This week the PRA released a “Dear CEO” letter from Victoria Saporta and Sam Woods clarifying their expectations around IFRS 9 disclosures.

The letter is a call to arms, requesting the UK’s largest banks to (voluntarily) respond to the regulator within six weeks of finalising their year-end 2020 (or 2020/21) annual reports regarding the evolution of their IFRS 9 disclosures.

In particular, the regulator asks firms to set out:

  • Progress in adopting the initial (Nov 2018) recommendations made by the Taskforce on Disclosures about Expected Credit Losses (DECL), which the firms committed to via the UK Finance Code for Financial Reporting Disclosure. This includes a line-by-line compliance assessment;
  • Plans to move to full compliance for any gaps; and
  • Progress to date and future plans relating to the second recommendations (Dec 2019) which, although not covered by the Disclosure Code, are still of interest to the regulator.

This was trailed in the Written Auditor Reporting thematic letter published on 30 September 2020 where, although disclosure did not feature prominently in their thematic findings, the regulator reiterated their general expectations around good disclosure practices:

“You will be aware, from letters Sam Woods wrote to your CEO in November 2016 and August 2017 and I wrote to you in January 2018 and January 2019, of the importance we attach to good period-end market disclosure about ECL. Indeed, we have said in the past that good ECL disclosure is essential if your firm is to explain its ECL story in a way that users of your financial reports will be able to understand and use as the basis for their analysis. This is even more so at the moment in view of the uncertainty and significant judgments that underlie current ECL estimates. I will be writing to you again on this subject shortly.”

These expectations were also mentioned as part of letters issued from Sam Woods last year March during the early stages of the COVID-19 pandemic. The letters issued by the regulator stated that they were “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.”

Progress to date

The large banks have made great strides towards reaching compliance with most areas of the recommendations covered by most lenders. However, comparability between firms is still a challenge. This sometimes extends to the fundamentals of ECL disclosure, such as where ECL on off-balance sheet exposure is reported and if it is included in coverage KPIs. Additionally, consistent and high-quality disclosure of Post Model Adjustments is going to be essential where out-of-model management judgement has become a material part of the overall ECL for some firms.

The PRA have also expressed concerns over measurement uncertainty and sensitivity disclosures for some time. This was emphasised most recently in the Written Auditor Reporting thematic feedback (September 2020), where the PRA talked about firms needing to enhance capability to “perform more comprehensive economic sensitivity analysis, more quickly, to inform governance and support more comparable public disclosures”.

The large banks were, initially, concerned about the complexity of sensitivity disclosures and worried about potential misinterpretation by users. However, these firms now disclose ECL for 100% weighted scenarios (i.e. multi-factor sensitivity analysis) for at least their major portfolios and a number of single factor sensitivity tests. But, again, the devil is in the detail and differences limit comparability.

In our view the area that has developed the least is measurement uncertainty, required under IAS 1. This is particularly pertinent in the current environment, with the economic outlook and the interaction between the economy and the emergence of credit risk both highly uncertain. The idea that there is a range of plausible ECL outputs within a range of uncertainty has now become more important under the current environment as that range of uncertainty will likely have increased. This is also a view that is important for auditors in understanding the level of estimation and where the bank has placed its estimate of ECL within that range of reasonably possible outcomes, particularly in ensuring that the estimate is not intentionally (or unintentionally) biased. 

For other firms the quality of disclosure tends to be better for larger and/or listed lenders with more compliance gaps for smaller and/or private lenders. We share the PRA’s view that that good ECL disclosure is essential for firms to explain their ECL story so that their stakeholders have a clear understanding of their position.

Action required

The action for the larger firms is clear: a progress update and roadmap to full compliance is due after Easter.

Other firms should also review their compliance and quality of ECL disclosures too – quality has improved since go-live in 2018 and the CoOVID-19 pandemic has brought new challenges. Additionally, the PRA are clearly very interested in firms’ practices and it is likely that the regulator’s focus will gradually shift from top banks to smaller institutions. Implementing some of the DECL disclosure requirements can be cumbersome and time consuming, so firms that have started earlier will likely be in a stronger position.

Deloitte can help with gap-assessment, recommendations for improvements, and assurance over changes. Our accounting advisory and credit risk teams have extensive experience in auditing, implementing and assuring IFRS 9 disclosures.

A note on DECL

The Taskforce on Disclosures about Expected Credit Losses (DECL) was sponsored by the PRA, FCA and FRC to bring together a panel of preparers and market participants to work together and reach a consensus on good practice for ECL disclosure. Participants came from some of the larger banks, investor and analyst communities with secretariat provided by the Big 4 accounting firms and the PRA.

February 2021 letter: Letter to CFOs - Disclosures about IFRS 9 expected credit losses (bankofengland.co.uk)

January 2019 letter: Letter from Victoria Saporta - Disclosures about International Financial Reporting Standard (IFRS) 9 expected credit losses (bankofengland.co.uk)