A step too FAR Getting remuneration right for insurers requires the right processes, not oversight imposed by regulators By Ewan Taylor Struggling with difficult trade-offs: Wayne Byres says APRA is trying to balance competing priorities and concerns
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e are seeing significantly more interventionist regulation of the financial services sector after the Hayne royal commission – regulation that will give the regulators unprecedented powers and impact the independence and autonomy of boards to do what they believe is best for their organisation. Chief among these interventions are the Australian Prudential Regulation Authority’s proposed CPS 511 and the extension of the Banking Executive Accountability Regime (BEAR) to the insurance industry. These would be administered through the Financial Accountability Regime (FAR), which risks stretching APRA beyond its current capability and adding to costs in the sector. A comprehensive and properly co-ordinated framework based on sound governance principles would be preferable to the current piecemeal approach to reform. This approach is hardly surprising, given the royal commission’s criticisms and recommendations – the Government feels politically obliged to be seen to be doing something. But it is time to make the point that the concepts of good regulation and
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process have not changed because of the royal commission. APRA Chairman Wayne Byres has acknowledged the organisation is struggling with “difficult trade-offs” required to ensure the framework for remuneration to be prescribed in CPS 511 appropriately balances a wide variety of competing priorities and concerns. In a speech last November he indicated that APRA may respond to the consultation feedback and back away from its proposed 50% limit for financial measures in incentive plans. Hopefully APRA recognises that the task it set itself of attempting to prescribe a single remuneration framework for all APRAregulated entities, including insurers, was always impossible. Such a perfect model does not exist. It would be costly indeed if mandatory standards were to constrain the evolution of new or different remuneration frameworks. For example, would the requirement for a set percentage of variable remuneration to be determined on non-financial metrics oblige insurers to provide incentives for “doing the right thing”? Or should an insurer that regards
behaving honestly and in the interests of customers as an expected minimum standard (breach of which results in termination of employment) be able to offer incentives based exclusively on financial performance? A significant challenge of non-financial metrics is that they rely more heavily on discretionary judgement, which is something that boards could still apply to reduce variable remuneration that was, in the first instance, assessed off financial metrics. A better solution that does not involve APRA making too many trade-offs and that will support the highest governance standards would be for it to take an entirely principles-based approach and then police the outcomes rigorously. The goals that Mr Byres has enunciated for remuneration should be broadly embraced. These are: • Achieving a better alignment of incentives with desired outcomes • A more holistic assessment of performance across a range of dimensions • Clearer accountability for (good or bad) performance. These would result in “…remuneration systems that provide appropriate incentives, improve accountability and support
