresight, prudent remuneration structures should always contain some element of deferred pay which is subject to re-assessment in line with actual risk outcomes. The remuneration policy should also include a provision to allow bonuses to be adjusted for unintended or extreme circumstances which threaten the financial soundness of the regulated institution. Executives are required to have ‘some skin in the game’ so that their incentives align with the long term health of their institution.

The Guidelines provide further information on risk adjustment, in particular the headings ‘adjusting remuneration for risk’, and ‘other considerations for executive remuneration’. These include an analysis on fixed and variable remuneration, equity-related components, executive lending and leverage arrangements, incoming and terminating payments, hedging equity exposure and fringe benefits.


Are bonuses subject to the regulator's rules?

Bonuses are subject to the regulator’s rules. The Prudential Standard requires that the remuneration policy cover all persons or classes of person whose actions could put the institution’s financial soundness at risk. Such persons include those who receive a significant proportion of performance-based remuneration such as bonuses or commissions. These persons may not individually pose a risk to their regulated institution but may collectively affect its soundness.

More specifically, remuneration arrangements include measures of performance, the mix of forms of remuneration (such as fixed and variable components, and cash and equity-based benefits) and the timing of eligibility to receive payments. All forms of remuneration are captured by this Prudential Standard, regardless of where, or from whom, the remuneration is sourced.

Even if a regulated institution has little or no performance-based components of remuneration, APRA still expects it to have a written remuneration policy, in accordance with the Prudential Standard, which explains the objectives and the structure of the remuneration arrangements.

The Board Remuneration Committee is also required under the Prudential Standard to make annual decisions on the remuneration of all of the categories of persons required to be covered by the Remuneration Policy. This will require the Board Remuneration Committee and, in case of foreign branches, the SOOA, to make decisions on the annual distribution of a regulated institution’s bonus pool.

What is the position concerning role based allowances?

This is not specifically covered as a concept in the Prudential Standard but is covered by the observations made in Section 4 above.

Must an institution’s remuneration policy be disclosed to the regulator?

Under the Prudential Standard, a copy of the Remuneration Policy must be provided to APRA upon request. A regulated institution listed on ASX is subject to the ASX disclosure requirements under the ASX listing rules and the ASX Corporate Governance principles. ASX-listed financial institutions must disclose their compliance with those principles (including Principle 8: remuneration).

Do the regulator’s rules on remuneration have extraterritorial effect?

The Prudential Standard applies to all regulated institutions. For an Australian incorporated regulated institution, the remuneration practices of its overseas branches and subsidiaries are important, so that APRA can assess the parent’s risk management and control framework. Therefore, the Prudential Standard has extraterritorial effect and applies to these branches and subsidiaries. For foreign ADIs, a foreign general insurer or an eligible foreign life insurance company, the Prudential Standard requirements apply only in relation to Australian business of the institution or group.

Do you anticipate further reform in this area?

APRA has recently updated the Prudential Standard. It is likely that further updates will be released by APRA as necessary to reflect and make more explicit the industry’s heightened standards in the area of remuneration, as well as to strengthen APRA’s risk management requirements and align them with domestic and international best practice.

In December 2014, the so-called Murray Report made a range of recommendations regarding Australia’s financial system, including in relation to the regulation of banks and other financial institutions. To date, the Australian Government has not responded to those recommendations, so it is not possible at this stage to determine whether there will be changes in this area of regulation.


1   As defined in Prudential Standard CPS 520 Fit and Proper, a person acting in a ‘Responsible person position’ means a person with the responsibilities or activities of a responsible person that would lead to the person being a responsible person within the definitions in paragraph 23 of this Standard (and as described in Attachments A to F inclusive). A responsible person to whom the standard applies includes a director, a senior manager, appointed auditor and certain persons who perform activities for a subsidiary of the institution where those activities could materially affect the whole, or substantial part, of the business of the institution or its financial standing, either directly or indirectly.