APRA AND ASIC UPDATES 1.1 ASIC

Transcription

1 MOving Ahead 16 April 2018 Prepared by Luke Hooper, Special Counsel In this edition: ASIC states its indicative minimum levy for the 2018 Financial Year; APRA releases the results of a review of remuneration practices of 12 large financial institutions (including superannuation funds); proposed superannuation guarantee legislation is introduced into the House of Representatives; proposed legislation is introduced into the House of Representatives proposing to require ASIC to consider the effects that the performance of its functions and the exercise of its powers will have on competition in the financial system; superannuation fund trustees become exempt from the requirements to follow applicable customer identification procedures when cashing out of low value superannuation funds and for the Departing Australia Superannuation Payment; and Treasury releases exposure drafts of Bills and Regulations for consultation in respect of ASIC's fees-for-service industry funding model. 1. APRA AND ASIC UPDATES 1.1 ASIC indicative levies (28 March 2018) ASIC stated that its indicative minimum levy for the 2018 Financial Year for superannuation fund trustees will be $18,000 and that the indicative graduated levy (based on adjusted total assets) will be estimated once data becomes available. 1.2 APRA Information Paper: Remuneration practices at large financial institutions (4 April 2018) APRA released the results of a review of remuneration practices of 12 large financial institutions (including superannuation funds). The primary focus of the review was to gauge whether regulated institutions were meeting APRA s expectations established in the current prudential framework and to assist APRA s consideration of whether changes to the framework are required to better achieve prudential objectives. Overall, the report identified the need for improvement in: ensuring practices appropriate to an institution s size, complexity and risk profile were adopted; 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.

2 APRA made the following observations in respect of superannuation fund trustees, which are subject to the requirements in APRA Prudential Standard SPS 510 Governance (SPS 510) and guidance in APRA Prudential Practice Guide SPG 511 Remuneration (SPG 511): short-term incentives were in the form of cash rather than shares, with a maximum deferral period of 2 years; there were no long-term incentive components incorporated into the remuneration structures; where short-term incentive arrangements were in place, the ratio of performance-based remuneration to fixed remuneration (for senior executives other than the Chief Investment Officer (CIO)) was significantly lower (10% - 30%) than seen at institutions from the other industries in the sample. However, staff working within investment teams, including CIOs, tended to have remuneration structures that included larger proportions of performance-based remuneration; and the application of malus (where deferred bonuses awarded from previous performance years are prevented from vesting as a result of an adverse outcome) was observed to be less prevalent than in the other industries. Similarly, buy-outs, sign-on payments and guaranteed bonuses in the superannuation industry were also less frequently observed. APRA s report provided the following analysis across the sample of its regulated institutions: Design of risk management performance measures (for trustees SPS 510, paragraph 27 & SPG 511, paragraph 40 are relevant) Scorecard design could be more effective the review identified institution scorecards with a large number of core drivers (up to 20 metrics in some cases), noting that a high number of measures can reduce the impact of any one metric, which is of particular concern if risk management is one of the metrics with diminished impact. Within the sample, institutions applied over eight metrics (on average) in calculating short-term incentive outcomes. An example of better practice was the application of a performance framework with measures across four areas of performance: risk; financials; customer focus; and people and reputation. These measures were explicitly tied to annual priorities and long-term strategies. The assessment in the risk category was used to apply a modifier across the other measures; ensuring incentives were adjusted to reflect risk management outcomes. Individual performance measures and variability of outcomes minimised for the majority of entities in the sample, the weighting of assessment metrics was more closely tied to the overall financial performance of the institution rather than to individual performance, resulting in a herding effect for executives and therefore averaging out poor performance across the business as a whole. Remuneration outcomes (for trustees SPS 510, paragraph 28 are relevant) Objectivity of assessments in most cases a subjective rather than an objective evidenced-based approach was observed in the assessment of performance against risk management measures. For example, in several cases the risk 2

