APRA Prudential Standard on remuneration released

LegalTalk - June 2009

On 28 May 2009 the Australian Prudential Regulation Authority (APRA) revised its Prudential Standard on governance for authorised deposit-taking institutions, general insurers and life insurers. The Prudential Standard will impose new remuneration and governance requirements for those organisations.

APRA's intention is that the remuneration requirements in the Prudential Standard will commence in January 2010. Transitional arrangements are not yet clear.

The key features of the Prudential Standard are as follows:
  • it is broadly consistent with the Financial Stability Forum's remuneration principles and the UK's Financial Services Authority's Code of Practice
  • it has been revised as part of a global focus to ensure that remuneration practices are sound and do not encourage excessive risk-taking - its focus is not on individual remuneration levels
  • the Board's role in determining remuneration and its relationship to risk has been emphasised and broadened
  • it applies to a wider population than just executives - it also applies to risk and financial control personnel and all employees whose total remuneration consists of a significant variable component
  • remuneration policies for the above employees must take account of risks, controls, capital allocated and the time necessary to reliably measure the business activities
  • the Board must be able to reduce or eliminate the payment of deferred performance pay where adverse outcomes subsequently arise; and
  • a Prudential Practice Guide (PPG) has also been released to provide non-compulsory guidance for boards.
APRA is seeking submissions on these proposals and submissions must be received no later than 24 July 2009. Subject to consultation, it is expected that the final Prudential Standard and associated PPG will be released in September 2009.

Taxation of employee share schemes - update

The announcement by APRA follows on closely from Treasury's announcement of proposed changes to the termination payment limits for prescribed executives and the review of executive remuneration by the Productivity Commission (see our May 2009 Employment Law Update), and the recent announcements in the Federal Budget of proposed changes to the taxation of employee equity plans (see our May 2009 Employment Law Update).

On 24 May 2009 the Assistant Treasurer, Chris Bowen, outlined in a media release that given the community concerns with the proposed tax changes and the possible unintended adverse impacts on employee share scheme arrangements, the Government will be engaging in a consultation process, beginning with the fast-tracked release of a policy options paper. The media release makes it clear the Budget announcement has not been withdrawn, but rather the Government is reconsidering how the Budget change will be implemented.