Independent review and analysis

Credit Risk back in the spotlight.

In our blogs, we have often pointed out that PRA observations about one business sector are often highly relevant to other regulated areas. The recent ‘Dear Directors’ letters to credit unions providing their annual assessment of the challenges facing those businesses is a good example.

Not surprisingly the letters include an assessment of post COVID operational planning, operational risk and resilience, outsourcing, orderly resolution of ‘Single Customer View’ requirements and cyber security. But the item that caught our eye is the PRA’s observations regarding credit risk. This was specifically highlighted in one of the letters (to directors of smaller credit unions) where it was stated that, “Average arrears in your peer group have increased by 11% over the last 12 months”.

We know that lenders and servicers of mortgage portfolios are gearing up their arrears handling resources and capabilities, because we are helping several of them to do just that. Most mainstream lenders we speak with have been relieved that there has not been an instant spike in arrears at the end of payment holiday and furlough schemes. They are, however, still concerned about the effect of future increases in bank base rate, tax rises and the increasing cost of living.

We believe that most lenders and holders of mortgage portfolios are not being lulled into a false sense of security based on historically low current arrears levels. Operational resilience experts, risk managers and resource planners are already working hard to ensure all PRA and FCA requirements are adhered to when the arrears ‘uptick’ does materialise.

Rockstead, as experts in these issues, has been here before. It really is not that long ago that central banks last focused on these issues; after the GFC, we helped lenders who were under pressure from a particular central bank, by providing oversight of their collection processes. We measured if customers were being treated fairly and considered if agreed arrangements were appropriate to customers’ circumstances, and we gave feedback on their agents’ performance. This time around calls will be further complicated by an increased requirement to identify vulnerable customers and to tailor solutions for them.

There really is no doubt that there will be an ‘uptick.’ The question is will you be ready for it? If you are interested to hear how we can help, give us a call.

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