Driving success through effective controls

Credit Risk Management Frameworks (CRMF) aren’t a subject likely to get individuals (or organisations) excited, but there are significant commercial benefits to be gained from ensuring that risk management frameworks function effectively.

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

There can be a perceived conflict between controls and the agility of a lender to achieve their tactical or strategic goals. However, controls, applied appropriately, can enhance a company’s efficiency. If we think about a rally car, the harness, roll cage etc. are obvious safety features in the event of a crash, but also route planning, safety inspections, marshals, weather monitoring, etc. provide the driver’s confidence to utilise the full power of the engine. It is the presence, not absence, of controls that allow the drivers to travel much faster than I would dare in my reasonably priced car travelling down an unfamiliar gravel track in the woods.  

The challenge facing businesses is in ensuring effective risk management supports their ability to achieve their commercial targets. 

The publication in September (Thematic findings of Internal Audit Review of the Credit Risk Management Framework – non-systemic UK Deposit Takers (UKDT) | Bank of England) of the PRA’s review of 33 non-systemic firms’, Internal Audit Functions (IA) findings against their CRMF highlighted areas that require attention. Of the 236 IA findings, more than two thirds related to “notable breaches around lending”. This review had been initiated as a result of high level of uncertainty in the macroeconomic environment and the expected deterioration in credit portfolios. The findings are relevant to lenders of all sizes. 

The areas requiring improvement, in priority order based upon the number of findings:

Affordability assessment

Insufficient focus is placed upon keeping models up to date, and reflective of the economic environment. Controls around refresh of rules, buffers and judgements need to be improved to reflect the latest developments of the macroeconomic environment and frequent, regular updates of the data in expenditure models.

Quality assurance (QA) and underwriting process 

QA controls should be improved. This includes first/second line of defence reviews, increasing the frequency of reviews and documentation of QA processes within policies.

Quality of management information (MI)

Reliable and consistent reporting without data issues is key. Good MI includes risk appetite metrics; performance, and quality indicators that support board level decision making. Forward-looking MI and informative commentary could contribute to a better CRMF.

Credit risk appetite (CRA)

CRA limits should be consistent with the business strategy, lending, and collections policies. CRA should be granular enough to support a good understanding of the portfolio’s asset quality. An escalation process should be in place to deal with breaches. Credit Risk MI, Credit Risk Appetite Statement and Lending policies should be aligned.

 Lending policy 

The governance and control processes around the lending policy should be improved. It includes sufficient documentation and monitoring of limits on exceptions relating to ‘out of policy’ loans.

Collections

Contingency planning is an area that should be improved. This includes early warning indicators for high risk and vulnerable customer segments. Capacity planning in place to deal with increases in the number of customers in financial difficulties. Portfolio performance being linked through the operational plan to make portfolio management more effective.

The PRA expects firms to use this list for their next review and assess their own CRMF controls and areas that might require strengthening.

4most have available solutions and extensive industry experience in working with organisations of all sizes and stages of development to address these areas.

Please contact– info@4-most.co.uk to learn more how 4most could help.

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