UK Prudential Regulator Publishes Guidance on Treatment of COVID-19 Payment Holidays

The U.K. Prudential Regulation Authority has published a new statement on the application of regulatory capital and IFRS 9 requirements to payment holidays granted or extended to address COVID-19. The statement follows the announcements made by the PRA, the U.K. Financial Conduct Authority and the U.K. Financial Reporting Council in March 2020 on financial reporting and audit requirements in light of COVID-19. Those announcements included a letter from the PRA to banks on the application of IFRS 9 (including expected credit loss accounting) to loan arrangements during the pandemic.
 
In its latest statement, the PRA sets out high-level guidance on the capital and accounting treatment for lenders exiting from, or extending, payment deferrals. The guidance is in line with the FCA’s draft guidance, also published today, on how mortgage lenders should treat borrowers at the end of a deferral period. The PRA intends to provide further detail once the FCA’s draft guidance is finalized.
 
The PRA reiterates its original guidance that loans that are eligible for deferrals or extensions in accordance with the FCA’s proposed guidance would not automatically be regarded as having suffered a significant increase in credit risk, be credit-impaired for ECL purposes or trigger a default under the Capital Requirements Regulation. This remains the PRA’s position for payment deferrals granted due to COVID-19 for the first time. In addition, the PRA’s statement proposes that:
 

• Borrowers coming to the end of a payment deferral who are able to resume full payments should not be regarded as being in default provided that payments are made in accordance with an agreed schedule;
• Borrowers who are unable to resume full payments due to COVID-19 should not automatically be classed as triggering days past due or generating arrears under CRR; instead, firms should consider the individual circumstances of each borrower using the information available to them to assess the underlying reasons for the borrower’s inability to pay; and
• Borrowers granted a payment deferral or an extension to a payment deferral should not automatically be regarded as having suffered a significant increase in credit risk or be credit-impaired for ECL purposes; when assessing loans for these purposes, firms should once again apply their judgement to the particular circumstances of the borrower in question.

 
View the PRA's statement on the treatment of COVID-19 payment holidays.
 
View details of the FCA, FRC and PRA statements on financial statements requirements.
 
View the FCA’s draft guidance on the treatment of mortgage borrowers.
 
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