APRA’s bank pay rules under fire

BlackRock, the world’s largest money manager, has weighed into the fiery debate on local banking and finance executive pay by urging the regulator to scrap proposed bonus thresholds.

And given BlackRock is a force to be reckoned with — it manages almost $10.2 trillion in assets of behalf of investors globally — its views will hold some sway.

While BlackRock supported aspects of the Australian Prudential Regulation Authority’s planned changes to remuneration structures, the standout line in its submission is: “APRA’s recommendation that financial performance measures make up no more than 50 per cent of the weighting of total performance criteria used to determine variable remuneration measurement can be viewed as overly prescriptive and limiting in its definition.

“Companies should have flexibility to determine the metric split that is appropriate for the sustainable long-term objectives of the company.”

APRA has proposed prescribing that performance measures such as customer satisfaction levels, compliance and conduct, which are non-­financial, account for 50 per cent of short- and long-term bonus payments. Financial metrics such as earnings or share price growth can account for the remainder.

As APRA beds down and formulates its final blueprint, banks and financials are on tenterhooks, given the potential for the change to up-end current frameworks and spark renewed investor unrest.

The approach has spurred a chorus of dissent and this week APRA conceded it wasn’t wedded to the thresholds as long as a viable alternative — not the status quo — was found.

BlackRock used its submission to point out its voting guidelines in Britain, where the firm recommends performance measures are majority financial and at least 60 per cent based on quantitative criteria.

The other clear theme in the submission is the need for pay structures to be transparent, measurable and quantifiable.

“Our concerns lie in setting an overly prescriptive framework, which results in a delineation between financial and non-financial risk rather than viewing the two as symbiotic and necessarily embedded throughout a firm’s strategy,” BlackRock said.

“Non-financial risks such as customer outcomes, conduct, compliance and reputational risk should be at the forefront of any firm’s strategy as better outcomes in these measures equals better financial outcomes. Attempts to separate this from strategy run the risk that compliance is seen in a more adversarial way rather than as a core, integrated part of a firm’s strategy.”

BlackRock agreed with APRA that deferral periods helped to build alignment between executives and shareholders, and acknowledged the regulator’s view that the status quo “was not an option”.

APRA chairman Wayne Byres made it clear this week that boards were still not using discretion enough to penalise executives for poor performance or conduct. The royal commission had applied some pressure but the metrics he cited speak volumes.

Chief executives, finance and risk bosses at the 10 largest Australian banks and insurers received, on average, 74 per cent of their target short-term incentives during the past two years, compared with 96 per cent in years before the royal commission.

The BlackRock Australia submission was authored by head of investment stewardship Iris Davila and public policy boss Alison Telfer.

On clawing back of pay and bonuses, BlackRock made the observation that effective clawback mechanisms could be “difficult and costly” to enforce.

BlackRock wants APRA to make changes without stipulating particular proportions around the composition of bonus payments.

“We favour a more flexible approach that allows companies and shareholders to recognise the unique features of each company and select the right weighting between financial and non-financial measures,” the submission said.

“Under this approach, companies should explain the rationale for selecting the weighting between financial and non-financial metrics as well as explain how these metrics reflect the long-term sustainable strategic objectives of the company.”

The task ahead is an enormous one for APRA and industry wants clarity as soon as possible.

AMP’s woes

A group of AMP’s financial planning practices have separately sought a new avenue of complaint by lodging grievances with the Australian Financial Complaints Authority.

This column understands AFCA will consider the concerns of unhappy advisers who were given large loans by AMP to buy their businesses, ahead of terms changing for many under a radical overhaul of the division.

The Australian Small Business and Family Enterprise Ombudsman is also assisting a group of AMP advisers, while court action is being assessed by the AMP Financial Planners Association and its law firm Corrs Chambers Westgarth.

Hundreds of AMP advisers have until November 29 to make a decision on their future after the wealth group outlined its restructuring plan. It included downsizing the number of practices and slashing the rate AMP will pay for planning practices as the “buyer of last resort”, from four times recurring revenue to 2.5 times.

AMP advisers have also finally received clarification around the company’s classification of “genuine retirement” and on how it will value businesses of long-serving and retiring advisers.

It’s understood a special provision for those that put in BOLR requests prior to the restructure being announced has been made. It allows retiring advisers receive as much as 3.5 times recurring revenue for their practice, which can be scaled down depending on the level of income generated from grandfathered commissions.

The threshold for retirement kicks in at 15 years of service, but only if the adviser is at least 55 years of age.

AFCA, the newest dispute resolution body on the block, has seen a jump in complaints since it opened its doors in November.

AMP is, however, well down the list on AFCA’s measure of total complaints from its inception to June 30.

Commonwealth Bank is No 1 on the complaints list of shame followed by ANZ.