[2025] UKUT 00185 (TCC)

On 18 May 2018, Ms Iovino copied Mr Arden on an email which said that “some potential gaps in the RWA calculation” had been identified following a meeting with KPMG. She attached a paper written by the Credit Risk and Analytics team which said that loans relating to Housing Association Properties; Houses in Multiple Occupation and Student Accommodation should all be reclassified from residential to commercial, and so given a risk weighting of 100% rather than 35%.

On 3 August 2018, Mr Stokes emailed Mr Donaldson to say that where a PBTL loan was for over five properties or was a HMO, it should be risk-weighted at 100%, but that the Bank didn’t capture the number of properties on which the loan had been made, or whether it was a HMO.

On 6 August 2018, it was agreed that the Bank would undertake a policy by policy review in order to “understand the gap on PBTL”.

On 17 August 2018, Mr MacLean emailed Mr Arden, saying that there was “an outstanding question re £1.7b of PBTL (whether it is in fact PBTL). The credit team are testing a sample of 170 contracts to test our expected level of accuracy”.

On 17 August 2018, Mr MacLean informed Mr Arden that the Credit Risk and Regulatory Reporting teams had performed some sampling testing of PBTL, but that as there was no PBTL flag in the Bank’s system it was “impossible to distinguish between a BTL and a PBTL loans in order to ascertain the PBTL impact on RWA” and this would remain the case until the Bank was able to “invest resources and extensive staff time to review the loan documents to ascertain what proportion of the current BTL risk weighted at 35% that will need to be reclassified as PBTL”.

On 24 August 2018, Mr Somers sent Mr Arden a PowerPoint presentation, which said stratified random sampling “reveals that circa 37% of the PBTL loans required recategorisation” and that the sampling had taken place as the Bank does not “capture planning use class or the number of holders of short hold tenancies as data items”; and that the sample of 100 out of 733 loans had been selected on the basis of:

On 17 September 2018, a paper about PBTL classification was considered at the CRPAC meeting. It said that, based on the recent sampling exercise, the best estimate was that 35% of the current PBTL book should instead be risk-weighted at 100%, and this would increase the RWAs by £269 million.

The paper also said that the PRA’s guidance was that 35% is required for owner occupied residential property and “certain Buy to Let” properties; that the phrase “certain BTL” was not further defined, so there was nothing to stop the Bank including for example multifamily or HMO properties, the Credit Risk team had “good reason to believe that this is not within the spirit of what the PRA intended”.

The Bank did not inform the PRA that there were any errors in the risk-weighting of the PBTL loans, either when emails were exchanged with Mr Sutherland or at the meeting which took place in September 2018, or at any other point before the communications and meeting in January 2019.

The RWA Report considered at the October 2018 CRPAC and Audit Committees said that risk-weighting for the miscategorised PBTL in T24 was estimated to result in additional RWAs of £37 million.

The difference between the £269m estimate in September and the £37m in October was because the former included both the T24 loan book and the Pepper loan book, and the latter excluded Pepper. This was because the Bank had taken the view that the regulations only required the higher risk-weighting to be applied for Pillar 2A purposes, and as the Bank was still operating on the standardised basis, it could decide for itself whether to apply the higher risk-weighting, and it limited the change to the PBTL loans in the T24 book.

On 20 December 2018, Deloitte’s final report said that correctly classifying the PBTL loans was estimated to result in an additional £312m of RWAs. Deloitte therefore took the view that all the PBTL loans needed to be risk-weighted at 100%, and the Bank did not have the option to use the lower risk-weighting, even while it continued to use the standardised basis.

As is clear from the foregoing, there were different views on whether 100% risk weighting was required for PBTL loans under the Bank’s current (standardised) approach, and this was echoed in the witness statements and oral evidence.

We find as a fact on the basis of Mr Somers’ evidence, which was not inconsistent with that given by Mr Sutherland, that at least at the time of the Q3 Update, there was genuine uncertainty as to which of the PBTL loans had to be reweighted at 100% and when the reweighting had to take place.

As is clear from the above findings: