The European Banking Authority (EBA) has recently published its Peer Review Report on how competent authorities (NCAs) in each EU member state have applied the regulatory technical standards (RTS) on identifying material risk takers (MRTs) - those individuals that have a material impact on the risk profile of the firm. The report generally highlights a good level of application by NCAs, with no ‘deficiencies or major issues’ during the period in question (1 January 2015 to 31 December 2017). However, it does identify a number of best practices and highlights some weaknesses of the NCAs.

Background

Under the Capital Requirements Directive (CRD), regulated firms must comply with, and report on, specific requirements relating to MRT remuneration. In order to do this, firms must identify their MRTs. The RTS were introduced in 2014 in order to harmonise EU firms’ approach to identifying MRTs, providing a list of quantitative and qualitative criteria to assist in this identification.

This peer review aims to assess the supervisory practices followed and measures taken by NCAs in respect to the requirements of the RTS.

Key points

Best practices identified in the EBA report include:

• collecting data on high earners identified as risk takers (i.e. whether any high earners are not regarded as identified staff) and supervisory follow through;
• comparisons of the identification outcomes between peers;
• provisions from NCAs on the content of internal documents regarding the identification process;
• institutions’ notification and prior approval process regarding exemptions for identified staff;
• assessing the application of exemptions for individual staff; and
• the use of supervisory tools for assessing institutions’ compliance, including deeper dives and onsite reviews where needed.

Weaknesses identified in the EBA report include:

• some NCAs have failed to distinguish between their standard risk-based methods of supervision and the application of the proportionality principle. This has led to a divergence in approach to proportionality and even the exclusion of certain institutions from supervisory review; and
• consideration of expanding data collection on high earners. At the moment, this is usually only collected following a direct dialogue with reporting firms.

Tapestry Comment
Regulated firms could expect to see greater scrutiny as NCAs look to make improvements in line with this EBA report.

Following this peer review, the EBA is entitled to submit an opinion to the European Commission if the peer review or any other information acquired in carrying it out shows that a legislative initiative is necessary to ensure further harmonisation of prudential rules. We do not expect the EBA to send that opinion as we already know that the EBA is busy in the area of MRTs. As reported in our earlier newsletter, the EBA has already published the updated draft RTS to identify MRTs under CRD V and there is a consultation paper out on that at the moment. It will be interesting to see whether the findings in the EBA’s peer review will bring any changes to the draft to address the weaknesses identified.
 
Firms should review their current approach to identifying MRTs and documenting this decision making so that they can react to any changes presented by the NCAs in light of this review or the updated draft RTS, which is out for consultation until mid-February.

If we can assist you, please do contact us.

As reported last week, the European Banking Authority (EBA) has published a consultation paper in relation to draft regulatory technical standards (RTS) on the criteria to identify all categories of staff whose professional activities have a material impact on the institutions’ risk profile (MRTs) under the Capital Requirements Directive (CRD). Consultation submissions are required by 19 February 2020 and can be submitted here by clicking on the ‘Consultation Papers’ tab near the bottom of the screen and then clicking on the ‘Send your comments’ button at the bottom.
 
Background

Firms regulated under the CRD must comply with specific requirements regarding remuneration policies and variable remuneration for MRTs, in addition to the general requirements regarding appropriate remuneration policies. To do this, firms must identify their MRTs.

To assist firms with the identification of MRTs and to harmonise the identification process between firms and across the EU, RTS were published in 2014 that set out a list of quantitative and qualitative criteria to help to identify the ‘core’ MRTs. Where a staff member met any of the qualitative criteria, they would be regarded as a MRT. Where a staff member met any of the quantitative criteria, they would be presumed to be a MRT, unless it could be determined otherwise.

The EU recently published the text of the latest CRD (CRD V), as reported here. The CRD V amends the categories of staff who should be considered to be MRTs and contains a mandate for the EBA to draft further RTS to help to identify MRTs and further harmonise the identification process across the EU. The EBA has now published the draft RTS and has begun the consultation process.

Key points

Definitions

• The categories of staff listed in CRD V as categories that should be regarded as MRTs include reference to: “with managerial responsibility”, “control functions”, “material business unit” and “significant impact on the relevant business unit’s risk profile”. The draft RTS set out the criteria to be used to define these terms. These definitions, particularly the new definition of material business unit, may materially impact which staff members are regarded as MRTs.

