CM-1.2.22
An effective internal control system for
(a) Measures to comply with applicable laws, regulations and internal policies and procedures;
(b) Measures to provide oversight of the integrity of information used and to reasonably ensure that the allowances reflected in the licensee’s financial statements and its supervisory reports are prepared in accordance with the applicable accounting framework and relevant supervisory guidance;
(c) Well-defined credit risk assessment and measurement processes that are independent from (while taking appropriate account of) the financing function and include:
(i) An effective credit risk rating/ scoring system that is consistently applied, accurately grades differing credit risk characteristics, identifies changes in credit risk on a timely basis, and prompts appropriate action;
(ii) An effective process which ensures that all relevant/ reasonable and supportable information, including forward-looking information, is appropriately considered in assessing and measuring expected credit loss (‘ECL’). This includes maintaining appropriate reports, details of reviews performed and identification and descriptions of the roles and responsibilities of the personnel involved;
(iii) An assessment policy that ensures ECL measurement occurs not just at the individual credit exposure level, but also when necessary to appropriately measure ECL at the collective portfolio level by grouping exposures based on identified shared credit risk characteristics;
(iv) An effective model validation process to ensure that the credit risk assessment and measurement models, including ECL models, are able to generate accurate, consistent and unbiased predictive estimates on an ongoing basis. This includes establishing policies and procedures which set out the accountability and reporting structure of the model validation process, internal standards for assessing and approving changes to the models and reporting of the outcome of the model validation (see also Paragraph CM-1.4.10);
(v) Clear formal communication and coordination among the licensee’s credit risk staff, financial reporting staff, senior management, the Board and others who are involved in the credit risk assessment and measurement process for an ECL accounting framework, as applicable (e.g. evidenced by written policies and procedures, management reports and committee minutes); and
(d) An internal audit function that independently evaluates the effectiveness of the licensee’s credit risk management framework, and in particular, assessment and measurement systems, models and processes, including the credit risk rating system. Refer to HC-6.5.
Added: June 2022