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Mark Vickers

Head of IFRS 9

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News & Views / 2017: A rocky year ahead for implementing IFRS 9?
20 January 2017

2017: A rocky year ahead for implementing IFRS 9?

Is your organisation ready to parallel run in 2017? And what will your initial staging results show? A few of Jaywing’s IFRS 9 experts have had these questions top of mind recently after hearing similar questions from our IFRS 9 clients, and the attendees from a number of IFRS 9 events we presented and chaired recently.

The conferences presented an excellent opportunity to not only round up the year on a positive note but also to hear first-hand how a number of banks were coping with the demands of IFRS 9. It was with some regret that I left the conference and headed for the nearest coffee shop to consider the day, and write down some thoughts.

It is clear that myriad challenges will exist for lenders implementing IFRS 9 this year. A number of banks identified many issues within their classification and measurement approaches due to complexity faced within the application of the SPPI (Solely Payments of Principle and Interest) guidance given. Another key challenge raised is agreeing a testing approach and ongoing assessment framework on bespoke trades, securitisations and business re-organisations. Questions remain therefore regarding the oversight of portfolios moving from one classification to another, namely from amortised cost to fair value through P+L, and how the governance and assessments are kept up-to-date, particularly when new business is often written in different languages under a differing business model.

"The question then is what constitutes a “sell” in this regard and how is this represented within the respective IFRS 9 solution?"

If a business model refers to how an entity manages its financial assets in order to generate cash flows – by collecting contractual cash flows, selling assets, or both – it figures then that a business model can typically be observed through the activities undertaken in achieving organisational objectives. The question then is what constitutes a “sell” in this regard and how is this represented within the respective IFRS 9 solution? Where a sell is prevalent in portfolio behaviour, the accounting treatment becomes one through FVOCI (Fair Value through Other Comprehensive Income) and not amortised cost. Sounds easy to be able to differentiate, but not in principle when confronted with the multitude of opaque aspects above. Similarly, when dealing with the IFRS 9 models themselves, there was equal consideration and discussion across the banks with regards to the degree and interpretation of “significance” when assessing deterioration in credit risk, and how, and in what way the staging triggers should be calibrated.

Most of these issues have been around for a while and, ostensibly, it now looks to be more of a fine-tuning exercise for banks rather than a first principles affair. This is good news in one sense, but the challenge here is down the line, in that it will be interesting to see the diversity of results and the manner in which banks will be judged, particularly where the staging results from one is widely deviant from peer groups.

"CP46/16 looks to be providing some much-needed clarity around the scope and application of new FINREP templates and the manner in which FSA015 is to be replaced."

In addition, the individual firms’ finance function is still orchestrating changes to data structure and configuration to drive a new framework of financial reporting templates (FINREP) necessary to cover the new elements within IFRS 9. Following discussion around consultation paper CP17/16, the PRA have outlined further steps in creating greater consistency in FINREP reporting by way of CP46/16 released in December 2016. CP46/16 looks to be providing some much-needed clarity around the scope and application of new FINREP templates and the manner in which FSA015 is to be replaced.

What’s more, the PRA also propose changes to firms currently reporting reduced disclosures through FRS102. In this regard, firms should submit FINREP templates 18 and 19 outlining details and information on performing, non-performing, and forborne exposures, while continuing to submit FSA015. This reduced requirement for now would have the benefit of providing supervisory consistency in reporting without imposing disproportionate burdens on smaller firms. Consultation closes on 13th March although, I suspect, this is likely to be the first of many discussions throughout the year in this particular regard.  

Operational issues aside, the conferences left a few strategic points to mull over and contemplate. For example, is the generation of new provisioning results post first-time adoption going to offer up greater or less volatility in results? The obvious answer of course is yes, as growing banks through portfolio evolution would capture more in stage two and therefore be exposed to a greater lifetime provisioning quantum earlier, but what of those institutions that have very high-quality books? I doubt that the same could be said, as stage two would not be triggered in quite the same way.

"In addition, it’s worth thinking about the impact IFRS 9 will have on a bank's strategic portfolio mix."

In addition, it’s worth thinking about the impact IFRS 9 will have on a bank's strategic portfolio mix. Sure, banks will continue to offer a wide range of products, but what of the long dated higher risk books? We know that a lifetime assessment will influence anything in stage two, so will this then mean that longer dated revolving credit, credit card and longer dates exposures with a large undrawn limit become less attractive? The answer is quite possible yes, especially as there is now a need to hold more provision linked to lifetime. Therefore, it naturally follows then that as banks are holding more capital to support IFRS 9, what will this mean from an investor perspective. Will the banking sector become a less attractive option in the near term? This is very much a diversification issue but certainly a real one as capital held in provisions is expensive.

2017 was expected to be the year where banks had planned to roll into a programmed parallel run phase with fine-tuning and governance left to handle. I now question however, if this is actually the case, as many banks are still concentrating on resolving multiple issues from last year and are concerned that they are beginning to run out of time. That said, there is an expectation in the market that the summer will bring a flurry of IFRS 9 results at the half year. It is certainly brave to go it alone and be the first, although I suspect there will be some form of benchmarking and collaboration ahead of that time.

What strikes me as odd though is that very statement looks to be putting IFRS 9 on to a two-speed highway. Those that can will, and those that cannot may offer something reasonable at that time, and consider a firmer position towards the end of the year. We could therefore be looking at an IFRS 9+ period operating in the second half of the year to allow banks a chance to present a more robust picture over and above what they indicated at the half year. This certainly looks feasible alongside the time challenges, worries and concerns expressed recently.

"I think overall, the underlying viewpoint was that everyone is "in the same boat" and many banks gained comfort that they were not alone in having the challenges they faced."

I think overall, the underlying viewpoint was that everyone is “in the same boat” and many banks gained comfort that they were not alone in having the challenges that they faced. If this hits a chord with you then do not worry, as it seems that you are in good company and alongside a number of others facing a busy 2017 in this regard.

Anyway, back to the coffee shop and having ordered a frothy cappuccino decided that an accompaniment of some sort was the order of the day. The flow of people had lessened and the shelves were emptying as it was getting late. The assistant turned to me and offered, “I’ve got a rocky road!” I nodded, smiled and paid. It summed up the day perfectly.

 

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