PRA published a letter that sets out findings from the 2020 Internal Audit Review of the Collections function of a sample of non-systemic banks and building societies. The review of the Collections function aimed to provide assurance, to the Boards of these firms and to PRA, about the effectiveness of controls in the areas of collection processes and control environment, governance and oversight, and regulatory reporting. This letter to the Chief Risk Officers of these regulated firms notes that the processes and controls in place for collections operations, from a prudential perspective, are largely adequate and effective across the majority of the firms. Nevertheless, the review identified some improvement areas, resulting in recommendations for these firms.
The PRA letter summarizes the findings of the review while Annex 1 pf the letter sets out more details on specific areas of interest. The observations reinforce the need for some firms to continue to enhance their collections operations and develop the right level of control and governance to ensure effectiveness, review the adequacy of resources, to efficiently manage the processes, and to ensure adequate oversight at the Board level. In terms of the assessment of processes and controls in place to support Collections functions, 63% of the recommendations relate to weakness in the policy/process documentation and 20% relate to ensuring alignment to regulatory reporting requirements in terms of definitions and rules (that is, FINREP, EBA Non Performing Exposure, Unlikely to pay (UTP), default. In terms of the effectiveness of controls of end-to-end Collections operation, 12% recommendations relate to poor forecast or forward-looking analysis of expected default exposures to predict impact on Collections resources, 11% relate to the remediation of system issues or system migration or lack of validation control checks, 10% relate to weak data control processes for regulatory reporting, and only 3% relate to improvement of IFRS 9 analysis to include the impact of forbearance and arrears (particularly where the ECL model is based on limited collection and forbearance experience).
Overall, the review showed that the majority of firms were compliant with the regulatory reporting requirements with a few exceptions, mostly on forbearance. Minor inconsistencies were identified between what is disclosed in the Internal Capital Adequacy Assessment Process (ICAAP) and in the regulatory reporting. The submission of complete, timely, and accurate regulatory returns continues to be the foundation of effective supervision; therefore, PRA expects all firms to continue to take action, as necessary, to ensure the integrity of regulatory returns. For this exercise, PRA had selected 42 non-systemic banks and building societies as participants. The firms in scope represented 42% of non-systemic firms’ lending exposures, with 70% of the firms being banks. Fifty-four percent of the firms in scope had a lending book of less than GBP 2 billion, of which 30% was less than GBP 0.5 billion. PRA will continue to monitor firms’ Collections functions in light of the COVID-19 pandemic impact on arrears and forbearance levels.
Related Link: Letter on Review Findings
Keywords: Europe, UK, Banking, Reporting, Governance, ICAAP, IFRS 9, Credit Risk, Basel, Internal Controls, Compliance Risk, PRA
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