Qualitative criteria

• The qualitative criteria in the draft RTS are comparable to those in the 2014 RTS. The presentation of the criteria has, however, changed materially.
• A number of the original qualitative criteria have moved from the RTS solely to the body of CRD V (e.g. references to members of the management body; senior management; staff members with managerial responsibility over the institution's control functions or material business units).
• The qualitative criteria that remain from the 2014 RTS have mostly been streamlined and/or clarified (e.g. references to members of committees have been clarified to refer only to voting members; reference to the staff member who heads the finance function has been replaced with a more specific reference to a staff member with managerial responsibilities for "the adequacy and appropriateness of accounting procedures". The clarifications and the streamlined approach may materially impact how firms approach identification of MRTs using the qualitative criteria.
• The general ‘catch-all’ qualitative criterion that applied under the RTS 2014 to any staff member with managerial responsibility for any other staff member who met one of the other qualitative criteria appears to have been removed.

Quantitative criteria

• The quantitative criteria are also comparable to the 2014 RTS with a few differences. These differences are set out in the following paragraphs.
• The quantitative criterion that applied under the 2014 RTS where a participant had been awarded, in the preceding financial year, total remuneration of EUR 500,000 or more has been increased to EUR 750,000 or more.
• The quantitative criterion that applied under the 2014 RTS where the staff member is within the 0.3% of staff who have been awarded the highest total remuneration in the preceding financial year is materially the same under the draft RTS but the wording has been clarified to refer to this assessment needing to be based on the institution on an individual basis.
• The quantitative criterion that applied under the 2014 RTS where the staff member was awarded total remuneration equal to or greater than the lowest total remuneration award in the preceding financial year to a member of the senior management or to a member of staff who meets certain of the qualitative criteria appears to have been removed.
• The ability under the 2014 RTS to determine that an individual identified as an MRT solely under the quantitative criteria will not be an MRT where the staff member (or category of staff): (a) only carries out professional activities and has authorities in a business unit that is not a material business unit; or (b) their professional activities have no significant impact on the risk profile of a material business unit, has been preserved. There are some clarifications regarding the operation of this ability, e.g. the reference to ‘significant impact’ in the preceding sentence referred to ‘material impact’ in the 2014 RTS and some of the criteria that should be considered when determining whether the staff member has a significant impact on the risk profile of a material business unit are set out in the draft RTS.
• The obligation to seek the prior approval of the competent regulatory authority to apply the ability referred to in the paragraph above now applies to all applications of this ability. The requirement for the competent regulatory authority to inform the EBA before giving approval for the application of this ability to a staff member awarded total remuneration of EUR 1,000,000 or more in the preceding financial year continues to apply, as does the requirement that approval for staff members awarded EUR 1,000,000 or more in the preceding financial year is only given in exceptional circumstances. The draft RTS clarify that exceptional circumstances “entails a situation that is unusual and very infrequent or far beyond what is usual".

Timing

Consultation submissions are required by 19 February 2020.

The EBA expects to submit a final draft of the RTS to the European Commission in June 2020.

Tapestry comment 
On the face of it, the draft RTS is not ground-breaking. The quantitative and qualitative criteria are comparable with the 2014 RTS and we had already expected the added clarity with regard to the definitions of, e.g. “material business unit” and “managerial responsibility” following the explicit references to these in the mandate prescribed in CRD V. That said, firms should review the draft RTS in detail as soon as practicable to determine the impact, if any, that the draft RTS would have on the identification process if it came into effect in its current form.

The overarching objective of both the 2014 RTS and the draft RTS is to harmonise the criteria for the identification of MRTs to ensure a consistent approach to the identification of such staff across the EU. The draft RTS undoubtedly takes steps to achieve this, clarifying previously ambiguous or imprecise criteria that required a degree of interpretation to navigate. The question for firms, however, is whether the added clarity is more restrictive or burdensome than it is helpful.

It may be useful for firms to take the time to model the draft RTS criteria against the staff population, or a sample of the staff population, to identify the differences between identification under the current approach and identification under the draft RTS. Firms will then be able to identify whether the new criteria captures any ‘anomalies’, that is, any staff members who the firm thinks should not be caught but are, and also importantly, any staff members who the firm thinks should be caught but are not. It must be remembered, when conducting the modelling process, that the RTS criteria identify the minimum categories of staff who should be regarded as MRTs and are not exhaustive – firms are expected to apply their own additional criteria, where required.

The findings of any modelling process, as suggested above, can then be used to respond to the consultation process, either on an individual firm basis or via an industry organisation. As the identification criteria are unlikely to change for a long time following the publication of the final RTS, we recommend that firms take the time now to work through the draft and respond to the consultation process before it ends on 19 February 2019.