3 assessment that determines an individual executive s risk rating simply comprised of a high level statement from the Chief Risk Officer (CRO) to the Board Remuneration Committee (BRC) indicating that no significant risk issues affecting performance measures had been noted (for executives as a collective). Instances of better practice included where the risk management function was formally engaged to provide input into the assessment of the risk measures within each individual executive s scorecard. However, there was no evidence within the sample period of any institution compiling a comprehensive assessment of risk management effectiveness in the executive s area of responsibility. Deferral periods for variable remuneration relatively short deferral periods for variable remuneration were typically between 1 and 2 years for short-term incentive (where typically 25% - 50% of total short-term incentive is deferred). In APRA s view, the principle of aligning variable remuneration with long-term financial soundness suggests that longer periods of deferral should be considered to reflect the institution s risk profile and the time horizon of risks. Documentation shortcomings in some cases, there was clear documentation of performance scorecard assessments against each scorecard metric; a clear and demonstrable flow of scorecard scores through to remuneration calculations and outcomes; and documented performance assessments to support the remuneration decisions made. However, in a number of cases, performance assessments against individual scorecards for executives were not documented, or only partially completed. This resulted in a lack of clarity and auditability about the rationale and transparency of the remuneration decisions. Adjustments to variable pay (for trustees SPS 510, paragraph 29 & SPG 511, paragraphs 12 & 34 are relevant) Absence of significant downward adjustments at executive level the review observed that downward adjustments to individual executives remuneration were rare. While there were multiple examples where employees at lower levels received downward adjustments (either in the form of in-year adjustments or malus), these were not always matched by corresponding adjustments at an executive level to recognise overall line or functional accountability. Limiting responsibility for poor risk outcomes to below the executive level suggests an inappropriate assignment of accountability. Some institutions in the sample used risk gates, which provide for an executive to be ineligible for the variable component of their remuneration in the instance of a significant risk incident or a material breach of the institutions risk management framework. While these risk gates provide a clear penalty for serious failures of risk management, they are rarely used. They also do not replace the need for more refined measures of risk-adjustment to the overall performance assessment. Preference for using in-year adjustments over the use of malus or clawback while rare, the review observed several instances of in-year adjustments at the executive level due to underperformance or a specific adverse outcome over the performance period. There were also a few examples across the sample of malus being applied for poor behaviour. However, there was limited evidence in the documentation provided that consideration had been given to risk events or issues from prior years which might reasonably give rise to the application of malus. The review observed that a small proportion of the sample had made provision for clawback, although these provisions were only applicable to employees in regulatory jurisdictions which specifically mandate clawback provisions. Although 3

4 clawback is often considered to be difficult to execute, both from a legal and operational perspective, an institution will be better positioned to enforce clawback by having the appropriate provisions within remuneration policies, incentive plan terms, and individual employment contracts. Risk adjustments to the bonus pool the majority of institutions stated in relevant policies that current and potential risks are considered when determining bonus pool amounts. However, the review found that bonus pool amounts are still largely based on short-term performance measures, with little evidence of explicit consideration of longer-term risk measures. Furthermore, the majority of the sample had not developed mechanisms or processes for the adjustment of the bonus pool to respond to significant risk events. Three institutions in the sample did, however, explicitly consider and utilise a risk-adjusted overlay to the bonus pool (with the weighting independently determined by the risk committee) in response to unexpected or unintended risk outcomes. Sign-on payments and guaranteed bonuses (for trustees SPG 511, paragraph 48 are relevant) Sign-on and guaranteed bonuses the review found evidence of sign-on payments made to employees as an incentive that were not related to variable remuneration arrangements with their former employer, and therefore not aligned with the principles of risk adjustment and validation of outcomes. Furthermore, there was also evidence of guaranteed bonus payments being made and extending beyond 1 year. As outlined in APRA guidance, this practice is not consistent with sound risk management or the principle of pay for performance. Identification and treatment of Material Risk-Takers (for trustees SPS 510, paragraph 30 & SPG 511, paragraph 24 are relevant) The concept of the material risk-taker (MRT) refers to an individual or category of individuals for whom a significant portion of total remuneration is based on performance and whose activities, individually or collectively, may affect the financial soundness of the institution or group. APRA gave specific consideration in its review to the approaches in remuneration frameworks to MRTs. Inconsistent approaches to identifying MRTs a variety of approaches to identifying MRTs was observed even amongst entities with similar profiles (size and characteristics). In some cases individuals with very significant remuneration packages were not considered MRTs and there was no analysis provided as to whether their roles could affect the financial soundness of the institution. Given the differences in definitions, the review also found a significant difference in the number of MRTs being identified across the entities. This suggests that the MRT identification practice needs to be reviewed for all entities. APRA considered that most institutions in the sample underestimated the extent of MRTs within their organisations that needed to be covered by the remuneration policy. MRTs not identified collectively while the remuneration policies of entities tend to include the language used in the prudential standards of individually or collectively to identify individuals that may affect the financial soundness of the institution, the majority of entities did not identify any MRTs based on identification of a group that may collectively affect financial soundness (for example, financial market traders, or intermediaries such as agents and brokers). 4

