Response letter - APRA Consultation on ARS 220 Credit Exposures and Provisions

APRA recently issued a consultation paper outlining its intention to overhaul the reporting requirements for Credit Exposure and Provisions (ARS 220). Under the proposed approach, APRA will collect a contract-level data set for all credit exposures of all banks in Australia (as opposed to the traditional collection of aggregated data in reporting forms and returns) from March 2022 onward. The details of the proposed changes and the implications & opportunities of the ARS 220 reform were discussed in a recent webinar hosted by RegCentric which is available for on-demand viewing.

The due date for feedback was 28 January 2021.

RegCentric has written a response paper to APRA, providing feedback on the proposed approach & timeline and seeking clarifications on specific reporting items in the proposed data collection.

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Level 24, Three International Towers

300 Barangaroo Ave

Sydney, NSW 2000

info@regcentric.com | 02 8091 7187

General Manager

Policy Development

Policy and Advice Division

Australian Prudential Regulation Authority

Via email: ADIpolicy@apra.gov.au

28 January 2021

Dear Sir/Madam,

Sub: Comments on revisions to the new Prudential Standard APS 220 Credit Risk Management

RegCentric is pleased to provide feedback to APRA’s consultation on ARS 220 Credit Exposures and Provisions.

RegCentric specialises in transformation in Regulatory Reporting, Finance and Risk in the Australian financial services industry. RegCentric supports a growing number of Australian financial services organisations adhere to their regulatory compliance obligations whilst driving strategic transformation. We help them leverage technology and data management best practices to drive operational efficiencies across Risk, Finance and Compliance departments. We differentiate ourselves by combining deep domain expertise in APRA regulation with technical know-how and a hands-on approach.

As a long-term advocate of data-set based collections, RegCentric welcomes APRA’s initiative to collect Credit Risk exposures at a granular level. Regulator’s data needs are dynamic; and capturing industry data in the form of static returns has been a sub-optimal approach for a long time. The volume and velocity of change in regulatory reporting requirements in recent years, and indeed in particular since the start of the COVID-19 pandemic, are evidence of the need for regulators to have access to high-quality, granular datasets to conduct dynamic and meaningful analysis for data-driven policy decisioning.

APRA’s proposal is a fundamental change in the way regulated entities exchange data with the regulator. There is a considerable impact on all aspects of the end-to-end regulatory reporting preparation and submission process. When done well, collecting datasets will significantly reduce the need for regulatory reporting change going forward.

However, there is a risk of significantly increasing the regulatory burden on industry if this reform is done in isolation from other reporting requirements that collect similar data. Our recommendation is that APRA take a strategic and holistic approach and – in collaboration with industry – creates a comprehensive data point model for credit exposures; including those concepts and dimensions that are captured through other collections. This will ensure consistency and efficiency for both regulator(s) and industry.

We also propose for APRA to provide industry with sufficient time to address the system, process and governance changes required to implement this fundamental shift in regulatory reporting. Experience in Australia and overseas shows that to implement reform of this magnitude typically takes entities at least 18-24 months to complete.

RegCentric would like to provide feedback on specific items in the proposed ARS 220 standards:

1. Implementation Timeline

a. Given there will be a fundamental shift towards granular information to be submitted to APRA for ARS 220, the proposed timeframe is aggressive. There are data items that several ADI’s currently do not have available at a granular level. To bring the capability of reporting at a granular level will take implementation of new processes and systems to accommodate this requirement. For example, a number of mid-tier Banks currently calculate RWAs at a segmented portfolio level for reporting under the existing APS 112.

b. RegCentric note that APRA has issued on 8 December 2020 a consultation for APS 112 Capital Adequacy: Standardised Approach to Credit Risk (as part of the wider consultation of the revisions to the capital framework for ADI’s). There are numerous synergies between both APS 112 and ARS 220. There would be significant efficiencies for industry to implement both these changes in a single program of work.

c. There are other major initiatives that ADI’s are currently dealing with such as Open Banking. These programs are heavily focused on data and are utilising similar resources across the ADIs. There is only a finite pool of data experts in each organisation and in the industry as a whole. We believe industry would struggle to deliver a high-quality outcome based on the current timetable and wider regulatory requirements.

d. APRA may wish to consider that the new ARS 220 be prepared for a period on a best endeavour’s basis (or parallel run with existing reporting). A period of best endeavours preparation would allow APRA to work with Industry on providing feedback and improving the quality of the data submitted from ADIs prior to APRA moving to full implementation.

e. Based on the above, RegCentric proposes APRA consider aligning the implementation with the Basel III/IV reform (currently proposed for January 2023), and introducing a period of 6 months of best endeavour’s basis reporting.