If we can assist you with your remuneration structures and compliance, please do contact us.

The European Banking Authority (EBA) has published a consultation paper in relation to draft implementing technical standards (ITS) that specify uniform disclosure formats and associated instructions for certain disclosures required under the Capital Requirements Regulation, as amended by the recently published Capital Requirements Regulation II (CRR II), including remuneration disclosure requirements. Consultation submissions are required by 16 January 2020 and can be submitted here by clicking on the ‘Consultation Papers’ tab near the bottom of the screen and then clicking on the ‘Send your comments’ button at the bottom.
 
Key points

• CRR II provided a mandate to the EBA in CRR II for the publication of uniform disclosure formats and associated instructions in relation to certain disclosure requirements, including the remuneration disclosure requirements.
• CRR II introduced some clarifications to the disclosures on remuneration that were required under the original Capital Requirements Regulation. Further information on some of these clarifications can be found here.
• The ITS specifies uniform disclosure tables and templates for the remuneration disclosures required under CRR II. These are set out at Annex 37 of the draft ITS.
• The ITS specifies instructions for firms to refer to when completing the tables and templates set out at Annex 37. These instructions are set out at Annex 38 of the draft ITS.
• The uniform disclosure formats are intended to convey sufficiently comprehensive and comparable information to enable the assessment of risk and demonstrate compliance.

Timing
 
Consultation submissions are required by 16 January 2020.
 
The EBA expects to submit a revised draft ITS to the European Commission in June 2020.
 
The CRR II changes, including the ITS, are anticipated to apply from 28 June 2021.  
 
Tapestry comment 
The approach that firms have taken to the disclosures required under Article 450 of the Capital Requirements Regulation can sometimes be inconsistent. Although the mandatory topics are (usually!) disclosed, the extent of the disclosure and style of approach taken to the disclosure is different between firms. This can sometimes make direct comparison between the remuneration policies and practices of firms difficult. The ITS is intended to minimise this inconsistency and ensure that the remuneration information disclosed is sufficiently comprehensive and comparable. We recommend that firms review Annexes 37 and 38 of the draft ITS and ensure, before the consultation period ends, that the instructions, tables and templates are clear and workable, to ensure that you have the opportunity to feed into the consultation process if any issues are identified. We intend on participating in the consultation process so if you would like us to incorporate any of your comments, please provide these to us as soon as possible and by 16 December at the latest.
 
If we can assist you with your remuneration structures and compliance, please do let us know.

A new prudential regime for EU-regulated investment firms, comprising the Investment Firms Directive (IFD) and Investment Firms Regulation (IFR), was adopted by the Council of the EU on 23 October 2019. 

The adopted texts can be accessed here: 

• Investment Firms Directive 
• Investment Firms Regulation 

Now the text has been approved by the Council of the EU, the adopted legislation is anticipated to be published in the Official Journal of the EU shortly and will enter into force 20 days following publication. IFD must be implemented into local law by EU member states within, and the IFR will apply directly (without local implementation) from, 18 months following entry into force.

Tapestry comment

Adoption by the Council of the EU has taken place later than anticipated after being adopted by the EU Parliament on 14 April 2019. As a result, the implementation deadline for IFD (and the application of IFR) is anticipated to fall into 2021 and so it may be that the application of the rules will be pushed back, possibly to the first performance year beginning on or after 1 January 2022.

As the Capital Requirements Directive V and Capital Requirements Regulation II will be applicable from 29 December 2020 and 28 June 2021 respectively, as reported here, those firms which will fall under the remit of IFD / IFR could face some uncertainty as to whether the more stringent CRD V requirements would need to be complied with until the IFD / IFR legislation is in effect. We expect clarity on this shortly and we will update you when such clarity is available. 

We will shortly circulate a more detailed update focusing on the detail of the IFD / IFR provisions. 

If you have any questions about this update or in relation to your remuneration regulation compliance generally, please do contact us.

The UK Financial Conduct Authority (‘FCA’) has published a ‘Dear Chair of the Remuneration Committee letter’ (dated 19 August 2019) on 28 August 2019 which outlines the FCA’s 2019/20 approach for supervising remuneration policies and practices for level 1 firms (e.g. deposit takers and investment firms with total assets exceeding £50bn). The letter also contains findings and observations from supervision during 2018/19.

