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Where the budget’s exec rem proposals fall short

by Matthew Smith | 17 May 2017

The newly proposed Banking Executive Accountability Regime contained in the budget emulates a similar existing regime in the United Kingdom but without all of its essential parts, according to an executive remuneration expert. #2 Where the budget’s exec rem proposals fall short

The proposed regime here, requiring banks to defer a minimum of 40 per cent an executive’s variable remuneration – 60 per cent for certain CEOs – for a minimum of four years and making them directly answerable to the country’s prudential regulator, could be susceptible to workarounds without a proper framework in place, reckons Dr Kym Sheehan, an executive remuneration expert from the University of Sydney.

“If you put in a policy like this in place without the rest around it, you risk people working to find loopholes,” Sheehan says, in conversation with InFinance.

This is the first article in a two-part series focused on the bank executive remuneration proposals contained in this year’s budget.

In particular, Sheehan highlights the ability to “claw back” bonuses from executives after they move on to another employer, as well as the lack of formal credos to prescribe behaviour for individuals in positions of seniority within banks, as components missing from the government’s plan.  

We’ve seen this before

Sheehan researched the reforms when the so-called Conduct Rules were first being considered by England’s Prudential Regulatory Authority in 2013. A summary of her analysis can be found here and here.

InFinance has written about the bank regulating experience in the UK and the likelihood that similar reforms are coming to Australia.

The latest local measures Treasurer Scott Morrison announced as part of the 2017 Budget are modelled on the UK’s regime, Sheehan highlights.

However, there’s a lot of detail missing from Morrison’s plan, Sheehan says.

InFinance will look into the rules the UK’s Financial Services Authority requires banking industry executives to adhere to in more depth in next week’s issue.  

If the government wants to emulate the UK financial system’s “material risk taker” regime, it needs to come up with more prescriptive regulations or risk banks easily working around the new measures, Sheehan concludes.

Such regulations would need to address areas, including: limiting the ratio of fixed to variable pay; having at least 50% of variable remuneration paid in equity; allowing “clawbacks” to apply to variable remuneration for a period of 10 years; regulating how an employer buys out the unvested remuneration of a new employee.

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