5 Board Remuneration Committee oversight (for trustees SPS 510, paragraph 42 & SPG 511, paragraph 16 are relevant) All of the entities in the sample were observed to have appropriately structured BRCs with charters and terms of reference. However the review did find evidence of inconsistencies in the level of oversight by BRCs of remuneration outcomes. Inadequate documentation APRA noted instances of poor quality, incomplete or inadequate documentation provided to the BRC. For example, in several cases, formal documented performance assessments of individual senior executives against balanced scorecard metrics were not provided to the BRC. The review also noted several examples where BRCs did not take the opportunity to seek additional information from other committees, such as the risk or audit committee, to support its assessments often relying solely on cross-membership between committees as a means to provide adequate input. Inadequate documentation and a lack of collaboration undermines the BRC s ability to perform its role in reviewing and independently assessing remuneration outcomes. Better practice observed made use of joint meetings between the BRC and the risk committee, primarily to focus on the appropriateness of risk ratings and remuneration outcomes of senior executives, risk and financial control personnel and MRTs. BRC willing to act in the absence of adequate documentation a compounding issue was the apparent lack of BRC challenge to receiving inadequate documentation. The review also noted in almost half the sample, the BRC assessed and approved remuneration outcomes of senior executives largely based on a verbal discussion and generalised attestations (applying to all the executives) from the CEO (for balanced scorecard metrics) or the CRO (for risk-specific metrics). A lack of adequate documentation results in limited transparency of decision-making and impacts the ability to review decisions, potentially limiting effective governance over the decisions and the oversight required by the prudential framework. Better practice observed was where the BRC actively challenged remuneration recommendations based on an assessment of risk management considerations, with the committee closely analysing the metrics on which remuneration recommendations were made for better assurance they were prudentially appropriate. BRC oversight of adjustments to financial measures used as the basis for variable remuneration there was limited evidence of BRCs expressly reviewing adjustments to statutory profit which could directly affect whether targets and hurdles for variable remuneration are met. Remuneration policy reviews all of the entities in the sample performed periodic reviews of the remuneration policy to assure its ongoing compliance with the minimum prudential requirements. However, all but one of these reviews was observed to be a routine process rather than a substantive review of whether the remuneration policy was working as intended. Next steps APRA intends to review the prudential framework and consider the expansion and strengthening of prudential requirements to reflect evolving international standards and regulatory expectations related to remuneration, including the application of the most recent Financial Stability Board Supplementary Guidance on Sound Compensation Practices. 5