Approach to supervision for 2019/20:

• Accountability - the FCA highlights that the remuneration committee chair is ultimately responsible for remuneration policies and practices. The FCA expects the chair to consider how remuneration will contribute to a healthy culture and promote the right behaviour.
• Ex-post risk adjustments - the FCA will continue to focus on adjustments made where an employee’s conduct falls below the standards expected. Firms must make appropriate, justifiable and consistent adjustments to variable remuneration. The chair must have oversight to ensure any adjustments are made in a timely manner.
• Diversity and inclusion - the FCA sees this as a key consideration and will continue to engage with firms on how remuneration policies can influence their approach to diversity and inclusion.
• Remuneration policy statement - for the FCA’s annual review with the PRA, in addition to submitting a Remuneration Policy Statement (‘RPS’), firms should submit a short summary of the key points in the RPS, including key changes. Firms should also submit an explanation of how the remuneration policies drive appropriate behaviour and lead to good consumer outcomes.
• Transforming culture in financial services - the FCA will continue to focus on transforming culture in financial services firms. They are now exploring what, other than remuneration, motivates individuals in the financial services sector (including non-financial incentives and recognition), the role of incentives in creating a successful business model and the interaction between interests of different stakeholders. The FCA will continue to engage with the financial services community on this and welcomes your views.

Tapestry Comment

The FCA approach to remuneration supervision for 2019/20 focuses on culture and governance. The FCA has highlighted the significance of the chair of the remuneration committee in being accountable for making the right policies to drive positive behaviour and culture. The FCA are continuing in their efforts to transform the culture of financial services firms - and are now also considering including non financial drivers - we expect to see more on this. Diversity in its broadest form (i.e. not just gender) is being taken even more seriously this year and we expect that this trend will continue.

This summer, we undertook research which showed that many financial services firms in the FTSE 100 had linked diversity / gender targets to their incentive plans. If you would like to see the key findings from our FTSE 100 Diversity Report, please let Gabby know. Firms should review the themes presented in this letter for 2019/20 and consider if their current policies and practices remain fit for purpose.

If you have any questions about this, or any other financial services update, please do contact us.

As we reported on here, the final rules on the extension of the UK Senior Managers and Certification Regime (SM&CR) to Financial Conduct Authority (FCA) solo-regulated firms have now been published. This will take effect from 9 December 2019, with the exception of benchmark firms who will be subject to the SM&CR from 7 December 2020.

Following this, the FCA has published 2 new webpages providing guidance and information on the extension:

• Senior Managers and Certification Regime: solo-regulated firms - this webpage provides guidance on SM&CR, and links to various guides and checklists on how SM&CR works, how firms can categorise themselves under this regime and what firms need to do to implement this. It also outlines the 3 key parts of the SM&CR (the Conduct Rules, Senior Managers Regime and Certification Regime) and summarises the key dates that FCA forms will be available and the deadline for submitting these.
• More information on SM&CR categorisation for solo-regulated firms - this webpage then highlights how firms can review, and change (by "opting up" or "opting down"), their SM&CR category. Here the FCA details 6 thresholds which will result in a firm being classified as Enhanced. Of these thresholds, 4 are based on GABRIEL returns (information submitted via the FCA's GABRIEL reporting system). If firms believe they have been categorised incorrectly, they should contact the FCA.

Tapestry comment

These webpages will be a useful resource for firms preparing themselves before 9 December, particularly the approximate 47,000 firms who may be impacted for the first time or those firms who wish to review their categorisation.

As this extension is now only 4 months away, firms should be reviewing these additional resources and the implementation process carefully to ensure they fully comply with this extended framework. This extension demonstrates an increased focus on conduct by the FCA, and so any firms that do not fully comply may be subject to scrutiny.

If you have any questions about this update or in relation to your remuneration regulation compliance generally, please do contact us.

The EU Insurance and Occupational Pensions Authority (EIOPA), the European Supervisory Authority responsible for the regulation of the EU insurance sector, has published a consultation paper on its draft opinion (Opinion) on the supervision of remuneration in the insurance and reinsurance sector. The consultation ends on 30 September 2019. 

Background
The remuneration rules that apply to insurance and reinsurance firms are found in the Solvency II Delegated Regulation (EU) 2015/35 (Solvency II). Solvency II establishes a range of remuneration requirements that are typically less detailed, and are subject to less detailed guidance, than the remuneration rules impacting other types of financial services firms. The impact of this is that Solvency II firms and supervisory authorities have 'considerable discretion' as to how the remuneration requirements are applied. 

