Covid-19 – Overview of regulatory response

The regulatory landscape has been dominated by the coronavirus outbreak, market instability and the elaboration of an appropriate regulatory response.

It is clear that regulators in the UK are committed to do all that they can to support the economy and the firms they regulate and have taken a proactive approach in doing so. They are conscious of the impact of Covid-19 on banks and financial institutions, with the majority of regulators taking a pragmatic approach to their supervisory duties and postponing non-essential supervisory visits and reporting. They are also extending deadlines for responding to key regulatory consultations. Their aim is to ensure that regulated firms can focus on their customers, business and business continuity plans in the immediate future.

Similarly, the UK FCA published a statement on 21 March requesting all listed companies observe a moratorium on the publication of preliminary financial statements for at least two weeks. The FCA believes that the practice of issuing preliminary financial statements in advance of the full audited financial statements is adding unnecessarily to the pressure on companies and the audit profession at this moment.

The regulators will nevertheless expect firms to have contingency plans in place. Where the UK regulators are concerned, firms will need to follow regulatory expectations as set out in their recent publications or recommendations on operational resilience and inform regulators promptly of any difficulty in meeting regulatory obligations.

REGULATORY/POLICY RESPONSE IN THE UK

BANK OF ENGLAND AND PRA

Reduction of the countercyclical capital buffer rate by the FPC and other policy measures

To support further the ability of banks to supply the credit needed to bridge a potentially challenging period, the Bank of England’s Financial Policy Committee (FPC) has reduced the UK countercyclical capital buffer (UK CCyB) rate to 0% of banks’ exposures to UK borrowers with immediate effect. The FPC expects to maintain the 0% rate for at least 12 months, so that any subsequent increase would not take effect until March 2022 at the earliest.
In addition, the BoE’s new Term Funding scheme for Small and Medium-sized Enterprises (TFSME) will, over the next 12 months, offer four-year funding of at least 5% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate.

The BoE and PRA subsequently released a new statement cancelling the Bank’s 2020 annual stress test for the eight major UK banks and building societies to help lenders focus on continuing provision of credit to businesses and households. The biennial exploratory scenario (BES) timetable has also been amended with the liquidity exercise paused until further notice, and the responses to the BoE’s Climate Risk paper to be considered in the summer.

PRA expectations regarding dividend distribution and bonuses following FPC measures

The PRA expects firms not to increase dividends and other distributions in response to the FPC measures. The PRA expects firms to identify a Senior Manager to lead the effective discussion, oversight, and scrutiny of any proposals relating to dividend distributions or share buybacks relating to the reduction of the UK countercyclical buffer rate and to discuss these matters with the PRA if called upon to do so.

Similarly, the PRA expects the Chair of the Remuneration Committee or the Senior Manager overseeing the implementation of the firm’s remuneration policies and practices, to take reasonable steps to ensure that any proposals to amend bonus pools directly or indirectly as a result of the reduction in the UK CCyB rate are discussed, recorded and, if appropriate, challenged by the RemCo and board as a whole and are consistent with the maintenance of a sound capital base.

FCA

FCA guidance to firms on their coronavirus response

The FCA is closely monitoring the coronavirus situation and taking any steps necessary to ensure customers are protected and markets continue to function well, working closely with the Government, the Bank of England, the Payment Systems Regulator and firms. The FCA is reviewing its work to delay or postpone activity which is not critical to protecting consumers and market integrity in the short-term and has extended the closing date for responses to open consultation papers and Calls for Input until 1 October 2020. 

The FCA expectations cover, among other things:

• Contingency plans to deal with major events - This includes firms’ assessments of operational risks, the ability of firms to continue to operate effectively and the steps firms are taking to serve and support their customers.
• Market trading and reporting - Firms should continue to record calls and make the FCA aware if they are unable to meet these requirements. Firms need to consider what steps they could take to mitigate outstanding risks if they are unable to comply with their obligations to record voice communications. This could include enhanced monitoring, or retrospective review once the situation has been resolved.
• Submission of regulatory data on market trading - in case of difficulty in submitting regulatory reports, firms should maintain appropriate records during this period and submit the data as soon as possible. Firms should not unnecessarily delay these submissions.
• Taking all steps to prevent market abuse risks, including enhanced monitoring, or retrospective reviews.
• Dealing with complaints promptly. Firms should aim to resolve any complaint within 8 weeks (15 days for payments firms). If they cannot, they should write to the customer explaining why.

The FCA also announced bans on short selling for a list of securities on several trading days. The list of securities included shares of large Italian, French and Spanish companies among others.

HIGH LEVEL IMPACTS

UK regulators are willing to exercise a degree of regulatory forbearance to allow firms to focus on their business continuity plans and on continuing to service their customers and clients in these unprecedented times.

It is however clear that regulators expect firms to have tested their contingency plans and not take advantage of some of the prudential measures designed to keep the economy going for a different purpose than they are intended for and will be closely monitoring firms practices and behaviours in the coming weeks and months.

Firms will need to carefully review their governance processes, business continuity plans and compliance and risk policies in view of the adjustments detailed in this note and get into the habit of communicating any potential difficulties in meeting their regulatory obligations to their usual supervision team.

Regulators have also committed to keeping these measures under review and are likely to publish more changes to their expectations and regulatory practices as the situation evolves. It will therefore be important for firms to closely monitor developments and keep their Boards and Senior Managers fully appraised on these changing regulatory expectations.

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