As the number of cases of Coronavirus continues to rise globally firms are having to cope with an unprecedented situation. The impact on financial markets has been very significant, with market volatility continuing and the economic shock to businesses expected to be sharp and large, but hopefully temporary.
The UK financial regulators have taken prompt action as a result of the current situation, seeking to mitigate the negative impact of this economic shock for the financial markets, firms and customers. We expect further action as the situation develops and that there will be pressure from the industry for regulatory forbearance.
The Financial Conduct Authority (FCA) has issued an update on its website for firms stating that it is closely monitoring the Coronavirus situation and that it will take any steps necessary to ensure consumers are protected and that markets continue to function well. The FCA update provides guidance to firms as well as setting out the actions that the FCA is taking. A further update has also been issued by the FCA which provides specific guidance on mortgage payment holidays and repossessions.
On the 11 March 2020, the Bank of England announced a package of measures to respond to the economic shock caused by COVID-19 and the Prudential Regulation Authority (PRA) issued related supervisory guidance. Additional measures have since been announced which aim to alleviate operational burdens and provide much needed flexibility to firms and financial market infrastructures in the wake of the COVID-19 outbreak. The UK financial regulators will be updating and reviewing their guidance regularly in response to the changing situation.
In this update we summarise the guidance and measures recently announced by the UK financial regulators that we consider are of particular relevance to our private bank and wealth manager clients. This is a rapidly changing situation so please feel free to contact us if you have any queries.
Support for customers
The FCA expects firms to provide strong support and service to customers during this period, and to be clear and transparent. These expectations reflect the requirements of the regulatory system; pursuant to Principle 6, a firm must pay due regard to the interests of its customers and treat them fairly and Principle 7, a firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
In relation to consumers the FCA reminds firms that it expects them to use the flexibility provided in the FCA Rules to support consumers, taking customers’ individual circumstances into account. Examples given include, enabling consumers to access cash by waiving fees in relation to Individual Savings Accounts (ISAs) or allowing them to access term deposits early. The FCA still expects firms to respond to complaints promptly but to contact the FCA if they will not be able to.
The FCA expects firms to manage their financial resilience and actively manage their liquidity. Firms should contact the FCA immediately if they believe they will be in difficulty.
The FCA expects all firms to have contingency plans to deal with major events that have been tested and reviewed, and reminds firms of the joint Bank of England/PRA and FCA paper on operational resilience.
Firms are expected to take all reasonable steps to meet the regulatory obligations which are in place to protect their consumers and maintain market integrity. The FCA gives the example that if a firm closes a call centre, requiring staff to work from other locations, the firm should establish appropriate systems and controls to ensure it maintains appropriate records.
The FCA also states that it is proactively discussing with firms and trade associations the issues firms are facing and we recommend that you raise areas where the need for regulatory forbearance is most acute with your trade association or with us and we would be happy to pass on.
Under the Short Selling Regulation (introduced following the 2008 financial crisis), EU regulators and the FCA have the power to apply short or long term bans on short sale of shares and certain other financial instruments. The FCA’s position on whether to use its powers has been to assist other regulators and expects to continue to do so. The FCA has recently updated its website to alert firms to the restrictions imposed on the short selling of certain Spanish and Italian shares.
On 16 March ESMA announced that it temporarily requires the holders of net short positions in shares traded on an EU regulated market to notify the relevant national competent authority if the position reaches or exceeds 0.1 per cent of the issued share capital. In response the FCA has confirmed that it will apply this change in the UK. However, as this change will require changes to its technology to receive such data, firms should continue to report according to the previous thresholds until further notice.
Offsite working – recording and reporting
The FCA has noted that as firms are moving to agile working from home arrangements, they must consider the broader control environment. In relation to telephone recording, the FCA has said firms should continue to do so but it recognises that this may not be possible, and firms should let the FCA know if this is the case. In that situation, firms are expected to consider other measures to mitigate risks, for example, enhanced monitoring. Firms are also reminded that they need to continue to take all steps to prevent market abuse risks including retrospective reviews.
If firms have difficulty in submitting regulatory data, the FCA expects firms to maintain appropriate records during this period and submit the data as soon as possible.
Mortgage customers – payment holidays
The FCA noted that it was encouraged by the actions of some lenders who have granted flexibility on mortgage payments as a way of protecting consumers. Firms should in any event consider the particular circumstances of their customers and take a flexible and tailored approach suitable to each customer. Firms should also actively encourage customers to get in contact at the earliest opportunity if they think they are likely to have difficulties in meeting their mortgage commitments.
The Chancellor announced on 17 March that “for those in difficulty due to Coronavirus, mortgage lenders will now offer a three month mortgage holiday”. The Treasury paper published on 18 March confirmed that the government has agreed with mortgage lenders that they will offer repayment holidays. The paper also confirmed that emergency legislation will be taken forward so that landlords will not be able to start proceedings to evict tenants for at least a three month period.