EIOPA has identified that this discretion has led to divergent practices across Europe. The Opinion aims to enhance convergence in the supervision of the remuneration policies of EU insurance and reinsurance firms. The Opinion is targeted at supervisory authorities and gives guidance to them on how to challenge the application of the remuneration requirements by firms. EIOPA has, however, stated that it is not their intention to add requirements or to create administrative burden. 

Scope
The Opinion applies to remuneration for staff in the categories listed below, whose annual variable remuneration exceeds EUR 50,000 and represents more than 1/4 of their total annual remuneration: 

• members of the administrative, management and . 
• supervisory body; 
• other executives who effectively run the firm; 
• key governance holders as defined in EIOPA's Guidelines on the system of governance; and 
• categories of staff whose professional activities have a material impact on the firm's risk profile. 

EIOPA has, however, stated that for staff not covered by the Opinion, supervisory authorities may adopt a proportionate and more flexible approach, including applying the Opinion to staff outside of the scope identified above but in a more flexible manner.

Key points

• Balance between fixed and variable remuneration: the proportions of fixed and variable remuneration must be such that employees do not become overly dependent on variable components and, if a firm exceeds the 1:1 ratio, the supervisory authority should investigate whether the remuneration policy is properly balanced. Supervisory authorities should also pay specific attention to very low fixed remuneration.
• Deferral of variable remuneration: firms should use different deferral periods depending upon the risks entered into, as opposed to only applying the 3 year minimum. Supervisory authorities should use their judgement to consider whether a deferral rate higher than 40% and/or a longer deferral period is needed. When deferral is lower than 40% supervisory authorities should engage with the firm to understand the specific situation. The deferral rate is recommended to be higher than 40% in the case of a particularly high variable remuneration e.g. a ratio higher than 1:1. 
• Financial and non-financial criteria: supervisory authorities should ensure that firms, when assessing an individual's performance ex ante, set out financial (quantitative) and non-financial (qualitative) criteria and describe the consequences on the pay-out of variable remuneration when the criteria are not met by the individual. The criteria used should be linked to decisions made by the individual and should ensure the remuneration award process has an appropriate impact on the individual's behaviour. When assessing performance in a multi-year framework, the following should be taken into account: (a) financial criteria covering a period long enough to capture the risk taken by staff; and (b) non-financial criteria contributing to creation of value for the firm, e.g. compliance, client service, achievement of strategic goals, staff turnover and reputation. The financial and non-financial criteria should be appropriately balanced and supervisory authorities should challenge where appropriate. 
• Downward adjustments: variable remuneration should not only be adjusted downward when staff do not meet their personal objectives, but also when their business units and/or the firm as a whole fail to do so. If a firm is likely to breach. or has breached, the Solvency Capital Requirement its remuneration policy should prescribe that downwards adjustment will be applied. Supervisory authorities should require a clear description of the downwards adjustment(s) from firms, including at least: (a) how short to long-term risks, cost of capital, internal capital requirements and dividends policies have been taken into account; (b) examples of how the downwards adjustment works; (c) rationale for the chosen downwards adjustment and triggers used; and (d) clarification that the downwards adjustments are designed in a way that any unvested portion of variable remuneration may be subject to malus. 
• Termination payments: remuneration policies should specify the possible use of termination payments, including maximum payment or criteria for determining the amount. The Opinion identifies payments that should qualify as termination payments. When defining the maximum level of any termination payment, the fixed/variable remuneration ratio should be taken into account.  Deferral requirements will apply to termination payments, with some exceptions as outlined in the Opinion. There is also guidance to help firms ensure that termination payments reflect performance achieved over time and are not being made to reward failure or being made in other circumstances where such payments should not be made. Supervisory authorities must ensure firms are able to demonstrate the reasons for the payments, the appropriateness of the amount and criteria, and that the payment is linked to performance achieved over time and does not reward failure. 
• Variable remuneration composition: supervisory authorities should ensure firms award 50% of variable remuneration in shares, equivalent ownership or share-linked instruments. The instruments should be subject to an appropriate retention policy.
• Reporting: supervisory authorities should collect qualitative and quantitative data to enable them to perform a supervisory review of the remuneration principles in accordance with the Opinion. 

Tapestry comment

This Opinion follows the UK PRA's recent comments on the application of Solvency II, in which the PRA identified disparities in how the Solvency II remuneration requirements have been implemented. It is notable that a few of the areas of disparity identified by the PRA, such as in relation to downward adjustments and the calculation of performance, are also addressed in the Opinion. This shows that the disparity identified by the PRA for UK firms may also be present throughout the EU generally.

