MLA A1 and A2: balance sheet FAQs

MLA A1&A2 - Balance Sheet

Q: If our firm is subject to International Accounting Standards (IAS), how do we report securitised loans in sections A1 and A3?

A: The answer provided on securitised loans and IAS was:

The method of reporting securitised/SPV loans to FCA in MLAR, for a firm subject to IAS, is the same as before the firm adopted IAS. That is, there is no change.

So please continue to report securitised/SPV loans in A3 columns 4 to 7, in D2 column 6, and in section G and any arrears in section H.

See also explanation below, as well as QAs in the General section of the FAQ at Q9 and Q12.

An explanation of why there is no change in reporting for MLAR purposes is as follows:

While PS 05/5 made a number of changes to various elements of SUP 16, in particular to the guidance notes on completion of the MLAR (but also other FCA returns) to take account of the impact of IAS on Prudential Capital etc., it was our understanding that we had not altered the underlying basis of how we wished securitised loans to be reported in the balance sheet and related analyses within MLAR.

Thus the guidance in MLAR (after the impact of PS05/5 and Handbook Instrument 2005/21) is substantially the same for securitised loans as it was before.

The relevant text is in the Introduction section of MLAR guidance, at section 9 (i) paragraph 2, and which is reproduced below (but without colour, so see original) from the version available in the IRR webpages.

9 (i) Positions to be reported gross:

In general, liabilities and assets should be shown gross, and not netted off (unless there is a legal right of set-off). Thus an account which moves from credit to debit will move from one side of the balance sheet to the other.

A notable exception to this however concerns the reporting of loan assets(eg under FRS5) which should follow PRU 9.3.33R - PRU 9.3.35G. Such assets should be shown in the balance sheet net of linked funding and also on this basis in other tables where balances are reported on the same basis. Only sections A3, D2, G and H require the reporting of such loan assets on a 'gross' basis.

  • As a consequence, we are expecting firms to report securitised loans as above. This means reporting them in each of A3 columns 4 to 7, and in D2 column 6, and in G and H.
  • In section A1, we expect firms to report securitised loans in A1.6, but only on a net basis (ie their contribution to A1.6 will be the A3.6 column 7 amount).
  • We are aware that this is not the same as a firm would report in its published IAS accounts, where securitised loans would normally now appear on the asset side of balance sheet, and the linked funding be reported on the liabilities side. (This would apply to all securitised loans, unless of course they were to qualify for de-recognition under the now more elaborate rules for de-recognition. Accounting Policy colleagues advise that this is likely to be quite rare as a consequence).
  • This was a conscious policy decision at the time PS 05/5 was issued, and so we do not expect total assets in the MLAR balance sheet to agree with those in a firm's published balance sheet.

Q: What other types of lending might be relevant for 'A3.5 Other loans' apart from those mentioned in the Guidance?

A: The firm asking the question asked: would it include for example lending to subsidiaries or lending to corporate bodies?

The answers are as follows:

  • A3.5 Other Loans is described in the Guidance as:
  • Other loans refers to any lending secured on land and buildings outside of the UK, any loan for which security is provided other than by land and buildings, together with all unsecured loans (eg consumer credit, personal loans, or such loans to corporates).
  • Other loans here only has meaning in the context of the lines A3.2-3.4, that is, what loans are not included in A3.2-3.4 and hence would fall into A3.5.
  • However, since A3.2-3.6 is a breakdown of what would be reportable in A1.6 Loans to Customers (that is, A1.6 is the sum of A3.6 column 3 plus column 7) then it is important to consider what would be reportable against A1.6. Thus, if it would not be reportable against A1.6 then it would not be a candidate for inclusion in A3.5 (or indeed any of A3.2 to A3.4).
  • Thus, in addition to those items explicitly included in A3.5 guidance, this category would also include any other loans to customers.
  • Although we do not define customer, it clearly covers both individuals and corporate entities (since these are mentioned within A3.2-3.4 categories).

We think A3.5 would therefore also include such loans as:

  • intercompany loans, eg to subsidiaries
  • lending to financial or other institutions
  • potentially 'loans' as part of a firm's liquidity portfolio (but in terms of A1 and A2 parts of the balance sheet, such 'loans' may be reported within a category other than A1.6, and so may not be relevant to A3.5
  • but is provided that none of the above are caught by A3.4 Other secured loans (ie secured on UK land & buildings).

Q: Could you provide advice on the treatment of Deed Safe Accounts with regard to the MLAR please?

A: The firm asking the question noted: We have Deed Safe accounts characterised as follows:

  • there is a minimal balance of £1 owed by the customer
  • as lender, we retain the deeds for safekeeping
  • the mortgage is not regarded as redeemed 
  • we still have a charge on the property

As the mortgages are not redeemed we are assuming they should be included in the reporting. If they are to be included do we need to identify purpose, impaired credit history and interest details etc where required in the reporting? Interest is not currently charged on these accounts, which we think will be problematic in section D.

On 'deed safe accounts' we advised as follows:

  • We mention these in section F at section 2.3 (v), as being items to ignore when compiling arrears figures;
  • That could be taken to imply that they are reportable as lending in section D and E etc.;
  • Whilst such accounts might, on a strict legal interpretation by the lender, still constitute mortgages and hence be deemed to be reportable as such in the various MLAR analyses (eg as part of residential lending to individuals), we think an alternative approach is more applicable;
  • Given that these types of cases are, for all practicable purposes, no longer active loans and in many instances also no longer subject to any applied rate of interest, we think it makes more sense to treat as 'other loans”'(ie as reported in A3.5 and B2.5 only). This then avoids the main figures for mortgage lending, especially 'numbers of loans' in section E of MLAR, being distorted and in effect giving rise to an implied average loan size that is likely to be significantly understated.
  • However, since the Guidance Notes do not explicitly cover the reporting of 'deed safe accounts', then a firm could adopt either approach. Our preference though would be to see such accounts treated as 'other loans'.