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Discussions with the PRA and the January announcement
Discussions with the PRA and the January announcement
On 21 January 2019, Mr Arden and Ms Gillan met with the PRA to discuss the RWA issue. They asked the PRA whether it was possible to ring-fence £300m of PBTL loans for a future sale and whether the balance of £600m could be phased in. On the following day, the PRA wrote to the Bank refusing both requests.
The PRA letter was discussed at the Board meeting which took place on the same day. The Board accepted that the “final figure of £900m was therefore confirmed” and following detailed discussions, the Board “supported management’s view that a trading statement should be released to the market”.
On 23 January 2019, the Bank announced a preview of its 2018 results. The announcementincluded the following:
“Risk weighted assets at full year are expected to be approximately £8.9bn with the increase driven by both net loan growth and an adjustment in the risk weighting of certain commercial loans secured on property and certain specialist BTL loans to large portfolio landlords. Total capital ratio is expected to be approximately 15.8% as at December 31 2018.”
The Bank’s shares fell 39%; this was the largest intra-day drop for any UK bank since 2009 and an all-time low for the Bank. Press releases were issued by firms of analysts and brokers the same day, including the following:
Bloomberg published a “reaction” which said that “Metro’s trading update reveals risk-weighted asset inflation is well ahead of expectation”.
Jefferies said that “the more price sensitive element of the statement was a surprise change in risk weighting on certain commercial real estate and specialist buy-to-let portfolios, leading to a 330bps decline in the total capital ratio”.
JP Morgan issued apress statement headed “an expensive mistake”, which focused on the “unexpected £0.9bn RWA increase from misinterpretations of risk-weighting requirements in the CRE and BTL loan books”.
Keefe, Bruyette & Woods (“KBW”) said:
“Metro released an unexpected trading announcement earlier today, disclosing weaker profits and more importantly, an error in its risk weighted assets calculation which weighed on capital ratios materially. The shares fell -30% intra-day.”
KBW updated this later the same day, saying:
“Since raising equity capital at £34.22 in July 2018, Metro's shares have plummeted due to a combination of factors, now down -61% since that time including falling -39% today following their negative pre-announcement for Q4 earnings.”
It is clear from the above that the key cause of the sudden share price fall was the increased RWAs for both CLIP and PBTL loans. Of the two, the CLIP loans adjustment accounted for almost 60% of the total (£563m out of £960m), and was the most significant element.
- Heading
- Introduction
- The jurisdiction of the Tribunal
- The burden and standard of proof
- The PRA and capital requirements
- The Bank’s lending
- CRE loans
- CLIP loans
- PBTL loans
- COREP reporting
- The Authority
- Listing Rule 1.3.3R
- The MAR
- The evidence
- Approach to the evidence
- Mr Arden
- Mr Donaldson
- Ms Gillan
- Ms Roberts
- Mr Somers and Mr Dransfield
- Mr Sutherland
- Mr Lane
- Mr Brierley
- Individuals who were not called as witnesses
- Findings of fact
- The early years
- Linklaters
- Key personnel during the period from March 2018
- Relationship with the PRA and the Authority
- 2016 and 2017
- The COREP audit and the CRE loans
- Mr Arden, the Board and the committees
- KPMG appointed
- April to June 2018
- July 2018
- The 2018 capital raise and half year results
- August 2018: PBTL and CLIP
- Communicating with the PRA
- KPMG decision trees
- PBTL classification
- Annual Review of Commercial Lending
- September Audit Committee
- September NEDs meeting
- September Board meeting
- Engagement of Deloitte
- Internal work in support
- Communications with the PRA
- Meeting with Linklaters
- Disclosure Committee meeting
- Mr Somers’ email
- Meetings with Mr Hill and Mr Bernau
- The October CRPAC meeting
- RWA Report
- Business and Commercial Lending
- The October Audit Committee meeting
- The Q3 Update
- Accounting, reporting and control report
- The October ROC meeting
- Chief Risk Officer’s Report
- The RWA Report
- Business and Commercial Lending Review
- The October Board meeting
- Linklaters Governance Update
- Audit Committee Update
- The Q3 Update
- 2019 Budget Paper
- Whether the RWA issue was discussed
- Chief Risk Officer’s Report
- Response to PSM Letter
- The Q3 Update and analyst calls
- Deloitte’s reports
- Discussions with Linklaters
- Discussions with the PRA and the January announcement
- Subsequently
- The PRA
- The Authority
- Mr Donaldson’s and Mr Arden’s careers
- The common ground
- The Parties’ cases
- The Authority’s case
- The Applicants’ case
- ISSUE ONE: WHETHER THE BANK BREACHED LR 1.3.3R
- The PRA and the COREP Returns
- Findings of fact
- The Applicants’ position
- The Tribunal’s view
- The PRA and confidentiality
- Findings of fact
- The Applicants’ position
- The Authority’s position
- The Tribunal’s view
- Mr Lane’s advice
- Findings of fact not in dispute
- Who was at the meeting
- How long was the meeting
- Linklaters’ practice when giving advice
- Knowledge of the impending Q3 Update
- What was said by Mr Arden at the meeting
- Confidential matter?
- The Tribunal’s finding
- The purpose of the meeting
- Reasonable to rely?
- Overall conclusion on legal advice
- No breach if uncertain and under investigation?
- Mr Jaffey’s submissions
- Mr Stanley’s submissions
- The Tribunal’s view
- No material breach if unknown
- The knowledge issue
- Key findings already made
- The Authority’s overall position on the knowledge issue
- The Applicants’ overall position on the knowledge issue
- Rules on classification
- Data issues
- Nature of the data issues
- Extent of the data issues
- Effect on materiality
- SME supporting factor
- Residential property
- Conclusion on data issues
- The mitigants overall
- The AIRB application
- Pillar 2A Offset
- Submissions
- Findings of fact
- Conclusion on Pillar 2A offset
- Phasing in
- PRA discretion
- Taking all the above into account
- Overall conclusion on the Knowledge Issue
- The PBTL Loans
- Findings of fact
- Submissions and the Tribunal’s view
- Whether the alternatives were unreasonable
- The Applicants’ position
- The Authority’s submissions
- The Tribunal’s view
- Reliance on the board and the Committees
- Findings of fact
- September
- October Audit Committee
- October ROC meeting
- October Board meeting
- The position of the parties
- The Tribunal’s view
- The Audit Committee
- The Board
- Reliance on Ms James
- Findings of fact
- Submissions
- Discussion
- Overall conclusion on Issue one
- The legal principles
- The statutory provisions
- Burton v Bevan
- Scandex
- Capital Alternatives
- Avacade
- Ferreira
- Submissions on Ferreira
- The words of the provision
- The ratio of Ferreira
- The corporate veil
- Forster: meaning of “knowingly concerned”
- Forster: reliance on legal advice
- The Applicants’ submissions
- The Authority’s submissions
- The Tribunal’s view
- The principles summarised and the issues remaining
- Mr Arden
- Mr Donaldson
- The position of the parties
- The Tribunal’s view
- ISSUE THREE: PENALTIES
- The Tribunal’s approach
- The DEPP
- The Authority’s position
- The Applicants’ position
- The Tribunal’s view
- The penalty framework
- Applying the Steps
- Step 2(1)-(3): Earnings
- The Tribunal’s view
- Step 2(4)-(7): Seriousness
- Step 3: Mitigation
- DEPP
- Submissions and discussion
- Co-operation
- Remediation
- Compliance with the PRA’s requirements
- Communications with the Authority
- No negative factors
- Other consequences
- Difference between the Applicants?
- Conclusions