As the Opinion is addressed at supervisory authorities, as opposed to firms directly, it is clear that EIOPA expects supervisory authorities to take action to deal with the divergent supervisory framework, in line with the new guidance, before taking a more direct intervention. If supervisory authorities do not effectively deal with the areas of disparity before EIOPA starts to monitor the application of the Opinion two years after publication, we may see more direct intervention. Any such intervention is unlikely to happen soon and, in the interim, supervisory authorities have time to try and bring firms into line with the expectations outlined in the Opinion.  

As the Opinion is only in a draft format, firms should review their existing policies and practices with the draft guidance in mind and consider: (a) whether to engage in the consultation process; and (b) whether, if the Opinion was to come into effect as drafted, the firm's remuneration policy would be compliant with the expectations outlined in the Opinion and, if not, either identify any required remedial action or be prepared to explain and justify any area of divergence.

If you have any questions about this update or in relation to your remuneration regulation compliance generally, please do contact us.

The Australian Prudential Regulation Authority (APRA) has released a consultation on new rules aimed at clarifying and strengthening remuneration requirements in APRA-regulated entities. The consultation period will close on 23 October 2019 and APRA has indicated that it intends to release the final rules before the end of 2019 or in early 2020, with a view to the rules taking effect on 1 July 2021.

The proposed rules are materially more prescriptive than APRA’s existing remuneration requirements, which are considered to have not delivered satisfactory outcomes. This is demonstrated by the recent high-profile issues suffered by the Australian financial services sector and evidence that existing remuneration arrangements have been a factor driving poor consumer outcomes.

APRA hopes that the new rules will create a remuneration framework that better aligns with the long-term interests of firms and their stakeholders, including customers and shareholders. The proposed reforms also address recommendations from the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. 
 
Key proposals: 

• To limit the focus on financial metrics and to put greater focus on non-financial risks (e.g. culture; governance), financial performance measures (e.g. revenue, profit and volume based measures; certain share-based measures) must not comprise more than 50% collectively or 25% individually of the performance criteria used to allocate variable remuneration.
• The firm must set specific criteria for the application of malus for variable remuneration, including the minimum criteria set out in the draft rules.
• For firms determined by APRA to be ‘significant financial institutions’, certain structural rules will apply, including requirements that: (a) a minimum of 60% of the total variable remuneration of the Chief Executive Officer must be deferred for at least 7 years, with no vesting before year 4 and vesting no faster than pro-rata after that; (b) a minimum of 40% of the total variable remuneration for a senior manager (other than the CEO) and for a highly-paid material risk-taker, must be deferred for at least 6 years, with no vesting before year 4 and vesting no faster than pro-rata after that; and (c) the variable remuneration of a senior manager or a highly-paid material risk taker must be subject to clawback for at least 2 years from the date of payment or vesting and, in circumstances involving a person under investigation, at least 4 years from the date of payment or vesting. Specific criteria must be set for the application of clawback, including the minimum criteria set out in the draft rules.
• Boards must approve and actively oversee remuneration policies for all employees and regularly confirm they are being applied in practice to ensure individual and collective accountability. The Board must also ensure risk outcomes are reflected in remuneration outcomes.
• The remuneration policy needs to be subject to annual compliance reviews and triennial effectiveness reviews of the remuneration framework need to take place.

APRA has indicated that it also intends to consult on a ‘practice guide’ in 2020 to support the implementation of the new rules, as well as possible additional disclosure requirements.  
 
Tapestry comment 

The approach that APRA proposes to take will bring APRA-regulated firms closer to the style of regulation that entities regulated by the European Union are subject to. It is worth noting, however, that APRA did stop short of simply matching the onerous approach taken by the EU. For example, APRA has noted that they have chosen not to include a ‘bonus cap’ or to prescribe specific types or forms of variable remuneration on the basis that they have not seen evidence of these approaches being effective in promoting better outcomes. Although these two requirements are not included in APRA’s proposals, the proposed reforms will materially impact the remuneration structure for APRA-regulated firms, particularly due to the onerous deferral, malus and clawback requirements that will be imposed on certain employees.

In case these rules are finalised, firms should consider how these changes may impact any policies and award documentation, and also how the extended deferral periods, and malus and clawback arrangements, will be implemented and communicated. As an initial step, firms should consider whether to participate in the consultation process ahead of the 23 October 2019 deadline.
 
If you have any questions in relation to this update, or on anything else, please do contact us.