The AICD suggests that the implementation date for CPS 511 and CPG 511 (once finalised) should be the performance year commencing on/after 1 January 2023 to allow more time for implementation. This is echoed in the Australian Banking Association's submission (covered separately below). ▪ The ABA's submission argues that APRA guidance and requirements under the proposed Financial Accountability Regime (FAR) should be in alignment ▪ The ABA's submission also argues that the drafting in the draft CPG 511 could be tightened in a number of ways to provide greater certainty/clarity. The submission flags some concerns around inconsistencies in the proposed requirements under both the draft standard and the draft guidance and has called on the regulator to clarify these points. Context On 30 April 2021, the Australian Prudential Regulation Authority (APRA) released draft guidance (draft CPG 511) (summarised in Governance News 05/05/2021 at p4) to support implementation/compliance with the proposed new remuneration prudential standard draft CPS511 (summarised here). Consultation on the draft guidance closed on 23 July 2021. AICD submission: Key takeaways The Australian Institute of Company Directors' (AICD) submission to the consultation is broadly supportive of APRA's proposed approach, and in particular, is supportive of the overall more principles-based focus in the draft guidance. General concerns The submission states that a number of concerns previously raised by the AICD around proposed requirements in the draft standard – eg the level of reporting expected to the board remuneration committee, the proposed length of the deferral periods, the 'prescriptive and mandatory criteria for the application of clawback', the broad definition of significant financial institution (SFI) and the lack of a 'tailored' approach to RSE Licensees - have not been addressed in the draft guidance. On the issue of deferral periods, the submission makes clear that the AICD considers that there is a gap between the proposed requirements in the draft guidance and the proposed requirements in the draft legislation to establish the Financial Accountability Regime (FAR). The AICD strongly argues that APRA requirements and those in the proposed FAR should be in alignment. The submission states: 'the recently released Financial Accountability Regime (FAR) draft legislation provides for less onerous deferral periods and amounts for CEOs and senior managers and executive directors other than the CEO. In our view the Standard should align to the FAR periods'. [Note: The consultation package to establish the proposed FAR is here. You can find our summary of the proposed reforms here.] Suggested improvements to the draft guidance In addition, the submission suggests a number of other ways in which the AICD considers the draft guidance could be made clearer/improved. Some of the key recommended changes in the submission are summarised in the table below. Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 5 ME_183543315_1 ISSUE IDENTIFIED AICD'S SUGGESTED CHANGE Implementation of the reforms Proposed implementation date: ▪ APRA proposes that entities will need to be compliant with the draft standard and draft guidance by the proposed commencement date of 1 January 2023. ▪ The submission raises concerns that this will not allow sufficient time for full implementation. The submission states: 'we have received feedback that the scale of change required by them is such that an implementation timeframe of more than one performance period will be required to properly identify potential alignment gaps, develop appropriate solutions and implement required changes'. ▪ The AICD suggests that the implementation date for CPS 511 and CPG 511 should be the performance year commencing on/after 1 January 2023 Clarification of the role/responsibilities of the board 'Material weight' in the context of variable remuneration: ▪ Paragraph 56 of the draft guidance sets out the considerations that a 'prudent board' might take into account when assessing whether 'material weight' is being applied effectively in the design/determination of variable remuneration outcomes. The AICD's submission raises concerns that as currently drafted, the draft guidance 'overstates the role of the board' in this context by suggesting that 'the board should be responsible for determining the material weight applied to variable remuneration outcomes across the business' on an individual basis. ▪ The AICD suggests some changes to the drafting of the draft guidance to make clear that the board is not expected to determine material weights at the level of the individual (outside the specific requirements in the standard). Responsibility for applying risk/conduct adjustments: ▪ The submission expresses concern that the section on risk and conduct adjustments in the draft guidance could be read as implying that the board is necessarily responsible for making risk/conduct