Insights from the PRA’s Thematic Feedback on Auditor Reporting

06 October 2023

< 1 minute read

On 29 September 2023 the PRA sent the latest edition of its “Dear CFO” letters based on audit findings [1]. This edition focused on IFRS 9 and climate risks. Here we share our thoughts on the key insights:

IFRS 9 Expected Credit Losses:

Progress has been made but more improvement is expected.
Model risk remains a critical concern; firms must ensure PMAs reflect credit loss expectations. The PRA sees scope for firms to move away from portfolio-level to more targeted account level PMAs.
With limited default experience, recovery assumptions must be carefully monitored and challenged. This includes reviewing assumptions which were built on a different economic environment. Downturn scenarios should capture the risk of recovery strategy failure.
Economic scenarios must explore vulnerabilities in specific sectors or segments (especially due to the high inflation and interest rates). The PRA suggest firms investigate building interest rates and inflation into models which currently emit them.
Firms should ensure models capture risks associated with affordability for vulnerable groups and industry sub-sectors, including the impact of higher inflation and interest rates which may make loans unaffordable. The PRA are challenging firms to demonstrate through monitoring and validation that their models adequately reflect those risks.

Climate Risks:

Identifying the right metrics for climate risk impact remains a challenge. Some firms are quantitatively assessing climate risk, whereas others are lagging behind and assessing only qualitative impacts.
Firms are enhancing governance and data, but documentation and planning are essential. Greater oversight of climate risks is anticipated.
Data quality and centralisation of data sources are persistent issues.

These findings from the PRA highlight the significance of proactive risk management in the credit industry.