[2025] UKUT 00185 (TCC)

The first item on the agenda (after agreeing the minutes of the previous meeting) was “RWA Reclassification”: the related paper from the Credit Risk and Analytics team had been circulated in advance. It was headed “Change in Risk Weighted Assets – October 2018” (“the RWA Report”). The Executive Summary began as follows:

“►This paper is to advise ELT (via PQR/CRPAC) of errors in the current RWA calculations for commercial exposures and gives an indication of how the key risk parameters will drive future RWA under IRB

►The correction to Standardised RWAs, primarily for commercial mortgages, leads to a significant increase in RWA of £642 million.

Commercial Mortgages – 50% to 100%	£574m
PBTL ineligible back book on T24	£37m
Business Loans ineligible as retail	£22m
Unsecured retail loans with collateral	£9m

►Finance and Credit Risk and Analytics will continue to review RWA calculations as data and processes improve, but any further adjustments to calculations are not expected to be material.”

The PBTL figure of £37m was less than the £269m in the paper provided for the meeting in September, because the latter was based on both the T24 book and the Pepper book, and the former excluded the PBTL in the Pepper book. This was because the Bank understood the regulations only required the higher risk-weighting to be applied for Pillar 2A purposes: in relation to the standardised basis, the PRA had stated that 35% is required for owner occupied residential property and “certain Buy to Let” properties, and there was no guidance on what was meant by “certain” BTL loans, see the earlier discussion at §§143(2)-143(3). In consequence, as Mr Somers put it, the Bank could decide whether it “wanted to take that hit now or in the future”, ie when a Pillar 2A offset was permitted. The Bank therefore decided to increase the risk-weighting for only some of the PBTL loans.

That slide was followed by another giving more detail which read (emphasis and colour in original):

“Following the decision tree work with KPMG, errors have been found in the current RWA calculations that will result in a significant increase in RWs.

►The material driver of the increase is the change in RWs applied to commercial mortgage loans.

►Commercial mortgages are loans to trading business companies to purchase commercial property (such as their own offices or factories) where repayment is from the trading business company’s cashflow and not from a third party rental income.

►We are currently applying a RW of 50% whereas we should be applying a RW of 100%.

►Applying a RW of 100% results in additional RWAs of £574 million.

►Other drivers include:

►Some loans were assumed to be unsecured retail at a RW of 75%, but were actually secured by commercial property and hence a RW of 100%, resulting in additional RWAs of £9 million.

►The loans badged retail within T24 erroneously included business loans, which have now been identified and moved to the correct category, resulting in additional RWAs of £22 million.

►It has been agreed that back book PBTL in T24 that is not eligible for the Retail Exposure Class (HMO, Multi-family, etc) will have a RW of 100%, resulting in additional RWAs of £37 million.

►TOTAL IMPACT is an increase in RWAs of £642 million

►All impacts are as at end September 2018, and are net of the SME supporting factor where applicable.”

Subsequent slides included the following statements:

The following slide set out a detailed “impact table” analysing the numbers which made up the overall adjustment of £641m; we have called this the “Impact” slide. In relation to the RWA issue, the key figures on this slide are those relating to the changes between:

The figures for the T24 book were as follows, all values in pounds.

The increase as the result of the new risk-weighting of CLIP loans in the T24 book was thus £568,663,327 (1,145,951,243 less 577,287,916).

The figures for the London book were as follows:

The increase as the result of the new risk-weighting for CLIP loans in the London book was thus £4,893,937 (11,713, 820 less 6,819,883). When added to the figures from T24, the extra risk-weighting required for CLIP loans was £573,557,264; this was the £574m shown on the earlier summary slide.

The analysis on the Impact slide also showed that there were 453 PBTL loan accounts in the T24 book, totalling £162,562,629; these were split into those which had been incorrectly weighted and those which did not need correction. The risk-weighting of a further £1,011,958,111 of PBTL loans held in “Pepper” was not amended.

The minutes of the meeting record that Mr Dransfield presented this paper, explaining that the reclassification was “due to misinterpretation of the PRA rulebook” and that “the material driver” was:

“reclassification of commercial mortgage loans which accounts for £572m (Footnote: ³) of the increase in RWAs. The rest is unsecured reclassified as commercial secured, retail in T$ [T24] which are actually business loans and back book non retail PBTL which is now classed with a RW of 100%.”

Ms Gillan’s evidence was that no-one at the meeting dissented from that proposition or said that the figures were wrong; she agreed with Mr Stanley that the figures were understood “to be estimates, but they were best estimates [they] had at the time”. Mr Dransfield’s evidence was that there was no discussion of the paper, other than a question about the probability of borrowers defaulting. Mr Arden’s evidence was not straightforward, see §44, but he also confirmed that no-one had disagreed, as did Mr Donaldson. We find as a fact that no-one at the CRPAC meeting dissented from the position set out in the RWA Reclassification Paper.