6 The proposed changes to be considered include (although may not be limited to): 2. LEGISLATION improved design of remuneration frameworks; enhanced implementation and outcomes; strengthened Board Remuneration Committee oversight; and enhanced reporting and disclosure 2.1 Treasury Laws Amendment (2018 Measures No. 4) Bill 2018 (28 March 2018) The Bill was introduced into the House of Representatives and proposes to amend the Superannuation Guarantee (Administration) Act 1992 (Cth), Taxation Administration Act 1953 (Cth) and Income Tax Assessment Act 1997 (Cth) (ITAA 1997) to: enable the Commissioner of Taxation (Commissioner) to issue a direction to an employer: to pay an outstanding superannuation guarantee liability or an estimate of the liability; and to undertake an approved course where that employer has failed to comply with their superannuation guarantee obligations; permit a taxation officer to make a record or disclose protected information to an individual who is or was an employee where the record or disclosure is information that relates to a failure or a suspected failure by the individual s employer or former employer to comply with the employer s superannuation guarantee obligations in relation to the employee; require all entities with employees to report: the information required under the Single Touch Payroll rules in Division 389 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (TAA 1953) (including salary and wages or ordinary time earnings) to the Commissioner. Currently, this rule only applies to entities with 20 or more employees; and salary sacrificed amounts to the Commissioner; amend fund reporting rules so that: (iii) the Commissioner can grant superannuation providers a grace period to correct false and misleading statements made under events-based reporting without penalty; the requirement to report superannuation guarantee contributions under the Single Touch Payroll rules to the Commissioner, under Division 389 of Schedule 1 of the TAA 1953, no longer applies; and trustees are not required to provide the Commissioner with a lost member s statement on a twice yearly basis. Instead the reporting will be at any time during the period specified in a determination the Commissioner makes via legislative instrument. 6

7 (e) Currently, trustees must give the Commissioner a lost member s statement on a twice yearly basis; amend compliance measures so that: (for the purpose of the director penalty provisions in Division 269 of Schedule 1 of the TAA 1953) a director will be under an obligation to ensure that the company complies with its obligations in respect of an estimate under Division 268 in Schedule 1 of the TAA 1953, commencing from the initial day. For PAYG liability estimates, the initial day will be: (A) (B) for companies who are small and medium withholders, the last day of the period identified in the notice of the estimate as the period to which the estimate relates; and for companies who are large withholders, the day on which the company would have been obliged to pay the underlying liability. For superannuation guarantee liability estimates, the initial day will be from end of the quarter to which the estimate relates to. Currently, for the purpose of the director penalty provisions in Division 269 in Schedule 1, a director is under an obligation to ensure that the company complies with its obligations in respect of an estimate under Division 268 in Schedule 1 commencing on the initial day, being the day the company is given a notice of the estimate; a director penalty cannot be remitted if a company is placed into voluntary administration or insolvency where the company has an obligation to pay: (A) (B) a superannuation guarantee charge and the company does not report the superannuation guarantee charge liability to the Commissioner on or before the due date; or an estimate of a superannuation guarantee charge and the day by which the company was obligated to pay the underlying liability to which the estimate relates has passed. Currently, a director penalty cannot be remitted if a company is placed into voluntary administration or insolvency where: (C) (D) the company has an obligation to pay a superannuation guarantee charge and the company does not report the superannuation guarantee liability to the Commissioner within three months from due date of the superannuation guarantee charge liability; and the company has an obligation to pay an estimate of a superannuation guarantee charge and three months from the day by which the company was obligated to pay the underlying liability to which the estimate relates has passed; and 7

