COVID-19 UK: Financial Regulation – FCA are adapting the rule book, not throwing it out – Update


The FCA is facing a difficult balancing act. As the conduct regulator, and the prudential regulator to many firms, it is imperative that firms which the FCA authorise maintain high standards. This would traditionally be done by placing requirements on firms in terms of customer disclosures, regulatory reporting and stringent due diligence. However, the FCA also recognises that these firms' resources, both financial and personnel, may have been severely depleted by the ongoing COVID-19 pandemic.

In its 2020/21 business plan, published on 7 April 2020 but likely not implemented fully until the pandemic is over, the FCA highlighted that we are facing an unprecedented challenge. It notes that the current situation is unlike economic downturns of the past, nor is it like the shock of a natural disaster. The potential damage to the economy and to our financial systems is difficult to quantify.

Retail firms, in particular, may already be dealing with an increased number of customer questions, and staffing shortages. That, along with reporting and disclosure obligations which kick in when there are significant changes, may overwhelm firms. The FCA itself is undoubtedly also suffering from similar issues.

It is therefore unsurprising that the FCA has announced measures designed to support firms during this time, while requiring firms to continue to abide by the rules or at least the spirit of them. We discussed these measures in our previous update around the new financial reporting emergency measures agreed and announced by the FCA, FRC and PRA.

In a Dear CEO letter to firms which provide services to retail customers, the FCA has provided the following flexibility to firms:

  • Identity verification can take place remotely, via scanned documents, selfies, verification codes and other remote methods already provided for by the Joint Money Laundering Steering Group guidelines;
  • Regarding best execution, a grace period until 30th June for firms to publish RTS 27, RTS 28 and Article 65(6) reports;
  • For firms providing portfolio management services or holding retail client accounts that include leveraged investments, a relaxation on the depreciation notification requirements until 1 October 2020, where no enforcement action will be taken if the firm has issued at least one notification to retail clients in the current reporting period and provides general updates through its website; and
  • No enforcement action for firms which cease all depreciation reports to professional clients.

Notably, with regards to the best execution and depreciation notification requirements discussed above, the obligations remain; however, the FCA has stated it will not take enforcement action if these obligations are breached as long as the conditions discussed above remain. The FCA is also not amending the due diligence requirements, but reminding firms of methods for fulfilling these obligations through different methods.

We understand the FCA is also permitting firms to focus their decreasing call centre capacity on vulnerable customers, directing others to their website. Where staff are working from other locations, for example their homes, the firm should have systems in place to enable the maintenance or records.

The FCA has also provided information for funds, allowing firms to delay their annual and half-yearly reports and hold general meetings virtually. The FCA is also willing to accept electronic signatures on applications to authorise funds or approve changes to funds.

Further, the FCA is delaying the implementation of some of its policy statements and consultation papers, understanding that firms will not have the resources to dedicate to implementing changes or responding to consultations.

The FCA does acknowledge that there are areas where they will be less able to take immediate action, particularly when co-ordination with other governmental or European authorities is required.

In addition, the FCA has released a statement regarding the Senior Managers & Certification Regime (SM&CR). The regime already permits someone to cover the Senior Manager's position for up to 12 weeks without requiring authorisation by the FCA, where the absence of the Senior Manager is temporary or reasonably unforeseen. However, the FCA is allowing firms to extend this for up to 36 weeks, if the absence is a result of the current pandemic, and if the firm notifies the FCA. In addition, firms may furlough Senior Managers and that manager will maintain their approval.

The relaxation and flexibility of the rules and requirements discussed above, comes as the FCA is expecting certain firms, particularly providers of consumer credit products, to offer payment freezes and no interest overdrafts.

Firms are also able to take advantage of various government schemes to assist companies during this time. We discuss these further in our recent insights: COVID UK: Finance - Mind the Gap and COVID-19 UK: Technology - Government Assistance and Support for Startups and SMEs.

In one such scheme, the government is providing lenders with a government-backed guarantee for loans of up to £5 million made under the Coronavirus Business Interruption Loan Scheme (CBIL). However, lenders are unable to ask for personal guarantees for loans of up to £250,000. Any loans over that amount, the lender may at its discretion, ask for a personal guarantee but this must exclude the borrower's principal private residence and recoveries will be capped at 20% of the outstanding balance after business assets have been applied.

However, interestingly, the FCA has confirmed that while the loans that firms receive under the CBIL may be used for debt payments, they cannot be used to meet firms' regulatory capital requirements, as they do not meet the requirements. As many of the capital requirements stem from European regulations and directives, the FCA may be limited in its ability to make amendments to this policy. However, if firms are finding they are struggling to meet their capital requirements during this period, the FCA may be required to step in to protect consumers which may rely on these firms.

From the measures taken, it is clear that the FCA is reluctant to allow firms to breach their regulatory obligations. Where changes have been made, these have been to provide flexibility to existing measures or the timings of requirements, rather than absolving firms from their responsibilities.

It seems unlikely the FCA will permit any perceived breach of consumer protection measures. That being said, as the crisis continues and the economy suffers, the FCA may need to take more extreme steps.