The Australian Prudential Regulation Authority (APRA) has today released a second consultation package on remuneration at financial institutions. This second package comprises a response paper to the submissions, together with revised draft versions of the relevant governance standards and an associated draft prudential practice guide (PPG).

PPG 551, a Prudential Practice Guide on remuneration, is aimed at banks, insurance and life assurance companies. The proposals are based on the Financial Stability Board’s (FSB) Principles for Sound Compensation Practices which was endorsed by the Leaders of the G20 in April 2009.

The proposals cite deferred pay as one method of “allowing time for the outcomes of business activities to be reliably measured”. the proposals note that board discretion is needed to protect the financial soundness of institutions in adverse circumstances and that it was also required to enable boards to correct “material adverse outcomes”, although only in extreme circumstances.

Australia’s regulated institutions must now have a board remuneration committee and a pay policy in place by 1 April 2010. Remuneration committees, like audit committees, will be required to comprise a majority of independent directors as well as an independent chairman.

However, the Australian has reported that the regulator warned acknowledged industry concern that pay was being over-dramatised as a cause of the financial crisis – “APRA agrees that risk in remuneration practices is one risk among many facing regulated institutions, and its proposals are not intended to give undue prominence to this risk.”

Last Updated: 10 September 2009