PRA Guidance - Arena Holdings

12 months on from the Arena Holding closure that impacted the entire asset finance industry, the PRA have released a report highlighting the main areas of concern that allowed the impact to become so large and run for so long. This article provides a summary of the PRA report on Arena Holdings Group and potential solutions that can be put in place to cater for many suggestions made by the PRA report.

Letter Overview

The large number of UK lenders with connections to the failed Arena Holdings Group, and the total exposure across all the lenders being disproportionate to the size of Arena, raised questions around the robustness of banks’ credit risk management frameworks and controls in the asset finance sector.

Whilst the report was intended as a review for Banks that were affected by Arena, it also provides a detailed view for all lenders to improve credit risk policies across the Asset finance industry.

The report identified four key control weaknesses:

1. Risk appetite in relation to Single Name Concentration (SNC) risk

2. Asset Inspections (AI)

3. Supplier vetting

4. Industry initiative on the creation of an asset register

Risk appetite in relation to Single Name Concentration (SNC) risk

The report states that many lenders have a 'one size fits all' approach to managing risk appetite. Lending limits are set based solely on the customer without considering other factors. Most lenders had a set amount they were willing to lend regardless of the type of assets and other key variables.

Asset Inspections

The report suggests that asset inspections taken by most lenders were inadequate. Issues with the inspection process, overview and follow-up actions meant that Arena could bypass asset inspections, stating that the assets were unavailable on a given day to inspect.

Supplier vetting

The report suggests that other factors should be considered when reviewing a supplier. Understanding the supplier’s size against the number of sales and whether the manufacturer authorised them provides additional risk factors and mitigants that should be considered.

Industry initiative on the creation of an asset register

The report made a clear suggestion that banks want an industry-wide asset register. The register should be used by all, and it would need to be non-vehicle centric. Having this in place would ensure that no duplicate or false registrations occur

Banks recognised the need to engage on an industry-wide basis for the creation of an asset register which would ensure authenticity of assets as securities

Report Summary

The report is clear that the key themes that should be considered are:

• Multiple data sources should be used to understand the risk level of a contract and be used to trigger further investigation.

• There is a disproportionate focus on KYC data over other data in risk assessments.

• Silos of information need to be removed from the asset finance industry and between teams within an organisation.

• Industry-wide innovation is required to tackle industry-wide problems for the benefit of all.

• Risk management processes such as asset inspections and supplier approvals are standalone and do not provide the required outcomes/actions.

Overall, it is evident that to tackle fraud is not to tackle one problem. Instead, they are intertwined and need to be addressed as such. No recommendation is shown to be more important than the next in the letter. Finally, solutions should work together to mitigate the actual risks, and the cost should not outweigh the potential loss.

The Open Assets Solution

At Open Assets, we focus on providing the asset finance industry with technology that enables you to understand your assets to mitigate risk and increase process efficiency.

fraud control and reporting processes require further enhancements by leveraging data, alerts and systems.

We have been working on product solutions, like those suggested by the PRA, as crucial building blocks for the Open platform. A combination of our Asset Management, due diligence, inspections and valuations products provides an easy-to-implement solution for almost all the asset-related suggestions made in the report.

Identity

The ability to identify any asset, regardless of type and organisation, is the backbone of the Open Assets platform and products. Uniquely identifying all assets within an organisation ensures that silos of data can not grow, catering for asset attachments and components where a financed asset may have multiple parts that should be considered together. This same technology powers our ‘Register’ product, which ensures that any asset is identifiable by all organisations in the same way and provides the foundations for a robust asset register.

Learn more about how we uniquely identify every asset here

Asset management

Built using the identity product logic, the core platform provides a way to store all asset-related information in one place. Providing a single location to assess assets, manage tasks and store data ensures that everyone has the same view of an asset. Ensuring everyone has the same view of the asset means that we build upon the knowledge we already have instead of starting fresh with each interaction.

To understand how our Master Asset Management solution provides the base for understanding your assets here.

Due diligence

The due diligence reports provide asset assessments from onboarding through to asset disposal. By scheduling assessments (monitoring), alternative data will identify risk changes within a contract. Use triggers such as annual test failures, licensing changes and export markers to identify any potential increased risk warnings on a contract that can be mitigated using the platform.

You can learn more about the various due diligence reports available here.

Inspection

Our inspection tool provides guidance for inspections to be carried out from within your organisation or by other trusted parties. Focussing on understanding the asset ‘today’, it offers easy to use inputs alongside previously known data about the asset to increase efficiencies.

By creating meaningful actions from the Inspections, risk warnings and mitigants are visible both for the asset and the party. Never lose historical data between inspections and ensure one view of an asset is built upon.

You can learn more about our Inspection tool here.

Open Assets Portfolio

Whilst our products tackle different parts of the issues identified, working together, they deliver a simple, effective solution that also creates efficiencies. The Open Assets Portfolio product bundle shows how our products work together to provide cost-saving efficiencies for Funders. The best part is that it’s easy to implement and requires no additional integration to get started or for the products to work together.

You can read more about the Open Asset Portfolio bundle here.