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The following examples (M, N & O) apply to banking companies which each have a 12 month accounting period from 1 January 2015 to 31 December 2015

This is the most straightforward case, like PPI, where the issue has been ongoing for some years and continues in the year.

Example 1

Bank M has provision of 拢1bn brought forward. It re-assesses this at quarter end dates as follows:

• 31 March: 拢150m is paid out, thinks remaining liability is 拢850m, no expense recognised (carrying 拢850m)
• 30 June: Further 拢100m paid out, thinks remaining liability now 拢1bn, so expense of 拢250m recognised (carrying 拢1bn)
• 30 September: Further 拢250m paid out, thinks remaining liability 拢1bn, so expense of 拢250m recognised (carrying 拢1bn)
• 31 December: Further 拢150m paid out, thinks remaining liability 拢800m, so income of 拢50m recognised (carrying 拢800m)

At face value, total expenses in pre-commencement period are 拢250m; post-commencement 拢200m. This seems like a reasonable approach.

Example 2

The Financial Conduct Authority (FCA) makes a PPI ruling on 1 September and says that banks have to pay out in regard to a new set of cases. The facts are the same as in Example 1.

Bank N has provision of 拢1bn brought forward. It re-assesses this as follows:

• 31 March: 拢150m paid out, thinks remaining liability is 拢850m, no expense recognised (carrying 拢850m)
• 30 June: Further 拢100m paid out, thinks remaining liability now 拢1bn, so expense of 拢250m recognised (carrying 拢1bn)
• 1 September: FCA rules. Bank has paid out further 拢150m but ruling means it thinks it is now exposed to 拢2bn further, so recognises expense of 拢1.15bn expense (carrying 拢2bn)
• 30 September: Further 拢250m paid out, thinks remaining liability 拢2bn, so expense of 拢250m recognised (carrying 拢2bn)
• 31 December: Further 拢150m paid out, thinks remaining liability 拢1.8bn, so income of 拢50m recognised (carrying 拢1.8bn)

拢250m of the total expenses for the period are pre-commencement and 拢1.35bn (拢1.15bn + 拢250m - 拢50m) is post-commencement. Time apportionment would not give a just and reasonable result, as at the commencement date the bank did not have a constructive or legal obligation in respect of the additional claims.

In this example Bank N anticipated having to pay out an additional 拢1.15bn following the FCA ruling on 1 September.

If instead, Bank N received a claim for 拢1.15bn in respect of a new conduct issue on 1 September this would be treated in a similar way to the additional claim from the FCA ruling.

Alternatively if Bank N received a new claim in respect of an existing conduct issue on 1 September, the bank does not need to allocate the expense to the date of the claim. Time apportionment will give a just and reasonable result.

Example 3

Bank O discovers at (i) 31 January, (ii) 1 July, (iii) 31 December that it has an issue, and estimates its exposure to be 拢1bn.

If we follow the principles at BKM209100, then the 拢1bn estimated at the given date should be allocated to the appropriate period. In the case of (i) and (ii), this amount will be subject to further revisions once at quarter end reporting dates and year end.

In the case of (iii), judgement is required. If the bank discovers the issue because of a ruling or other concrete event, then it seems right that all of the expense is allocated to post-commencement and disallowed. But if the bank discovers the issue in the course of compiling its accounts, and it reflects compensation paid throughout the year, then it seems that time apportionment would deliver a just and reasonable outcome.