Australian financial watchdog moves to prescribe stricter terms for executive pay

SYDNEY (Reuters) – Australia’s prudential regulator on Tuesday said it intends to prescribe stricter terms on executive pay policies of the country’s large banks, retirement funds and insurers as it seeks to enhance accountability in the financial sector.

FILE PHOTO: A woman carries a shopping bag as she walks with other pedestrians along a street on a spring day in the central business district (CBD) of Sydney, Australia, October 9, 2017. REUTERS/David Gray

In the aftermath of a public enquiry that last year blamed flawed incentives for widespread wrongdoing in the industry, the Australian Prudential Regulation Authority (APRA) wants to introduce new remuneration rules from 2021.

The regulator plans to impose a minimum seven-year deferral period for variable long-term bonuses, and to limit the importance of financial performance in defining variable pay to increase focus on risks related to culture and governance.

The reforms underline a push for more scrutiny – particularly of the Big Four banks, CBA, ANZ, NAB and Westpac – in the wake of the Royal Commission inquiry last year that found serious flaws in the management of compliance and risk.

“Remuneration design and implementation that does not properly consider the incentives it creates, including an over-emphasis on short-term financial performance, can drive poor customer and beneficiary outcomes and jeopardize financial soundness,” APRA said in a statement.

APRA’s announcement comes amidst criticism of Macquarie Group Ltd’s move to shorten the time before deferred equity – worth about A$88 million – is awarded to previous Chief Executive Nicholas Moore from seven to two years.

That, proxy advisory firms said, increases Macquarie’s already heavy focus on short-term performance to determine pay, and undermines the bank’s policies regarding wrongdoing.

Those policies allow its board to scrap promised profit-share awards for senior employees who act dishonestly or “in a way that contributed to a breach of a significant legal” requirement.

Representatives of Macquarie, Commonwealth Bank of Australia (CBA), Australia and New Zealand Banking Group Ltd (ANZ) and National Australia Bank Ltd (NAB) did not immediately return requests for comment on APRA’s proposed new rules.

APRA said minimum deferral periods for variable pay of up to seven years for senior executives in larger, more complex entities would ensure they have “skin in the game” for longer.

The regulator will conduct a three-month consultation period and expects to finalize its new policies by year-end.

Westpac Banking Corp said it will review the proposal and participate in the consultation process.

Reporting by Paulina Duran; Additional reporting by Devika Syamnath in Bengaluru; Editing by Himani Sarkar and Christopher Cushing

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