By Paulina Duran
SYDNEY (Reuters) - Australia's prudential regulator said it intends to prescribe stricter terms on executive pay policies of the country's large banks, retirement funds and insurers as it seeks to enhance accountability in the financial sector.
In the aftermath of a public enquiry that last year blamed flawed incentives for widespread wrongdoing in the industry, the Australian Prudential Regulation Authority (APRA) wants to introduce new remuneration rules from 2021.
The regulator plans to impose a minimum seven-year deferral period for variable long-term bonuses, and to limit the importance of financial performance in defining variable pay to increase focus on risks related to culture and governance.
The reforms underline a push for more scrutiny - particularly of the Big Four banks, CBA, ANZ, NAB and Westpac - in the wake of the Royal Commission inquiry last year that found serious flaws in the management of compliance and risk.
"Remuneration design and implementation that does not properly consider the incentives it creates, including an over-emphasis on short-term financial performance, can drive poor customer and beneficiary outcomes and jeopardize financial soundness," APRA said in a statement on Tuesday.
APRA's announcement comes amidst criticism of Macquarie Group Ltd's move to shorten the time before deferred equity - worth about A$88 million - is awarded to previous Chief Executive Nicholas Moore to two years from seven.
That, proxy advisory firms said, increases Macquarie's already heavy focus on short-term performance to determine pay, and undermines the bank's policies regarding wrongdoing.
Those policies allow its board to scrap promised profit-share awards for senior employees who act dishonestly or "in a way that contributed to a breach of a significant legal" requirement.
Representatives of Macquarie, Commonwealth Bank of Australia (CBA) and Australia and New Zealand Banking Group Ltd (ANZ) did not return requests for comment on APRA's proposed new rules.
CGI Glass Lewis said the "elevation" in importance of non-financial measures for executive remuneration was "admirable" in theory but difficult to execute effectively in practice.
"Boards will need to demonstrate that such measures are challenging and that they can appropriately exercise discretion when determining outcomes," said Daniel Smith, head of the advisory firm's Australian operations.
APRA said minimum deferral periods for variable pay of up to seven years for senior executives in larger, more complex entities would ensure they have "skin in the game" for longer.
The regulator will conduct a three-month consultation period and expects to finalize its new policies by year-end.
Westpac Banking Corp said it will review the proposal and participate in the consultation process.
A National Australia Bank Ltd (NAB) spokeswoman said the bank had been expecting the regulator's new rules and would "participate in the consultation process, to ensure we meet APRA's final requirements".
(Reporting by Paulina Duran; Additional reporting by Devika Syamnath in Bengaluru; Editing by Christopher Cushing and Himani Sarkar)