You may recall that the PRA, in November 2019, asked the internal audit function of 42 non-systemic banks and building societies to undertake a review of their collections function and relevant regulatory reporting. This thematic covered three specific areas of interest:
- Collection processes and control environment
- Governance and oversight
- Regulatory reporting
The PRA recently published their findings in a letter to CROs and the overall conclusion is that “20% of firms require significant strengthening in the Collections function, with these firms having an overall IA report rating of Amber. No firms had an overall rating of Red”.
The PRA reviewed 225 internal audit findings of which 12% were Amber/Red. The findings from these relate to:
Red:
- Material control weaknesses relate to issues in regulatory reporting on forborne exposures (the impact of which is likely to have increased given the increase in forbearance volumes since the COVID-19 pandemic) and unsatisfactory execution of collections strategies (including systems, capacity, resource planning and MI)
- In BDO’s experience, as an internal auditor, several firms struggled with the reporting of forbearance in the FINREP F18/F19 templates as they have to apply a regulatory “probation period” prior to moving a loan from forborne to non-forborne. This has proved challenging from a data and systems perspective and resulted in firms materially understating their forborne exposures.
Amber:
- Significant control weaknesses relate to the following thematic issues, including:
- Poor prudential policies and process documents: Including lack of version control, process descriptions, up-to-date terms of reference, consistent terminology and clarity around delegated authority
- Weak Collections control processes: These controls appear weaker for SME/Commercial and Specialist BTL lending and were driven by system limitations and lack of second line oversight
- Weak Collections MI and reporting: Specific areas where additional work is required relate to inclusion of risk appetite on arrears/forbearance and lack of Board reporting and awareness (25% of firms do not report forbearance metrics to Boards). Only 3% of firms reported Covid-19 deferral metrics to their Board/Executive Committee.
What should firms do?
Given the expected increase in collections/forbearance cases following the fallout of COVID-19, it is important that firms have effective plans and resources in place to scale up their collections activity under stress. A key part of this is having sufficient controls, systems, processes and governance of the collections process along with ensuring that contingency resource skills are suited to collections activities.
Firms should continue to enhance the collections process and this should be supported by regular third party and external review to provide assurance that firms have addressed the issues identified in the thematic review.
How BDO can help?
If you would like to discuss the above or would like to understand how BDO can help your firm with strengthening your collections process or addressing some of the issues identified in the thematic review, please contact Leigh Treacy or Oivind Andresen.
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