In response to the COVID-19 outbreak, FCA, the Financial Reporting Council (FRC), and PRA have announced a series of actions and made statements to support the continued functioning of capital markets in the UK. FRC issued a guidance for companies on corporate governance and reporting. This is complemented by guidance from PRA regarding the approach that should be taken by banks, building societies and PRA-designated investment firms in assessing expected loss provisions under IFRS 9. Additionally, FCA allowed listed companies an extra two months to publish their audited annual financial reports. Also, FRC issued a guidance for audit firms seeking to overcome challenges in obtaining audit evidence.
In these extraordinary circumstances, previous market practices related to the timing and content of financial information and the audit work that is done must change. These changes are likely to include changes to timetables for publication of financial information that had been set before the full implications of COVID-19 were clear. In his letter to Chief Executive Officers of UK Banks, Sam Woods of PRA highlighted that PRA is pursuing a range of regulatory and supervisory measures to alleviate the financial stability impact of the COVID-19 and maintain the safety and soundness of authorized firms. These measures are aimed at ensuring that banks are able to continue to lend to households and businesses, support the real economy, and provide robust and consistent market disclosures. The letter sets out guidance in three areas:
- Consistent and robust IFRS 9 accounting and the regulatory definition of default
- The treatment of borrowers who breach covenants due to COVID-19
- The regulatory capital treatment of IFRS 9
Mr. Woods asked banks to consider the guidance in the annex to the letter when taking decisions about expected credit loss (ECL) and regulatory capital estimates in the coming days, weeks, and months. He mentioned that PRA is thinking about what further steps could be taken to enhance the robustness of, and bring greater consistency in, the application of IFRS 9. This might include considering aspects of the key judgments around economic scenarios; determining whether a significant increase in credit risk has occurred; the current suspension of repossessions; and treatment of guarantees.
Many companies preparing financial statements are facing unprecedented uncertainty about their immediate prospects in an environment that may challenge or disrupt their usual management and governance processes. The guidance published by FRC, highlight some key areas of focus for boards in maintaining strong corporate governance and provide high-level guidance on some of the most pervasive issues when preparing their annual report and other corporate reporting. FRC encourages boards to:
- Develop and implement mitigating actions and processes to ensure that they continue to operate an effective control environment, addressing any key reporting and other controls on which they have placed reliance historically, but which may not prove effective in the current environment.
- Consider how they will secure reliable and relevant information, on a continuing basis, to manage their future operations and those of their workforce and suppliers, including the flow of financial information from significant subsidiary, joint venture and associate group entities.
- Pay attention to capital maintenance, ensuring that sufficient reserves are available when the dividend is made (not just proposed). Making forward-looking assessments and estimates is particularly difficult at present.
- Joint Statement (PDF)
- PRA Letter and Guidance
- FRC Guidance on Corporate Governance and Reporting
- FCA Statement
- FRC Guidance for Auditors
Keywords: Europe, UK, Banking, Securities, COVID-19, Accounting, Reporting, IFRS 9, ECL, Regulatory Capital, Corporate Governance, Credit Risk, Financial Instruments, Financial Statements, FRC, FCA, PRA
ECB published Guideline 2021/975, which amends Guideline ECB/2014/31, on the additional temporary measures relating to Eurosystem refinancing operations and eligibility of collateral.
EIOPA published a report, from the Consultative Expert Group on Digital Ethics, that sets out artificial intelligence governance principles for an ethical and trustworthy artificial intelligence in the insurance sector in EU.
HKMA published the seventh and final issue of the Regtech Watch series, which outlines the three-year roadmap of HKMA to integrate supervisory technology, or suptech, into its processes.
EC launched a targeted consultation to improve transparency and efficiency in the secondary markets for nonperforming loans (NPLs).
BIS, Danmarks Nationalbank, Central Bank of Iceland, Norges Bank, and Sveriges Riksbank launched an Innovation Hub in Stockholm, making this the fifth BIS Innovation Hub Center to be opened in the past two years.
FDITECH, the technology lab of FDIC, announced a tech sprint that is designed to explore new technologies and techniques that would help expand the capabilities of community banks to meet the needs of unbanked individuals and households.
EC released the EU Taxonomy Compass, which visually represents the contents of the EU Taxonomy starting with the EU Taxonomy Climate Delegated Act.
FDIC is seeking comments on a rule to amend the interagency guidelines for real estate lending policies—also known as the Real Estate Lending Standards.
EIOPA published its annual report, which sets out the work done in 2020 and indicates the planned work areas for the coming months.
The ESRB paper that presents an analytical framework that assesses and quantifies the potential impact of a bank failure on the real economy through the lending function.