2. APRA Consultation feedback

a. RegCentric strongly encourages APRA to provide specific direction to industry as opposed to principles-based guidance from industry. Clarity simplifies decision making for market participants and increases consistency for APRA. For example, APRA was asking for industry views on a methodology to pro-rata allocation to individual financial instruments of provisions that have been raised on a portfolio basis. It would be preferred if APRA provides a clear direction in its reporting standard.

In a webinar with more than 100 participants, RegCentric conducted a poll to check if participants would find it useful to receive data quality guidance, in line with APRA’s RPG-702 guidance for EFS. 64% of participants answered “Yes - the prioritisation of data would allow us to understand which data is critical. The benchmarks provide clarity and don’t increase the reporting burden.”

b. APRA indicated a different reporting regime for Prescribed Provisioning entities. This creates inconsistency with other reporting requirements, where different metrics (eg. asset size or size of the portfolio) are used. Setting consistent guidelines around ADIs reporting criteria to APRA will result in APRA receiving consistency of data and also alignment with other regulatory reporting (such as EFS) from ADIs which represent a similar risk to the banking system and would also support APRA’s benchmarking of ADIs. In addition, consideration should be given to include guidance that where an ADI has available data fields, and it is cost-effective for them to include the fields in the granular data feed they should be encouraged to do so.

c. In prior regulatory reform, APRA provided FAQ’s which in some cases superseded the reporting standards that were published at that time. These FAQ’s were then later integrated “in bulk” into the relevant standards or guidelines. Feedback from our clients is that having information spread out in different locations is confusing and increases burden on industry. We recommend APRA maintains an up-to-date reporting standard with clear change tracking where APRA needs to update the reporting standard based on industry queries or feedback.

3. Clarifications

a. The exposure class breakdown is based on the proposed APS 112 changes which would come into effect after ARS 220. Unless APRA aligns the implementation dates of these 2 reforms, can APRA clarify how entities should be reporting the exposure classes in the period between the effective date of ARS 220 (currently 1 Jan 2022) and the effective date of the APS 112 (currently 1 Jan 2023)?

b. RegCentric note that under the current proposal, APRA Connect and D2A will be used concurrently. D2A will be used for existing APRA returns whereas APRA Connect will be used for the more granular information under ARS 220. Can APRA clarify how APRA will validate ARS 220 data against existing data submissions that are not submitted in the same platform?

c. Can APRA clarify if it intends to publicly disclose any of the information that has been submitted under ARS 220? If so, will a separate consultation be held on what would be an appropriate level of public disclosure?

d. Can APRA clarify that branches from foreign ADI’s will be required to report the updated ARS 220 data to APRA? Should fields which do not apply to these entities (e.g. RWA related fields) be left empty?

e. For specific data items, please refer to the comments on the template attached to this letter.

4. Opportunities

a. As outlined, RegCentric is supportive of the implementation of ARS 220. We note that the current ARS 220 is requesting loan data on a deconsolidated basis (i.e., excluding securitised loans). There is an opportunity to request all loan information from ADI’s rather than a subset of the total loan portfolio. APRA should consider receiving the total loan portfolio and tagging those loans that are deconsolidated. This may provide the opportunity for APRA to capture information earlier for such returns such as ARF 720.1A/B Loans and Finance Leases.

We propose APRA works with industry participants to establish a data point model that captures all data points relevant to credit exposures. APRA may wish to consider reviewing EFS returns with a focus on lending (ARF720.1, 741-746), or specific portfolio’s (223, 750), and the RBA securitisation reporting requirements at the same time.

This approach will result in an increased scope and timeframe for initial implementation; however, this would result in a sustainable reduction of the cost of regulatory reporting for industry.

b. The format of table 1 and 2 requires information to be submitted at a granular loan level. Table 3: Movement in exposures and provisions, however requires an ADI to calculate the movements in gross carrying amount; drawn amount and provisions while also providing detail on reasons for movement in impairment stages. Table 3 is similar to disclosures that are required under AASB 7(35I) for AASB 9. If APRA requires Table 3 to be submitted can this be aligned (where applicable) with any existing reporting that already exists under AASB 7 (35I).

We thank APRA for the opportunity to lodge this submission and would welcome further discussion on our feedback. Please don’t hesitate to contact us via email on info@regcentric.com.

Yours Faithfully,

David Williams

Senior Consultant

Thomas Verlaet

Founder | Principal Consultant

Office: 02 8091 7187 | Level 24, Three International Towers | 300 Barangaroo Ave | Sydney, NSW 2000