Practical considerations of policy advice of COVID-19

Over the last couple of weeks, there have been a number of updates from the Bank of England (BoE) and the International Accounting Standards Board (IASB) in terms of application and treatment of Payment Holidays and the change of focus, to allow banks to deal with the current operational demand.

Here is a summary of the key points, and our views.

Basel 3 IRB model changes

Summary

The Implementation of the proposals related to the Definition of Default, Probability of Default, Loss Given Default estimation, and ‘hybrid’ IRB models have now formally been deferred to 1 January 2022.

Impact

Within the industry, we are seeing that generally progress is still underway. Whilst some attention has been given to the current challenge, many firms have dedicated teams and external support that can continue to drive this forward. This, in our opinion, makes it more likely that firms can now hit the deadlines and in a way that doesn’t completely swamp the regulator by submitting over a longer period.

Given there are many new approaches, we expect that the regulator may need applications significantly ahead of the new deadline in order to feedback and ensure robust implementation. It also means firms that are applying for the first time, are more likely to be able to engage with their supervisor early and confirm timelines.

IFRS9 Updates

Summary

Following the PRA’s view on treatment of Payment Holidays and forbearance, the IASB released a statement on 27 March 2020, urging caution in applying information that has not yet proved to be ‘reasonable and supportable’ and to follow the local Regulator’s advice.

Impact

We expect firms to take this advice and continue to monitor the situation. Whilst any adjustments to ECL may well be via a Post Model Adjustment (PMA) they are likely to be based on statistical evidence and multiple forward-looking scenarios that will need to be updated regularly.

Customer Treatment

Summary

The FCA have gone further in their guidance on forbearance measures for non-mortgage assets, releasing a statement 2 April 2020 with the following key proposals:

• Set out the FCA’s expectations on firms to offer a temporary payment freeze on loans and credit cards, where consumers face difficulties with their finances as a result of coronavirus, for up to three months

• Ensure that for customers who have been hit financially by coronavirus and already have an arranged overdraft on their main personal current account, up to £500 will be charged at zero interest for up to three months

• Require firms to make sure that all overdraft customers are not worse off on price, when compared to the prices they were charged before the recent overdraft changes came into force

• Ensure consumers using any of these temporary measures do not have their credit rating affected because of this.

Impact

These proposals were subject to a (very short) consultation period, with any changes due to be implemented by 9 April 2020. This also supersedes the overdraft charge changes due to apply from 6 April 2020, highlighting customers should be no worse off, when in reality some would have been. This makes the identification of customer circumstances more important, and firms will have to be operationally agile and embrace technology to stay on the right side of regulators, customers and shareholders.

In addition to this, there are some legislative concerns related to the Consumer Credit Act where firms, having agreed these measures, may have to still send statutory notices to customers after two months to ensure the debt is legally enforceable in the event of long term default. This is an undue administrative burden for firms and is confusing for customers.