On 20th March, the FCA issued new guidance which applies to all mortgage lenders, mortgage administrators, home purchase providers and home purchase administrators. The guidance is intended to have a broad remit and will also apply to authorised firms providing unregulated loans secured on land, such as buy to let loans. The FCA makes clear that this guidance applies in the exceptional circumstances arising as a result of COVID-19 and the resulting impact on the financial situation of customers, it is not intended to be relevant in other situations. The guidance builds on Principle 6 and MCOB requirements in relation to treating customers fairly, and acting honestly, fairly and professionally in accordance with the customer’s best interests.
The FCA guidance clearly sets out the FCA’s expectations on firms in relation to payment holidays for customers. A firm should grant a payment holiday for three months where a customer tells the firm they may experience payment difficulties in the current circumstances and wish to receive a payment holiday. Firms are reminded to raise the option of a payment holiday when interacting with customers. An affordability assessment is not required when granting a payment holiday in this context nor is there an expectation that firms investigate the circumstances surrounding a payment holiday request. Firms should explain the implications of a payment holiday to customers. The FCA guidance reminds firms that a payment holiday is just one option and firms can still offer other alternatives which may be more favourable to customers. The FCA has also confirmed that the guidance is relevant to customers regardless of whether or not they are in shortfall.
In addition, the guidance confirms that the account of the customer should not be recorded as having detrimental arrears and, accordingly, there should be no negative impact on the customer’s credit score because of the payment holiday.
In respect of repossessions the guidance states that firms should not commence or continue repossession proceedings against customers at this time irrespective of the stage that repossession proceedings have reached. Again, customers should be kept fully informed of the consequences of suspension of repossession proceedings. Finally, the FCA guidance warns firms that it will not hesitate to take appropriate action where necessary.
Delay of non-critical regulatory change and interaction
The FCA has said it is reviewing its work plans with a view to delaying or postponing activity which is not critical to its statutory objectives in the short term or relevant to the current situation and hence allowing firms to focus on supporting their customers during this difficult time. The FCA has also said it will scale back the programme of routine business interactions and it will only contact firms in relation to business critical matters and the current situation. The FCA has extended the deadlines for responses to open consultations until 1 October 2020 and is delaying the publication of certain other papers. We await further developments regarding regulatory forbearance.
The Bank of England and the PRA have also confirmed a review of their programme of regulatory change and that they will postpone non-critical work where appropriate. This includes the postponement of the planned joint Bank of England / FCA survey into open-ended funds until further notice as well as the postponement of supervisory programmes, (where appropriate), non-critical data requests, and on-site visits. Deadlines imposed by the Bank of England and PRA can also be postponed, where appropriate. The PRA has also extended the deadline for responding to certain open consultations until 1 October 2020.
The PRA has said it will review its approach for considering and processing applications for Senior Managers with a view to reducing the burdens involved during current events.
As of 11 March, the Financial Policy Committee (FPC) of the Bank of England reduced the UK countercyclical capital buffer rate to 0 per cent of banks’ exposures to UK borrowers (this had been 1 per cent and was due to increase to 2 per cent). The FPC expects to maintain the 0 per cent rate for at least 12 months.
PRA regulatory guidance
The release of the countercyclical capital buffer reinforces the expectations of the FPC and the Prudential Regulation Committee that all elements of banks’ capital and liquidity buffers can be used to draw down as necessary to support the economy. The PRA has also published supervisory guidance on 11 March consistent with this. The PRA reminds firms that its approach to capital buffers is that their presence is to absorb losses and provide an additional layer of capital above minimum requirements, and that the use of such buffers is not a breach of capital requirements. The PRA also notes that it does not expect firms to increase dividends and other distributions in response to the FPC’s action and it will monitor firm’s distributions against this expectation.
Term Funding Scheme with additional incentives for SMEs
On 10 March, the Monetary Policy Committee (MPC) voted unanimously to reduce the Bank of England base rate to 0.25 per cent and in an emergency move on 19 March the rate was further reduced to 0.1 per cent. However, with such low interest rates the Bank of England recognises it may be difficult for banks to reduce deposit rates further which in turn could limit their ability to cut lending rates. In order to mitigate these issues, the Bank of England announced it will introduce a new Term Funding scheme for banks and building societies with additional incentives for Small and Medium-sized Enterprises (TFSME), financed by the issuance of central bank reserves. The TFSME will offer four-year funding at, or very close to, the Bank of England base rate, with additional funding available for banks that increase lending, especially to SMEs. Experience from the Term Funding Scheme launched in 2016 suggests that the TFSME could provide in excess of £100 billion in term funding.
To be eligible for the TFSME banks and building societies must be participants in the Bank of England’s Sterling Monetary Framework and be signed up to access the Discount Window Facility. The TFSME will open no later than 27 April 2020 and will run until 30 April 2021. Further documentation, including an application form, terms and conditions, and operating procedures is expected to be published on the Bank of England’s website in mid-March 2020.
We at Farrers want to reassure you that we are fully prepared to provide continuity in our service delivery. We have a detailed business continuity plan already in place. Click here to read more.
We hope that you find this briefing of interest and wish you well at this very challenging time.
If you require further information about anything covered in this briefing, please contact Grania Baird, or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, March 2020