All firms which are regulated by the PRA and/or FCA will be affected by issues relating to COVID-19. In many cases, issues faced by firms mirror those of businesses generally, but regulated firms also have to consider the impact on their regulatory obligations.
Planning and Risk Mitigation
Firms are expected to consider the risks to their business and their operations and plan accordingly. In a fast moving situation it is impossible to anticipate all risks, but firms should have in place business continuity plans which will need to be modified as events develop. Where firms are modifying how they operate (for example through more home working) or different delivery channels to customers, this will present additional risks. These may include additional cyber security risks, fraud risks, or the inability properly to provide a service to customers.
Prudential and Liquidity Risks
For many firms, COVID-19 presents an existential crisis, with an increasing risk of bad debt, a fall off in business or for particular sectors, such as insurers, an increase in liabilities. Firms are expected to actively manage their financial resilience and liquidity in this respect the FCA has confirmed that capital and liquidity buffers are there to be used in times of stress and firms who have been set buffers can use them to support the continuation of the firm’s activities. Firms that are in difficulty must notify their regulator immediately.
Meeting obligations to customers
The FCA has announced that it expects firms to continue to meet obligations to customers – including treating customers fairly and adherence to applicable delivery standards. The FCA believes that there is sufficient flexibility in its rules to enable firms to modify how they deliver services to customers. Where firms are unable to comply with their obligations (for example in complying with time limits for dealing with complaints), they should be transparent with customers in explaining the delay and keep the FCA informed. The FCA has said that it understands the pressures firms are under. Our expectation is that as long as firms act in good faith and are transparent the FCA will be sympathetic.
There are particular risks for firms operating in the financial markets. As firms move to home working and alternative sites, they need to consider how control arrangements will operate in changed circumstances. The FCA still expects firms to record calls, but accepts that in some circumstances this might not be possible. Again, the key message is that firms should keep the regulator informed and updated and mitigate risks, including cyber risks arising from remote working, where possible.
Extreme market volatility can present opportunities for traders but also increase the risks of abuse. In most cases traders employ legitimate strategies to take advantage of those opportunities. However, where markets are fluctuating widely and price-sensitive events take place multiple times daily the opportunities for market abuse or insider trading increase and the ability to detect that abuse is reduced. Down the line, such abuse may give rise to significant reputational as well as regulatory issues.
The FCA expects firms to continue to take all steps to prevent market abuse for example by employing enhanced monitoring or retrospective reviews where necessarily. The FCA has said that it will continue to monitor and if necessary take action.
Regulatory Change Programme
In order to devote resource to dealing with the COVID-19 response and to alleviate pressure on firms, the FCA has announced that it is postponing or delaying non-critical activity. This includes extending the closing date for responses to a number of consultation papers until 1 October 2020 and rescheduling other planned work. The FCA has also scaled back its programme of routine business interactions with firms.
Supervisory Action and Enforcement
The FCA has confirmed that it will continue to intervene to protect consumers and the markets. If conditions deteriorate then we anticipate that the number of occasions where the PRA or FCA have to intervene will increase. We also anticipate that interventions will include enforcement where the primary purpose is to intervene to protect consumers or the markets, particularly where redress is an important objective of the regulator.
In contrast, we would expect a temporary reduction in the number of referrals to enforcement where the objective of the enforcement is punitive rather than remedial, particularly where resources of the firm are under stretch dealing with COVID-19 issues. In some cases this may mean enforcement is deferred rather than avoided.
The FCA and PRA have made no announcement regarding cases currently in enforcement. However, our experience is that notwithstanding practical difficulties, cases are being actively progressed. Nevertheless, the regulators' principal investigation methods involve the holding of compulsory interviews and the obtaining of documents and information through requirement notices. Under current circumstances, the regulators are likely to face practical difficulties in continuing to conduct interviews, and investigations are likely to be delayed. Whilst the provision of documents and information doesn’t present the same problems – in circumstances where key staff have to work from home and may be fire-fighting other issues - it is likely that extensions to deadlines will be necessary. We anticipate that the PRA and FCA will continue to progress cases which have reached the disciplinary stage, including where necessary holding remote meetings and hearings through use of technology.
Advice to firms
Indications are that the PRA and FCA will be sympathetic to the problems firms face in dealing with the challenges of COVID-19. However, there are some key expectations:
- Firms need to maintain strong governance controls and manage the risks to their employees, customers and the market.
- Firms have to manage their financial resilience and liquidity and report to the regulators as soon as they are in difficulty.
- Firms need to be clear and transparent with customers and the regulators.
- In making alternative arrangements for working or trading (eg from alternative premises or using different delivery channels) firms need to consider the additional risks (including regulatory risks) and plan accordingly.
- Firms need to have an effective control framework in place to deal with home-working and other alternative methods of delivery. Where this is not possible the regulator should be informed and the risks mitigated as far as possible (eg through enhanced monitoring).
- Firms need to be alive to the additional risks in trading in a volatile market. In appropriate cases firms may need to employ additional monitoring and controls to mitigate those risks.
- Regulatory obligations and reporting requirements continue to apply through the current crisis unless the FCA or PRA provide express dispensation. For example the FCA has announced that it is allowing listed companies an extra 2 months to publish their audited annual financial reports. Firms will need to comply with those requirements - although the regulator is likely to be sympathetic where firms face practical difficulties and the firm is open and transparent with the regulator
Practical guidance for COVID-19
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