Business Insight

APRA issues finalised Prudential Standard CPS 511 Remuneration and accompanying prudential guidance

24 November 2021

What you need to know

Following an extensive consultation process, APRA has released the final version of Prudential Standard CPS 511 Remuneration (CPS 511), which incorporates a number of changes to the draft released in November 2020.
The changes relate to the remuneration arrangements of third-party service providers, risk and conduct adjustments, and the determination of Significant Financial Institutions.
CPS 511 will be implemented under a phased approach, commencing on 1 January 2023 for the largest and most complex authorised deposit-taking institutions.
The frontline supervisors of regulated entities within APRA will generally be responsible for monitoring compliance with the finalised standard, though support is likely to be provided by the Remuneration Risk Specialists in APRA's Governance, Culture, Risk and Remediation team.

What you need to do

Now is the time to consider how CPS 511 applies to your organisation, and what changes need to be made to your remuneration and accountability frameworks to comply.
Consider the guidance and examples of better practice set out in the finalised Prudential Practice Guide CPG 511 (CPG 511), noting that this will ensure that APRA-regulated entities are able to comply with CPS 511 upon its commencement.
Implement a framework to measure how the risks associated with remuneration are managed within your organisation, with reference to qualitative and quantitative risk and compliance measures.
APRA has indicated its intention to impose additional disclosure requirements to improve transparency and strengthened accountability, meaning that APRA-regulated entities should plan for further consultation on these matters early next year.

Background

On 27 August 2021, APRA issued the final version of CPS 511, along with an accompanying Response Paper. APRA has also more recently released the final version of CPG 511, which seeks to assist entities to comply with the enhanced requirements in the finalised standard. Each of these documents can be accessed here.

CPS 511 reflects modest changes to the draft version circulated for consultation in November 2020 (Draft CPS 511). The finalised prudential guidance has similarly been updated to reflect these amendments. For further information regarding Draft CPS 511, please see our previous Financial Services Update.

CPS 511 will be a standalone prudential standard which governs remuneration arrangements of APRA-regulated entities and will take effect progressively from 1 January 2023.

This update describes the changes APRA has made to CPS 511 and CPG 511 since earlier drafts of the documents were released for consultation, and what regulated entities should do to implement the standard.

What has changed?

The amendments that have been made to CPS 511 and CPG 511 are outlined below:

TOPIC	CHANGES
Remuneration arrangements of third-party service providers	APRA has clarified in CPS 511 that entities must identify and mitigate material conflicts to the objectives of their remuneration frameworks that result from any third-party service provider compensation arrangements. APRA has indicated that there are a range of possible mitigants available to entities, depending on the conflict. It could include additional oversight or controls to incentivise the management of risk, or imposing tighter approval criteria. This change was made in response to concerns expressed by industry regarding the ability to control how a service provider chooses to remunerate its employees.
Risk and conduct adjustments	APRA has revised its approach of linking the severity of risks to particular adjustment tools, with CPS 511 instead requiring entities to ensure that adjustments to variable remuneration are proportionate to the severity of the risk or conduct incident in question. It provides greater flexibility in the adjustment tool that can be used. The draft standard had otherwise been more prescriptive, prompting industry concern. APRA has stated that in some adverse risk and conduct events, the use of an in-period adjustment alone may be sufficient. For more significant events, malus and/or clawback may be warranted.
Thresholds for SFIs	Under CPS 511, the quantitative asset threshold for ADIs to be classified as "Significant Financial Institutions" (SFI) has been raised from $15 billion to $20 billion, to achieve consistency with the proportionality requirements in other parts of the ADI prudential framework. APRA has also clarified that, for superannuation funds, the $30 billion threshold will apply at the registrable superannuation entity licensee level and therefore to the aggregate asset value of all RSEs of an RSE licensee. The final asset thresholds for APRA-regulated entities other than foreign ADI and insurance branches are as follows: ADIs: >$20 billion; General and life insurers: >$10 billion; Private health insurers: - >$3 billion; and RSE licensees: >$30 billion. APRA has declined to index the thresholds, on the basis that it would add complexity. Importantly, foreign branches will be classified as non-SFIs, unless they are determined as SFIs based on factors other than asset thresholds. However, foreign branches with assets above the SFI threshold will be required to defer the variable remuneration of highly-paid material risk-takers.

