Provisioning

72. Depending upon the nature of the Authorised Person and its business, the Authorised Person's provisioning policy should set out:
a. who has responsibility for reviewing the provisioning policy and approving any changes;
b. how frequently the policy should be reviewed;
c. when the review will take place, including the circumstances in which a review might be more frequent;
d. who has primary responsibility for ensuring the provisioning policy remains appropriate, including any division of responsibilities;
e. the areas of its business to which the provisioning policy relates — it should include both on balance sheet and off balance sheet Exposures and assets;
f. where it takes different approaches to different lines of its business and the key features of those differences;
g. who has responsibility for monitoring its asset portfolio on a regular basis in order to identify problem or potential problem assets and the factors it takes into account in identifying them;
h. whether a loan grading system or a watch or problem list is used and, in the latter case, the criteria for adding an asset to or taking an asset off that list;
i. the extent to which the value of any Collateral, guarantees or insurance which the Authorised Person holds affects the need for or size of provision;
j. on what basis the Authorised Person makes its provisions, including the extent to which the level of provisioning is left to managerial judgement or to a committee or involves specified formulae and the methodologies or debt management systems and other formulae used to determine provisioning levels for different business lines and the factors applied within these methodologies;
k. who is responsible for ensuring that the Authorised Person's provisioning policy is being implemented properly, and the measures the Authorised Person has in place if its provisioning polices are not adhered to;
l. who is responsible for the regular reviews of the Authorised Person's specific and general provisions and who decides whether provision levels are satisfactory. The reviews should take account of changes in the status of the Exposures and potential losses and changes in the conditions associated with them;
m. the reports used to enable management to ensure that the Authorised Person's provisioning levels remain satisfactory, the frequency and purpose of those reports and their circulation;
n. the procedures for recovering Exposures in arrears or Exposures which have had provisions made against them, including who has responsibility both internally and externally for its arrears management and recovery and the involvement of the Authorised Person's solicitors;
o. the procedures and methodologies for writing off and writing back provisions, including treatment of interest and who has the relevant responsibility for determining these;
p. the frequency of any review of its write off experience against provisions raised; such a review can help identify whether an Authorised Person's policies result in over or under provisioning across the business cycle, and contribute to a general review of an Authorised Person's provisioning policy and the design of any loan grading systems, Credit Risk models, and risk pricing; and
q. the Authorised Person's procedures and methodologies for calculating and raising provisions for contingent and other liabilities, how frequently they should be reviewed and who has the relevant responsibilities. Other liabilities include the crystallisation of contingent liabilities such as acceptances, endorsements, guarantees, performance bonds, indemnities, irrevocable letters of credit and the confirmation of documentary credits.
73. Provisions may be general (against the whole of a given portfolio) or specific (against particular Exposures identified as bad or doubtful), or both. The Regulator expects contingent liabilities and anticipated losses to be recognised in accordance with the applicable accounting standards.
74. Appropriate systems and controls for provisions vary with the nature, scale and complexity of the credit granted. An Authorised Person for which the extension of credit is a substantial part of its business is expected to have greater regard to developing, implementing and documenting a provisioning policy than an Authorised Person for which Credit Risk is incidental to the operation of its business.
75. The Regulator recognises that the frequency with which an Authorised Person reviews its provisioning policy once it has been established will vary from firm to firm. However, the Regulator expects an Authorised Person to review its policy to ensure it remains appropriate for the business it undertakes and the economic environment in which it operates. The provisioning policy should be reviewed at least annually by the Governing Body.