Credit Risk Questionnaire

Section 1 Contact Information To be completed by all credit institutions that have exposure to credit risk. If you do not provide lending facilities please return form appropriately annotated Not applicable 1.1 Licenceholder Name and Address

Name of Licenceholder Address

1.2

Please give the name and contact details of two individuals who will be able to assist in the event of queries. First Contact Second Contact

Name Position Telephone Fax E-Mail address

Should you have any queries concerning the completion of this questionnaire, please contact the Credit Risk Project Coordinator, David Clucas, at the Financial Supervision Commission on 689316, or e-mail david.clucas@fsc.gov.im or nick.sheard@fsc.gov.im Page 1 of 15

Section 2 Background

2.0 a) b)

Lending Book: Please provide a copy of your most recent internal audit credit review. Date of last review (DD/MM/YYYY) How often do internal audits take place in relation to credit risk/ lending? //

2.1 a) b) c) d)

Total advances (in 000s Sterling equivalent) 31/12/2002 31/12/2003 31/12/2004 Forecast 31/12/2005

()

2.2 a) b) c) d) e) f) g)

Principal Types of Lending (in 000s Sterling equivalent) Mortgage - residential Other property related including buy to let Leveraged or geared lending including capital release schemes

()

2.3

Breakdown of lending portfolio as a % as at 31st December 2004 (in 000s Sterling equivalent) $ ()

Category: a) b)

Government Commercial (Secured)

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Section 2 Background
2.3 c) d) e) Breakdown of lending portfolio as a % as at 31st December 2004 Commercial (Unsecured) Personal (Secured) Personal (Unsecured)

Totals of each as %

2.4.1

Mortgage Lending:

What is the average LTV of a loan secured by a residential property? Owner occupier (if available) What is the average LTV of a loan secured by a residential property? Buy to let (if available)

2.4.2 a) b) c) c) d)

Leveraged or Geared Lending facilities: If you provide leveraged or geared lending please provide the following information: Minimum LTV Maximum LTV Covenant Test - First Covenant Test - Final How often are these monitored? % % % %

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Section 2 Background

2.4.3 a) b) c) d) e) f) g) h)

Introduced business Is introduced business accepted in respect of mortgage business? Is introduced business accepted in respect of providing geared lending arrangements or a capital release against investment bonds? Is this on the basis of a fixed fee? Is the interest margin ever shared with the Introducer? Is the share / split arrangement transparent to the customer in respect of any arrangements? Are regulated mortgage contracts are sold in UK? Has the institution registered with the FSA in UK in respect of the above? Is any other type of introduced business accepted (if yes please insert in 3.9)

Yes

No

2.4.4

Cash backed arrangements: Approximately what % of the lending book consists of cash backed arrangements?

2.4.5

Syndicated Arrangements:

Yes

No

Are facilities managed on behalf of any third party?

Approval process / discretionary powers: Please provide separately a breakdown of all sanctioning authorities. Note: Sanctioning authorities should show up to what level a member of staff can lend before they have to refer & who is responsible for approval over their approved limit (role). 2.5

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Section 2 Background

2.6 a) b) c)

Approval Process: Are sanction levels reduced/ treated differently with regard to new business? Are procedures in place to ensure that people making credit decisions have no conflict of interest? Is there a process in place to report any unauthorised borrowing above individual levels?

Yes

No

2.7 a) b) c) d)

Staff Experience & Capability: Do relevant staff receive training to provide lending services? Are staff that provide lending also responsible for arranging security? Are staff required to sit professional examinations? Are staff that manage customer relationships provided with discretion to provide advances?

Yes

No

Half Yearly

Annually

Qtrly

2.8

Frequency of Training:

a) b) c) d)

Various aspects of the credit risk process Credit Policy Money Laundering & KYC training Complaints and Data Protection training

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Other

Section 3 Control & Monitoring

3.0 a) b) c) d) e) f) g) h) i)

Control: In terms of key controls please indicate on the matrix below how often reports are produced on the following: Out of order positions Delinquent or dormant accounts Asset Quality reports Credit ratings reports Large payments Accounts with large turnover Account/ Limit reviews Details of all limits marked Total Asset Book

3.1 a) b) c) d)

Control - continued. Are reports compiled: Directly from the mainframe computer? Produced from other system data and entered into a spreadsheet? Manual process? Other? (Pleases specify on 3.9 if appropriate)

