[2025] UKUT 00185 (TCC)

Meanwhile, on 9 September 2016, Mr Sutherland informed the Bankthat it had been selected by the PRA for inclusion in an audit of COREP returns. Metro Bank’s Internal Audit team was required to review and assess whether the Bank had effective procedures and controls in place to produce those returns, and to assess a sample of submitted returns.

The audit was carried out between January and March 2017; the work consisted in assessing whether:

A draft report was provided to management in May 2017 and the final report was sent to Mr Sutherland in July 2017. The findings were summarised as follows:

“Audit reviewed the June and September 2016 returns and identified a number of errors (e.g. omissions, inconsistent interpretation of rules) which are summarised below. The Regulatory reporting team had subsequently rectified and corrected the majority of the errors in the March 2017 COREP returns, the details of which are attached in Appendix 1. The errors in the June and September returns resulted in a net understatement of required capital in the range of £0.95m to £12.59m (0.26% to 3.50% of total required capital) for June 2016 and £0.8m to £11.46m (0.21% to 2.97% of total required capital) for September 2016 respectively…”

The report explained that “the most significant impact of the errors” was due to the incorrect RWA being applied to CRE loans; these should have been risk weighted at 100% but had been risk weighted at lower percentages. The report continued:

“This is due to a lack of information in the systems to allow proper classification. Since the identification of this error by audit, the Regulatory Reporting team has started categorising (and calculating the impact of) the CRE loans manually until an automated solution is in place. Commercial Lending have a project underway to assign a more granular classification to loans which will allow Regulatory Reporting to automate the classification of loans. As at 8 May 2017, the estimated understatement of capital requirement is in the range of £11.1m to £21.7m for the quarter to September 2016 and £9.12m to £20.76m for the quarter to June 2016. A remaining portion of CRE loans amounting to £223m (36% of approx. total CRE loans) is still being worked on to establish the appropriate risk weights to be applied.”

The detail of the report included a section headed “Treatment of exposures secured by commercial immovable property”, which read:

“In case of Exposures secured by Commercial immovable property the Bank has been prudent and applies a 50% risk weight to that part of the Exposure which has an LTV<50%. However, as per the CRR rules exposures with LTV <60% are applied a Risk weight of 50%. Management should reconsider if this prudent approach is still appropriate.”

It was common ground that this was incorrect. Although Article 126 of the CRR did provide that CLIP loans be assigned a risk weighting of 50%, the PRA required 100% risk weighting, see §25.

By the end of 2017, over 50% of the portfolio had been reviewed and classified by the Commercial Lending team, as the result of which £500m assets had been reclassified as CRE and the Bank’s RWA increased by £237m. However, as is clear from the above, there was a misunderstanding as to the correct treatment for CLIP loans and these were still incorrectly risk-weighted.