On 2 October 2020, the PRA published a Dear CFO letter (dated 30 September 2020) providing thematic feedback to both firms and auditors from a review of written auditor reports received in 2020 and subsequent discussions with firms. The Dear CFO letter also contains two annexes. The first annex covers thematic findings on IFRS 9 expected credit loss accounting (ECL). The second annex covers thematic findings relating to the global benchmark reform, investment in technology and third party controls.
The Dear CFO letter reports that the PRA has found that firms have made significant progress to enhance the controls and governance around their ECL models and data. However, further progress is still needed particularly as weaknesses in underlying models and data had started to emerge prior to the start of the COVID-19 pandemic, with a number of significant models either failing validation or being rated as ‘needs improvement’.
The report also notes that it is clear from the auditors’ written reports that a continuing limitation of firms’ ECL processes is the time they take to run end-to-end. A consequence of this is that to incorporate late breaking events, firms have had to rely on tactical solutions that sit outside the normal control framework to respond to the need to update economic scenarios more frequently. Firms are encouraged to ensure control and governance frameworks are adapted to cope with increased reliance on these tactical processes and data.