Yes

No

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producedNot

Weekly

Monthly

Daily

Other

Section 3 Control & Monitoring

3.2

Monitoring: Please indicate how often the following tasks are performed. (Whilst reports may be produced in Section 3 this area is designed to ascertain how often some defined aspects are reviewed) Out of order positions Asset Quality trends Review of sanctioned facilities (within approved discretions) Exposure positions re sector/ type of lending Loan arrears Potential bad debts / provisions Credit Policy monitoring Credit policy review

a) b) c) d) e) f) g) h)

3.3 a)

Responsibility for credit monitoring: Who performs the regular control review process? (Role) Who performs the regular monitoring overview process? (Role) How often does the most senior manager review the monitoring process?

b)

c)

.4 a) b) c) d)

Provisioning process: If there are any general provisions under IAS principals what are the current level as a % of total book? What are the current level of specific provisions as a % of total book What is the current level of bad debts as a % of total book? How do provisions compare with 18 months ago as a %? +/(-)

3.4.1

Provisioning process - arrears

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applicableNot

Weekly

Monthly

Dailey

Other

Section 3 Control & Monitoring

When is an account deemed to be in default/ arrears?

3.4.2 a) d) c) d) e) f)

Provisioning process - general Are there any specific policies in place in respect of problem advances, including provisions? Have any specific provisions been made for misselling where there is an underlying loan? Is any information maintained for the number of loans in arrears that have subsequently been rescheduled? Have any exposures that have been written off been recovered in last 18 months? Is there any ongoing litigation where a provision has not been made? Have any specific provisions been made against a loan type? (If yes please insert details in 3.9)

Yes

No

3.6 a) 3.5 b) a) c) b) c) c) d) e)

Collateral/ security: Are there any procedures to confirm that security is in order prior to release Documentation: of funds? Is there a opinion ever obtained review security documentation periodically? a legal procedure in place to in respect of any arrangements? Y/N Are details of insurance cover obtained for property related exposure? (If yes please provide details when this would occur in 3.9) (If details of insurance cover are obtained in respect of other assets please explain) Is a facility letter prepared for all advances? Who prepares security documentation? (Position) Is this a fixed template? Who reviews security documentation? (Position) Is the efficacy of any of your products at risk from specific changes in the legal, fiscal or regulatory requirements of other jurisdictions? (If yes please insert details in 3.9)

Yes Yes

No No

3.7 a) b) c)

Other: Does the credit institution lend in any circumstances where interest is paid less frequently than quarterly? (If yes please provide details in section 3.9) Is there a formal complaints procedure in place for lending related issues? Does the Bank / business unit have any responsibility for credit card debts?

Yes

No

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Section 3 Control & Monitoring

3.7 d) e) Other: Are any facilities managed on behalf of any third party including Group? Does the credit institution provide equity release/ reversionary finance to the over 60s Yes No

3.8

Risk Profile:

Yes

No

Are your credit risks managed and controlled from the Isle of Man?

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Section 3 Control & Monitoring

3.9

Other information: Where there was insufficient room in previous sections or if there is any some other information you think is relevant please advise below:

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Section 4 Corporate Governance

4.0 a) b)

Board Overview: Does the Board review credit policies? Is there a separate credit committee with delegated responsibility?

Yes

No

4.1 a)

Where is the banks credit committee located? Isle of Man, or other (If other please specify)

4.2

Review of policies & procedures: How often are the following areas reviewed?

a) b) c) d) e) f) g)

Large credit risk reports Credit Policy Individual sector / customer exposure Individual Lending discretions Provisioning & Bad debts policy Lending related complaints Competence and training of personnel

4.3 a) b) c) d) e) f) g)

Credit Risk Credit Policy: Does credit policy cover: Loan grading and risk classification? Large exposure limits for loans by Region or individual countries? Large exposure limits for loans by Economic sector? Large exposure limits for loans by Type of client? Groupings/Related /connected party lending? Collateral, and when this should be taken? Minimum interest margin per sector?

Yes

No

N/A

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(specify)Other

Half Yearly

Monthly

Qtrly

Section 4 Corporate Governance

4.3 h) i) j) k) Credit Risk Credit Policy: Does credit policy cover: Covenant adherence? Guarantees and other contingent liabilities? Currency exchange risk? Complaints procedure re lending related products? Yes No N/A

4.4 a) b) c) d) e)

Other: If Lending Management for the bank is performed outside of the Isle of Man are the appropriate legal agreements in place? If Credit Management is performed for other parts of the Group (different entity) and/ or 3rd parties, are the appropriate legal agreements in place? Is the other entitys regulator aware of the arrangement? Has a disaster recovery plan been agreed? If yes has it been tested?

