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Banking royal commission: APRA is not sure what a good bank salary is



The mandate of the Australian Prudential Regulatory Authority is quite clear when it comes to bank payments: "A review of oversight of compensation practices must be rigorous and sustainable and shortcomings must be dealt with immediately by monitoring measures."

Rules for remuneration are specified in the CPS 510 prudential standard, which covers a number of bank governance issues.

So when a team of regulators, led in this case by APRA chairman Wayne Byres himself, met with the Commonwealth Bank board at the end of 2016, you would think it would be an uncomfortable discussion.

Moreover, APRA knows that bank risk control is inadequate and faces avalanche of behavior problems. In fact, this risk problem is not reflected in the results of CBA payments, which would certainly be a serious concern.

But in the royal commission on Thursday, a senior advisor who helped Michael Hodge, QC, took Byres to APRA's record of the meeting.

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"There seems to be no discussion or issue raised about what really happened with CBA 2016 executive remuneration," said Hodge.

Byres agreed.

Hodge then went to a report from one of APRA's own supervisory staff, who said that the regulator "could and should have called for inadequate remuneration practices beforehand, at least by the end of 2016".

So what happened?

Wayne Byres said, remuneration is

Wayne Byres said, remuneration is "not a field where we have sufficient expertise to truly be challenging confidently".

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Lack of APRA expertise

A big problem, said Byres, is a lack of expertise.

"I think the view is in APRA, we really don't have a good enough view of good practice, and we need to … get a more comprehensive view of industry practices and then deal with them in an industrial way."

At the time of the CBA meeting this was "not an area where we have sufficient expertise to truly challenge challenging" boards, said Byres.

But he added this was a special situation, because a meeting with the CBA board came after the company received the first strike (vote or more than 25 percent) on the previous month's remuneration report.

Byres seemed confused by the reason for the strike. First, he first told Hodge that strikes were the result of dissatisfaction with banks because they moved from financial metrics to metrics around people and culture – a step that APRA truly valued.

But then Byres told Hodge the strike happened because there were no payment consequences for behavioral problems that appeared at the CBA.

History has events around this terrible strike, but documents given to Chanticleer show proxy advisors who actually support CBA's new metrics, which should be soft, until ASIC revealed the first scandal of the fee-for-no-service scandal just 16 days before CBA GMS.

When proxy advisors including Ownership Matters realized that CBA had paid a large executive bonus despite knowing the cost issue, they changed their recommendations and the strike began.

Specific CBA problems may be less important than the bigger problem here: that APRA doesn't know what a good payment framework is, and still tries to find out

How is this not a higher priority for APRA, given the standards of prudence and established relationships between poor remuneration incentives and bad culture?

Hodge asked Byres if APRA had taken action against financial institutions because it did not comply with the remuneration rules under the CPS 510.

If you take part in this royal commission, you know the answer.

James Thomson

j.thomson@fairfaxmedia.com.au


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