8 (f) (iii) the Commissioner can seek a Court order to compel an entity to comply with a requirement to provide a security deposit for an existing for future tax related liability under section of Schedule 1 of the TAA; and enable the Commissioner to disclose: (iii) the tax file number of an individual if the employee has provided the tax file number to the Commissioner in a tax file number declaration, or made a tax file number declaration in particular circumstances. Currently, the Commissioner can disclose the tax file number of an individual if the employee provided the number to the Commissioner in a tax file number declaration; to an individuals employer protected information on matters relating to the withholding rates of an individual; and protected information to an individual s employer (including the individual s existing superannuation membership accounts) for the purpose of the individual making an informed superannuation choice. The Bill s proposed date of effect is 1 July Public Sector Superannuation Legislation Amendment Bill 2018 (28 March 2018) The Bill was introduced into the House of Representatives and proposes to: amend the Parliamentary Contributory Superannuation Act 1948 (Cth) to ensure that in all circumstances the calculation of any lump sum superannuation guarantee safety-net benefit meets the minimum Superannuation Guarantee requirements; amend the Judges Pensions Act 1968 (Cth) to allow members of the Judges Pensions Scheme the option to request that they be paid a lump sum amount from the scheme to meet their Division 293 tax liability (the additional 15% charged on an individual s taxable contributions once they earn in excess of $250,000); amend a number of Commonwealth Superannuation Acts to standardise and modernise provisions relating to eligibility for reversionary superannuation benefits payable to or in respect of children; and reduce the size of the Commonwealth Superannuation Corporation Board from 11 to 9 directors. 2.3 Treasury Laws Amendment (Enhancing ASIC s Capabilities) Bill 2018 (28 March 2018) The Bill was introduced into the House of Representatives and proposes to require ASIC to consider the effects that the performance of its functions and the exercise of its powers will have on competition in the financial system, including whether: the decision will create a barrier to entry, making it more difficult for new firms to enter the industry; 8

9 (e) the decision will create regulatory advantages for some entities over others competing in the same sector, or generally across the industry as a whole; the decision will improve consumers ability to exert demand-side competitive pressure in a market; the decision will disproportionately impact small entities (for example by imposing obligations that do not appropriately scale the regulatory risks presented by those entities) and the impact that would have on competition; and alternative competitively-neutral approaches can be identified. 2.4 Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2018 (No. 2) (28 March 2018) The Instrument amends the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) by exempting superannuation fund trustees from the requirements to follow applicable customer identification procedures when cashing out of low value superannuation funds (up to $1,000) and for the Departing Australia Superannuation Payment. 2.5 Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 (28 March 2018) The Bill was introduced into the House of Representatives and proposes to include additional basic conditions that must be satisfied for a taxpayer to apply the capital gains tax (CGT) small business concessions to a capital gain arising in relation to a share in a company or an interest in a trust (Object Entity). Currently, to be eligible to apply the CGT small business concessions, a taxpayer must satisfy the basic conditions set out in section (1) of the ITAA 1997 in relation to the capital gain. Further, additional basic conditions (as contained in section (2) apply for capital gains relating to the Object Entity, being that: the taxpayer must be a CGT concession stakeholder in the Object Entity; or broadly, entities that are CGT concession stakeholders in the Object Entity must have small business participation percentages totalling at least 90% in the taxpayer. The Bill proposes to amend the additional basic conditions so that: either: the taxpayer must be a CGT concession stakeholder in the Object Entity; or broadly, entities that are CGT concession stakeholders in the Object Entity must have small business participation percentages totalling at least 90% in the taxpayer; unless the taxpayer satisfies the maximum net asset value test, the taxpayer must have carried on a business just prior to the CGT event; the object entity must be a CGT small business entity for the income year or satisfy the maximum net asset value test; and 9

