Banks must change their way on pay, says APRA

The Australian 12:00am September 5, 2018

Michael Roddan

Australia’s best-paid bankers are still failing to get the message that huge bonuses and remuneration drive bad behaviour, the chairman of the prudential regulator says.

At the annual Risk Management Association conference in Sydney yesterday, Australian Prudential Regulation Authority chairman Wayne Byres told a gathering of chief risk officers and other financial managers that they needed to change the way they paid their most senior executives to prevent excessive risk taking and punish badly behaved bankers. The government in its 2017 federal budget forced the nation’s biggest banks — Commonwealth Bank, Westpac, ANZ and National Australia Bank — to put their executives on a potential bad behaviour register that would also require handing over 40 per cent of their bonuses to the regulator to defer financial rewards.

But Mr Byres said the banking executive accountability regime (BEAR) was only one part of a process to regain the community’s trust, and called on banks to overhaul their cultures and hold their own executives to account “more firmly and quickly” than current practices.

Mr Byres said APRA’s sector-wide review of banker pay found that junior bankers and frontline staff faced financial penalties, but senior executives in charge of the division were “insulated” from the consequences of poor risk outcomes.

“This must change,” he said.

He said companies were too heavily focused on rewarding executives for return on equity and share price movements.

“The current structure of long-term incentives in Australia is particularly problematic in this regard, and is out of step with how best practices in remuneration are evolving internationally,” Mr Byres said.

“This will also have to change.”

APRA also found boards failed to challenge executives who wanted greater pay and suffered from “insufficient documentation” for the oversight of board remuneration committees. “It was clear that stronger governance of executive remuneration is needed,” Mr Byres said.

Last month, Credit Suisse private investment banker Francesco De Ferrari signed on to the top job at scandal-plagued AMP with almost $18 million in possible performance bonuses on top of a maximum $8.3m annual salary if he can pull off an incredible rally in the group’s share price, which has fallen 40 per cent since the start of the royal commission.

While the big four banks have collectively named 85 executives for the BEAR register, the smaller banks have until mid-2019 to comply with the regime. Mr Byres said some of the big banks did not know which executive was accountable for some of the businesses until they had to comply with the legislation. “Returning to today’s theme, the BEAR will not necessarily aid the industry to regain the community’s trust, at least directly,” Mr Byres said.

“The BEAR clearly has teeth, and use of the BEAR’s enforcement provisions will demonstrate to the community that there are going to be clear and material consequences for poor prudential outcomes.

“But it will only come after some event that has damaged the trust and standing of the industry in the first place, so at best the BEAR might help square the ledger ex post.

“Where I hope the BEAR will have a positive impact — albeit indirectly, and over time — is through forcing the industry to hold itself to account much more firmly and quickly than has been the case to date. This appears to have been the case in other jurisdictions that have introduced BEAR-style regimes, and I certainly hope that we will see a similar impact here.

“It is not the regulator’s job to regain that trust for you. The industry needs to earn and sustain the community’s trust through its own actions.”

APRA recently found incentive bonuses were not aligned with sound risk management and long-term financial sustainability, and “fell short of the better practices” set out in the regulator’s existing guidance on executive pay.

The regulator’s crackdown on bonuses comes as Kenneth Hayne’s royal commission into the banking sector has revealed widespread misconduct and fraud in the sector, largely driven by the sales culture and short-term bonuses. New Prime Minister Scott Morrison has said his banking executive accountability regime laws, which were introduced at the last federal budget to force the part-deferral of some bonuses and give the regulator greater powers to fire executives, were “essential” to drive cultural change in the financial system.