A new APRA survey suggests the finance sector has a lot of work to do to meet levels of best practice.

APRA surveyed 12 of the largest banks, insurers and super funds on how their executives and staff are paid.

While most were within the regulator’s rules about remuneration, its report concluded that they “often fell short of the sound practices set out in the relevant prudential guidance, and were therefore some way from better practice”.

“The institutions we reviewed by and large had the required frameworks, policies and processes that could provide the basis for a sound system of remuneration,” said APRA chair Wayne Byres.

“But in many cases their practical application left something to be desired.”

Mr Byres says there is “considerable room for improvement” in how finance staff and executives are paid.

He commissions, bonuses, promotions and incentive payments cause bank staff to act against the best interests of the customer.

“APRA has been raising concerns for some time that the competitive drive for market share and profits in lending for housing has produced incentives to lower credit standards,” he warned.

“Coupled with some borrowers' own incentive to ‘do whatever it takes’ to get a loan, and the excessive comfort that comes from a period of rapidly rising house prices, there has been inadequate incentive hard-wired into the system to seriously scrutinise applicants' ability to repay the loans they take out.”

The report identified the need for improvement in:

  • ensuring practices were adopted that were appropriate to the institution’s size, complexity and risk profile;
  • the extent to which risk outcomes were assessed, and weighted, within performance scorecards;
  • enforcement of accountability mechanisms in response to poor risk outcomes; and
  • evidence of the rationale for remuneration decisions.

In response to the findings, APRA says it will consider ways to strengthen its prudential framework.

A future review of the relevant prudential standards and guidance will take account of the forthcoming Banking Executive Accountability Regime (BEAR), as well as international best practice.

The full report is accessible in PDF form here.