Regulator caves to pressure from Australian banks on executive bonuses

Apra had initially wanted a 50% cap on the amount of bonuses that come from financial performance and a delay of seven years in payment

Stock image of $50 notes
Bank executives will still have to wait up to five years for bonuses under draft reforms set up by the financial regulator. Photograph: RBA/AAP
Bank executives will still have to wait up to five years for bonuses under draft reforms set up by the financial regulator. Photograph: RBA/AAP

Last modified on Wed 11 Nov 2020 21.14 EST

The prudential regulator has bowed to pressure from the banking industry and watered down proposed new rules restricting bonuses that were recommended by the Hayne royal commission.

In a new draft remuneration standard, released on Thursday, the Australian Prudential Regulation Authority (Apra) abandoned its previous position that the proportion of banker bonuses that can come from financial performance should be capped at 50%.

Apra’s new proposed standard also slashes the amount of time for which bonuses have to be delayed by up to two years, depending on the seniority of the banker.

The delay in paying bonuses is designed to stop executives from pursuing short-term gain at the expense of the organisation over the longer term.

Apra said the new draft standard “responds to industry feedback” to its initial proposal, released in November last year.

The changes match the demands made by banks and the lobby group the Australian Institute for Company Directors in its response to the draft released in November.

In its submission to Apra, the AICD slammed the 50% cap as “a blunt instrument that undermines the board’s role in setting remuneration structures that are tailored to the needs of their organisations”.

Apra initially proposed chief executive bonuses be deferred for seven years and bonuses for other senior executives for six years.

The AICD complained that these periods were “at odds with our understanding of international practice and is not sufficiently sensitive to differences in entity risk profile and strategy”.

Apra now proposes a deferral period of six years for chief executives and between four and six years for other senior staff, depending on their role.

AICD’s concerns were mirrored in submissions from ANZ, which argued that there should not be hard cap on financial measures in bonuses and said Apra’s proposed deferral periods result in it being “disadvantaged in hiring and keeping executives because others will be able to offer packages with more attractive deferral and clawback arrangements”.

In its submission Australia’s biggest bank, the Commonwealth Bank, proposed capping financial measures at 70% and said it was also concerned the long bonus deferral periods could make it harder to hire high-flyers.

The proposal for a cap was also opposed by investors including one of the world’s biggest fund managers, BlackRock, which said it was “overly prescriptive”.

Banking royal commissioner Kenneth Hayne recommended Apra crack down on executive pay in the industry in his final report, handed to treasurer Josh Frydenberg early last year.

Hayne said that the fact that the CBA handed out full bonuses to senior executives in 2016, despite the bank being mired in a series of scandals including the failure of its anti-money laundering and counter-terrorism financing systems, charging people for fees it never provided and mis-selling credit card insurance demonstrated the need for a crackdown on pay.

He also found that Apra had failed to adequately supervise bonuses.

The regulator has now made bonuses one of its top priorities, and promises to make sure banks are transparent in telling investors and the public how they are handed out.

“Once implemented, we expect the standard to deliver stronger incentives for individuals to manage non-financial risk, appropriate financial consequences where material risk incidents occur and increased transparency to drive stronger board accountability for remuneration outcomes,” Apra deputy chair John Lonsdale said.

The new proposal is open for consultation for three months. Apra hopes to settle the new standard by the middle of next year and bring it into force from 1 January 2023.