TOPIC

CHANGES

Remuneration arrangements of third-party service providers

APRA has clarified in CPS 511 that entities must identify and mitigate material conflicts to the objectives of their remuneration frameworks that result from any third-party service provider compensation arrangements.
APRA has indicated that there are a range of possible mitigants available to entities, depending on the conflict. It could include additional oversight or controls to incentivise the management of risk, or imposing tighter approval criteria.
This change was made in response to concerns expressed by industry regarding the ability to control how a service provider chooses to remunerate its employees.

Risk and conduct adjustments

APRA has revised its approach of linking the severity of risks to particular adjustment tools, with CPS 511 instead requiring entities to ensure that adjustments to variable remuneration are proportionate to the severity of the risk or conduct incident in question. It provides greater flexibility in the adjustment tool that can be used.
The draft standard had otherwise been more prescriptive, prompting industry concern.
APRA has stated that in some adverse risk and conduct events, the use of an in-period adjustment alone may be sufficient. For more significant events, malus and/or clawback may be warranted.

Thresholds for SFIs

Under CPS 511, the quantitative asset threshold for ADIs to be classified as "Significant Financial Institutions" (SFI) has been raised from $15 billion to $20 billion, to achieve consistency with the proportionality requirements in other parts of the ADI prudential framework.

APRA has also clarified that, for superannuation funds, the $30 billion threshold will apply at the registrable superannuation entity licensee level and therefore to the aggregate asset value of all RSEs of an RSE licensee.

The final asset thresholds for APRA-regulated entities other than foreign ADI and insurance branches are as follows:

ADIs: >$20 billion;
General and life insurers: >$10 billion;
Private health insurers: - >$3 billion; and
RSE licensees: >$30 billion.

APRA has declined to index the thresholds, on the basis that it would add complexity.

Importantly, foreign branches will be classified as non-SFIs, unless they are determined as SFIs based on factors other than asset thresholds. However, foreign branches with assets above the SFI threshold will be required to defer the variable remuneration of highly-paid material risk-takers.

While the standard is now considered to be finalised, APRA has reiterated that it is willing to make further consequential amendments to CPS 511 to ensure there is appropriate alignment between the standard and the Government’s proposed Financial Accountability Regime (FAR). On this note, APRA has already updated CPG 511 to align more closely with the proposed FAR requirements, including by updating the guidance relating to the deferral and vesting requirements in CPG 511.

When will it be implemented?

CPS 511 will apply to APRA-regulated entities from 1 January 2023 under a staged implementation approach as follows:

1 January 2023: ADIs that are SFIs;
1 July 2023: insurance and RSE licensee entities that are SFIs; and
1 January 2024: all other APRA-regulated entities.

In the meantime, APRA has foreshadowed exercising a strong supervisory focus on industry’s implementation of the requirements. This will amount to a more detailed review of progress for a subset of entities.

APRA also plans to conduct a post-implementation review in 2027.

What now?

APRA-regulated entities should review CPS 511, consider how it will apply to them having regard to the accompanying prudential guidance and determine what changes will need to be made to their remuneration and accountability frameworks. APRA plans to advise those entities that are to be designated as SFIs by no later than 30 October 2021 to assist with this process. APRA will also be separately consulting on new disclosure requirements in early 2022 to promote the transparency of remuneration arrangements and reinforce accountability across the sector, with a view to finalising these requirements in 2023.

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Authors: Silvana Wood, Partner; Jennie Mansfield, Partner; Elena Lambros, Partner(Ashurst Risk Advisory); Luke Whitcher, Director(Ashurst Risk Advisory); Daniel Fawcett, Senior Associate and Jack Collins, Associate

The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.