Operational Risk - Refund of interest and fees

Q&A 5261 refers to a loss from an operational risk event, such as execution error, that is recovered within a certain timeframe, i.e. a loss with subsequent recovery. As stated in that Q&A, such loss events should be reported in COREP C17.01 in the reporting period when they are recognised in the P&L financial statement. If a recovery of that loss, total or partial, occurs in the same reporting reference period or afterwards, such recovery should be reported separately in the specific COREP C.17.01 item, depending on the type of recovery (i.e. direct loss recovery or recovery from insurance and other risk transfer mechanisms).  The oprisk event indicated in this question is different from the previous one, since it is an improper “operational risk gain”, followed by a pertinent loss. Such events are attributable to the so-called “timing losses”, which are defined as:  According to CDR (EU) 959/2018, Article 2(14), the “negative economic impact booked in a financial accounting period due to an operational risk event impacting the cash flows or financial statements of previous financial accounting periods”. According to Article 22(1)(f) of that Regulation, such losses should be included in the scope of operational risk loss, where they span more than one financial accounting year and give rise to legal risk;  Therefore, such loss events should be reported in COREP 17.01 only if the recognition of the loss in the institution P&L statements (e.g. the outflow of the refund to the customers) occurs in a financial year subsequent to when the operational risk event occurred and which caused an improper oprisk gain (e.g. the cash inflow due to incorrectly overcharged interest/fee). The loss amount to be reported should not be reduced of the, previously occurred, gain, which should not be considered as a recovery (e.g. the loss amount to be reported should be the outflow of the refund to the customer, including also any amount paid to compensate the customer for the incorrectly charged interest/fee, without netting it with the cash inflow due to incorrectly overcharged interest/fee).  Viceversa, when the refund to a customer that was overcharged due to an operational failure is provided in the same financial accounting year as the overcharge took place and thus no misrepresentation of the institution’s financial statements occurs, no operational risk loss should be reported in COREP 17.01.