Risk & Compliance Morris Dancing, the Bubonic Plague and IFRS 9

Picture of Edinburgh
Dec042017

Within walking distance of Old Town and next to the city’s largest green space, the University of Edinburgh welcomed a very international and highly skilled group of data scientists to discuss the hottest topics in credit scoring and related topics at the Credit Scoring and Credit Control Conference XV. It was a natural fit for FICO’s analytics leaders to be invited speakers — perhaps less obvious was the acceptance of my paper’s topic, IFRS 9: Comply and Compete.

This session (no doubt to the disappointment of some but I hope to the relief of others) broke the mould and focussed more on the business impacts of this critical change in accounting standards, rather than the often highly technical modelling approaches required to help achieve compliance.

IFRS 9 changes the accounting recognition of loan impairment from an “incurred” to an “expected” loss basis, requiring new predictive models that bring the worlds of accounting and credit risk modelling ever closer together. IFRS 9 affects the financial impact of every credit decision across the customer lifecycle and also requires significant changes to key business processes such as budgeting, stress testing and capital planning.

Fully understanding these impacts will require not just innovative, granular and responsive models, but also powerful software, excellent data management and strong governance and coordination across many parts of the organization. FICO’s Impairment Management Solution addresses every aspect of this critically important problem.

IFRS 9 — Just Weeks Away

With the first January 2018 deadline just around the corner, we are seeing more and more organisations turn their thoughts from how to achieve compliance ahead of the deadline to how to remain competitive for the years to come after. The current impairment accounting standard (IAS 39) was introduced in January 2005, so it’s safe to assume that life under IFRS 9 is here to stay for at least a decade or more. Remaining competitive in the face of the additional capital constraints IFRS 9 imposes will require holistic solutions considering product design / pricing, underwriting strategy, credit line management and collections and recovery, all areas where FICO is poised to help!

I’ve always loved visiting Edinburgh so made sure to take time to enjoy the city as well during the three intense days of networking and thought-provoking presentations. I wandered the charming, crooked streets of Old Town and took time to learn about life in the city in the 17th century by taking “The Real Mary King’s Close” tour. The streets were crowded, unsanitary and dangerous back then – it’s no wonder that up to half the population perished from the 1645 bubonic plague epidemic. Quarantine methods were incredibly harsh but almost understandable in the face of such an uncontrollable plight. Who knows how many lives would have been saved with modern medical techniques and contagion modelling methodologies…

On the lighter side, the event organisers also hosted a delightful gala dinner with traditional Scottish cuisine and Highland Dancing for entertainment. Although I was disappointed to miss out on winning the clever quiz contest (sample question: Whose name comes next in this sequence? Richard, Robinette, Bruce, Arnold, Danforth), I enjoyed the meal and the time I spent in conversation with FICO attendees and other event attendees.

To learn more about this event and FICO’s participation please read this excellent article from Mark Thompson. For more on IFRS 9, see these posts by myself and my FICO colleagues.

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