5 minutes on... APRA releases for consultation new remuneration disclosure and reporting requirements

Last Wednesday, 6 July 2022, Australian Prudential Regulation Authority (APRA) released for consultation, an amendment to Prudential Standard CPS 511 Remuneration and a new Reporting Standard CRS 511.0, outlining new requirements for remuneration disclosure and reporting. While enhanced disclosure and reporting requirements were expected on these topics, the level of detail/depth of the proposed requirements may be greater than anticipated. 

The amended standard sets out APRA’s heightened expectations for reporting and disclosure regarding how regulated entities are satisfying the key principles of the standard (around remuneration governance, design and risk considerations), aggregated details of remuneration outcomes, and adjustments for material incidents.

In response to requiring enhanced reporting and disclosures, APRA has committed to publishing statistics annually around quantitative remuneration details and outcomes for CEOs and Specified Roles (as defined by CPS 511) by entity level to facilitate benchmarking across regulated entities. The publication of such data is aimed to aid transparency and help build trust in entities from investors, advisors and broader community stakeholders. 

Which entities will be impacted and when?

The disclosure requirements will take effect in line with the implementation timeline of the broader Standard where effective dates are staggered by institution type, as seen below. 

The update on the proposed disclosure requirements is timely as many organisations are going through year-end activities and have an opportunity to consider these as part of year-end reporting, test comfort levels and readiness given FY22 disclosures, and respond to APRA’s consultation.

What are the requirements?

APRA reporting requirements

APRA has committed to publish statistics on remuneration outcomes across all APRA-regulated industries, providing aggregated information about Specified Roles at an entity-level on eligibility, quantum, and year-on-year increase in fixed, variable and total remuneration. Further clarification regarding the interpretation of “entity-level” statistics (i.e. whether this refers to remuneration paid to all Specified Roles at an entity level or individual outcomes by cohort for each entity) will likely be sought during the consultation process. 

To enable this proposed publication and APRA’s supervision of CPS 511, APRA is consulting on a draft Reporting Standard CRS 511.0. This requires regulated entities to annually submit to APRA the below qualitative and quantitative remuneration information via a machine readable document (a sample template has been released by APRA). 

Within 4 months of the end of the entity’s financial year, regulated entities must report: 

• A description of how the Board oversees the entity’s remuneration practices, including input provided by the Board committees and CRO;
• Findings from compliance and effectiveness reviews;
• List of Specified Role titles within the organisation, highlighting individuals also identified as an Accountable Person under FAR and details around their reporting level, and performance, risk and conduct ratings, and fixed remuneration levels;
• For entities that offer variable remuneration to Specified Roles, details of incentive plan design and incentive adjustment triggers and mechanisms; 
• For entities that offer variable remuneration to Specified Roles, details of variable remuneration outcomes on a cohort basis.

Public disclosure requirements

The below disclosures are also required to be disclosed on an entity’s website within 4 months of the end of an entity’s financial year. Although Significant Financial Institutions (SFIs) have more prescriptive requirements, the same principles around disclosure apply to both SFIs and non-SFIs.

For all APRA regulated entities:

• Summary of Board oversight practices;
• Key design features of remuneration frameworks such as criteria for assessment, deferral and vesting; and
• A description of the method used to assess risk management outcomes, and any application of consequence management in the event of material breach or misconduct.

Additional disclosures for SFIs:

• Findings from remuneration framework reviews i.e. compliance and effectiveness reviews;
• Application of material weight for non-financial measures and overview of variable remuneration for Specified Roles;
• Deferral and vesting policy;
• Adjustment tools to ensure alignment of remuneration outcomes with performance and risk; and
  
• Quantitative remuneration disclosures for CEOs on an individual basis and for Specified Roles on a cohort basis.

Challenges

The extensive disclosure requirements will pose various challenges to APRA regulated entities, however the impact will vary depending on type of institution and current practice. 

• Listed SFIs will face less change as they are familiar with remuneration reporting and disclosure requirements under ASX listing rules (although not to the extent proposed under CPS 511); 
• RSEs will experience moderate change due to existing requirements under other regulations (e.g. SIS); 
• Unlisted SFIs, or foreign subsidiaries of SFIs, will face the greatest change as they previously have not been required to provide in-depth (or any) remuneration disclosures; 
• Engagement and critical conversations will need to be managed with key stakeholders such as executives and directors on disclosure of information that may be perceived to be commercially sensitive (such as non-financial measures), as well as with those executives who will experience having their remuneration details in the public domain for the first time. 

Other challenges common to all regulated entities may include:

• Gathering data on aggregate quantitative remuneration outcomes by cohorts and sub-cohorts due to the short time frame for preparation eg. for an ADI who is an SFI;
• Complying with different reporting requirements i.e. Remuneration Committee reporting covers outcomes on a cohort basis for Risk and Financial Control Personnel (RFCPs), whereas regulatory reporting only cover RFCPs who report to senior management; 
• Ensuring capability and capacity to administer given the timeline and depth of disclosures;

What happens next?

APRA will continue to have a supervisory focus on the implementation of CPS 511 requirements, along with finalising the requirements on reporting and disclosures in the coming months. Other details include:

• Consultation period for submissions is open until 7 October 2022. 
• APRA may make minor updates to CPS 511 and/or CPG 511 to align with the FAR once finalised (expected around end of 2022); 
• Post the consultation period, APRA expects to finalise the requirements on reporting and disclosures by Q4 2022;
  
• Pre-implementation reviews are currently underway, with APRA engaging with SFIs. Some SFIs have been requested to complete a progress report due later this month (July 2022) and thematics from this pre-implementation review are expected to be published in early 2023.

What should I do next?

As an APRA-regulated entity:

• For SFIs, self-assess your readiness and the availability of information to be disclosed; 
• For unlisted companies, consider the approach and impact of disclosures, including planning out the communication and engagement process with relevant external stakeholders;
• Consider your consultation response (if any) to APRA;
• For entities that currently have remuneration disclosures in annual reports, consider the enhancements (if any) which could be implemented throughout the current year or early 2023; and
• Consider conducting a dry run (behind-the scenes) of disclosure requirements during the next reporting period to test and learn, as well as inform your consultation response.

Though non-APRA regulated companies are not required to make changes to any disclosures, the proposed requirements set a new expectation for remuneration disclosure and transparency that will likely have flow-on impacts to non-regulated entities.