adjustments when in fact it may be appropriate that the board delegate this function to management. ▪ The AICD suggests some changes to the drafting to clarify that escalation of an issue to the board (though an option) may not necessarily be the only appropriate mechanism for escalation of issues in this context. Third-party oversight (mortgage brokers) ADI oversight of mortgage broker remuneration: ▪ ADI oversight of mortgage broker remuneration: The submission flags that 'a common mortgage broker model' in use by a number of ADIs entails the ADI engaging directly with approved aggregators (which have separate contracts and remuneration arrangements with mortgage brokers), rather than directly with mortgage brokers. The submission argues that these arrangements could make it difficult for ADIs to fulfil the proposed requirements around third-party service providers. ▪ The submission calls for APRA to engage directly with ADIs around the practice and their role within it, and for clarification around the proposed extent of the duty in the draft guidance. ▪ Separately the ABA has raised similar concerns (These are discussed in more detail below). [Source: AICD submission: Draft Prudential Practice Guide CPG 511: Remuneration 23/07/2021] Governance News | Weekly wrap up of key financial services, governance, regulatory, risk and ESG developments. Disclaimer: This update does not constitute legal advice and is not to be relied upon for any purposes MinterEllison | 6 ME_183543315_1 APRA consultation on Draft CPG 511: The proposed commencement date and ADI oversight of service providers among the key concerns raised in the ABA's submission The Australian Banking Association's (ABA's) submission to APRA's consultation on draft CPG 511 raises several concerns about the proposed approach in both the draft standard (draft CPS 511) and the draft guidance (draft (CPG 511) and emphasises that its submissions to both consultations should be read together. Key concerns raised in the ABA's submission include, in common with the Australian Institute of Company Directors' submission, the proposed commencement date for the new obligations and ADI oversight of third service providers. ▪ The ABA would like to see the proposed commencement date of the new requirements amended: Consistent with the AICD's submission to the consultation (discussed separately above) the ABA 'strongly recommends' that the obligations under the proposed new standard (CPS 511) and the guidance apply to the performance years commencing on or after 1 January 2023 to allow 'sufficient time to comply'. ▪ Oversight of service providers: The ABA's submission also raises concerns around the proposed obligations on ADIs to oversee the remuneration frameworks of service providers eg mortgage brokers. The submission argues among other things, and in common with the AICD's submission, that ADIs are limited both in their ability to identify conflicts and in their ability to influence service providers' remuneration frameworks. The ABA also points out that some service providers' remuneration is already regulated, and that in consequence, the imposition of new requirements would create unnecessary overlap. To address this, the submission suggests that 'for those service providers whose remuneration arrangements are currently regulated, APRA could identify the residual prudential risk it is seeking to address through CPG/CPS 511 so that the ABA can offer constructive options for how the required oversight might be managed'. The submission further suggests that APRA might potentially consider amending draft standard (CPS 511) to require ADIs to seek assurances from services providers that their remuneration arrangements align with the remuneration design requirements in the APRA standard/guidance. In the case of mortgage brokers, the submission suggests that this assurance could be provided to ADIs by head groups (ie approved aggregators), rather than individual brokers. Other concerns ▪ International banks: The ABA suggests that draft CPG 511 be amended to include guidance on how the Australian subsidiaries of global banks can apply for an adjustment or exemption from a specific requirement in the standard. ▪ Material risk takers: The submission asks that APRA clarify its 'expected approach to the identification of Material Risk Takers' to address what the ABA considers to be an inconsistency between the draft standard and the draft guidance. ▪ Variable remuneration: The submission also asks that APRA clarify the definition of variable remuneration in draft CPS 511 paragraph 18(u) to eliminate uncertainty. The ABA also raises concerns about the 'prescriptive' approach to variable remuneration in paragraph 40 and Table 2 in draft CPG 511. The ABA submits that this should be replaced with principles based guidance eg 'parameters' or 'guardrails' for general categories of variable remuneration that APRA considers are to be 'avoided' or 'tightly controlled'.