10 the shares or interests in the Object Entity must satisfy a modified active asset test that looks through shares in companies and interests in trusts to the activities and assets of the underlying entities. 2.6 Treasury Laws Amendment (2018 Measures No. 1) Act 2018 (Cth) (29 March 2018) The Act received Royal Assent and: enables the Commissioner to pay amounts held in respect of lost member accounts to individuals with a terminal medical condition; extends tax relief under Division 310 of the ITAA 1997 (loss relief and asset roll-over) for superannuation funds that merge on or after 1 October 2011 and before 2 July 2020; enables the Government to recover the ongoing cost (as opposed to merely the implementation cost) of the governance of the superannuation transaction network (SuperStream), from 1 July 2018; and transfers the regulator role for early release of superannuation benefits on compassionate grounds from the Chief Executive Medicare (Department of Human Services) to the Commissioner. 2.7 ASIC fees-for-service (11 April 2018) Treasury released exposure drafts of Bills and Regulations for consultation in respect of ASIC's fees-for-service industry funding model under the ASIC Supervisory Cost Recovery Levy Act 2017 (Cth) (Levy Act). Under the Levy Act, ASIC will recover its regulatory costs from ASIC-regulated entities in a more directed manner. The consultation package includes the following Bills and Regulations: Corporations (Fees) Amendment (ASIC Fees) Bill 2018: (iii) increases the caps to allow ASIC to recover the costs ASIC incurs when providing regulatory services: (A) (B) (C) from $10,000 to $200,000 for a chargeable matter; the fee or sum of fees for a chargeable matter may not exceed $300,000 (currently $50,000), except for services in relation to a market licensee and a particular or potential conflict; the total fee may in relation to a market licensee and a particular or potential conflict may not exceed $300,000 (currently $100,000) in a 12 month period; provides that the Regulations may prescribe for a particular chargeable matter, whether the fee is for low, medium or high complexity; provides that the Regulations may prescribe for a particular chargeable matter, different fees based on the type of entity; and 10

11 (iv) provides that ASIC can determine by legislative instrument whether a type of application for a particular regulatory service is low, medium or high complexity; Superannuation Auditor Registration Imposition Amendment (ASIC Fees) Bill 2018: increases the ASIC recovery fee cap (from $1,000 to $5,000) that ASIC incurs when providing regulatory services in relation to SMSF auditors; Superannuation Industry (Supervision) Amendment (ASIC Fees) Bill 2018: provides that ASIC can charge additional fees in relation to an application to vary or revoke the conditions or cancel the registration of an approved SMSF auditor; and Treasury Laws Amendment (ASIC Fees) Regulations 2018: (iii) (iv) (v) prescribe the cost reflective fees that ASIC can charge for the services it provides for a specific entity; provide a tiering regime for fees to ensure entities pay the appropriate fee based on the complexity of the service; update the hourly rate that ASIC charges, to ensure the rate closely reflects the costs incurred by ASIC; provide that indexation will only apply to registry fees; and ensure that fees that are no longer required to be charged have no fee. In doing so, the consultation package details the amended fee schedules the: Corporations (Fees) Regulations 2001; and Superannuation Auditor Registration Imposition Regulation Submissions in respect of the proposed Bills are due by 24 April Submissions in respect of the proposed regulations are due by 1 May CASES There were no cases of significance, this month. 4. OTHER RECENT DEVELOPMENTS 4.1 Taxation Administration Member Account Attribute Service the Reporting of Information relating to Superannuation Account Phases and Attributes 2018 (Registered 5 April 2018) The Instrument is made under sections and of Schedule 1 of the TAA 1953 and sets out the way in which trustees are required to give a statement to the Commissioner in relation to a member s superannuation account phases and attributes. This instrument repeals and replaces the previous instrument Reporting of all new member accounts and closed member accounts by superannuation providers in relation to superannuation plans (other than self-managed superannuation funds) in 11

12 accordance with the Taxation Administration Act 1953, registered on 22 February The Instrument s principal purpose is to set out the timeframe for the giving of a statement to the Commissioner in relation to a member s superannuation account phases and attributes (including, but not limited to, opening and closing of accounts, defined benefit interest indicator and acceptance of contributions and government rollover), via the Member Account Attribute Service (MAAS) form. The Instrument establishes that such a statement is to be lodged no later than 5 business days after the day on which: an account is opened; and any changes to the account phases and/or attributes relating to the account occur, unless the time for lodging the approved form is deferred by the Commissioner under section of Schedule 1 to the TAA Reporting of superannuation account attributes and phases, pursuant to the Instrument, commences from 1 April For more information, please contact: Luke Hooper Special Counsel T: E: lhooper@millsoakley.com.au 12