Yes

No

Thank you for completing this questionnaire

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Section 5 Guidance notes

Guidance notes for completion of Credit Questionnaire
If you do not provide Lending services then this questionnaire does not apply but to enable us to keep a track of responses please return the form appropriately annotated not applicable. It is also not required in respect of interbank placements and deposits.

The purpose of the questionnaire is to provide a high level overview of a Licence holders attitude to credit risk. Whilst every effort has been made to keep the questionnaire as simple as possible it is accepted that some institutions may have lending responsibilities split between different departments. In these cases it might actually be easier for the institution to provide a structure chart & a broad overview to support answers to some of the sections as detailed below. The intention is that once the information has been assessed a focus visit will follow and the aim is to keep this to a day, or day and a half maximum. With this in mind it would be appreciated if a consolidated picture could be presented wherever possible. The questionnaire is intended to be self-explanatory but the following notes are to provide some guidance. Section 2: Background 2.0 It is quite possible where lending responsibilities are split across the business that more than one internal credit audit has been done and a copy of the relevant report may have already been sent to the Commission. Apologies if this is the case but it would be extremely useful to have a copy of the latest internal credit audit reports for the purpose of this exercise. The background information will provide an overview of the organisation and the depth of the review process. 2.1 The data for the completion of the questionnaire should be 31st December but if your accounting period is different please provide this information instead. 2.2 There is a perception that a few areas are dominant in the lending arena and this section is designed to ascertain exposure to these and there are spaces for including other types of significant exposures, if applicable. (See also 2.4.1 2.4.3). 2.3 This is designed to show how the lending book is composed between primarily commercial and personal and also currency exposure. Column 4 in brackets is designed for any other material currency exposure and if more space is required provide brief details in 3.9 and we will discuss. For purposes of this (and provided management information permits) put buy to let mortgages in commercial. 2.4.1 This should be the average LTV of a residential mortgage advance for owner-occupier & buy to let if available. 2.4.2 The minimum and maximum LTV should be provided from cases agreed over the last 6 months. There may also be a range of covenant tests in respect of various schemes. Provide the parameters that apply to your current scheme but if there is material exposure elsewhere please provide brief details in 3.9 2.4.3 It is expected that most introduced business will be mortgages, both buy to let and owner-occupier, plus geared facilities that includes traded endowments and capital releases against investment bonds. If introduced business in respect of capital releases or reversionary advances to the over 60s are provided, and these are material please advise details in 3.9. We are aware that some licence holders have registered with the FSA in order to promote
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Section 5 Guidance notes

regulated mortgage contracts in the UK and expect to be will be liasing with them at some stage in respect of this activity. 2.4.4 / 2.4.5 If cash backed or syndicated arrangements are provided to group or beyond it would be expected that there is a service level agreement in place. 2.5 With some of the larger institutions there may be separate reporting lines in respect of different parts of the organisation and it might be easier to provide this information separately. As the note advises, the purpose of this is to understand the hierarchical structure and who takes responsibility for approval over a prescribed limit. This should include on and off Island sanctioning levels. 2.6 If there are exceptions because different parts of a group deal with matters in a different manner then annotate the box for the aspect that would normally apply. This will be discussed in more detail if necessary as part of the visit programme. 2.7 / 2.8 This is intended to establish the norm and a broad overview only. It is accepted that some staff will be qualified as a result of many years experience. Section 3: Control & Monitoring 3.0 3.3 Some reports may be produced more often than one of the frequencies mentioned, in which case annotate more than one box. There may be systems in place that enables monitoring to be done by someone different to the person who actions the reports. This may be done remotely and should be evidenced by an audit trail. 3.4 Under International Accounting Standards (IAS) principles a general provision should only now be made when there is historic data or other business reason to justify, consequently the Commission would expect to see information to support any significant alteration from any previous year. Specific provisions could be against a customer or group of customers where normal avenues of recovery suggest there may be a shortfall. This is required as a percentage. 3.5 Different organisations have different policies when it comes down to a legal opinion may be requested. Whilst a yes/no option does not give any scope to advise that this is sometimes obtained - it is the norm that we are looking to and this will be picked up later from a testing exercise later on. Example: Where borrowing has been agreed for a Company / Trust in one jurisdiction for the liabilities of a Company / Trust / individual in another and where the security is, say an investment bond we would like to establish if a legal opinion would / would not be considered. 3.7 Other aspects that are considered important as they could have a material affect on a licenceholders operations. Section 4: Corporate Governance This is designed to ascertain if appropriate control and governance is exercised.

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Section 5 Guidance notes

If there is any aspect that has not been covered in these notes please telephone David Clucas on 689316.

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