This article has been updated as at 23 June 2020.
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 and that it will be able to receive notifications according to the revised threshold from 6 April.
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
Following the Chancellor’s announcement on 17 March that “for those in difficulty due to Coronavirus, mortgage lenders will now offer a three month mortgage holiday” the FCA issued guidance (20 March 2020) which applies to all mortgage lenders, mortgage administrators, home purchase providers and home purchase administrators. The guidance sets out the FCA’s expectations for home finance providers and makes clear that the 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 Principles 6 and 7 and MCOB requirements in relation to treating customers fairly, paying due regard to the information needs of customers and acting honestly, fairly and professionally in accordance with the customer’s best interests.
One of the key measures under the guidance is the expectation that firms will provide customers who request it, with a mortgage payment holiday for a period of up to three months. There has been significant take-up of the mortgage payment holiday scheme and Christopher Woolard, the interim chief executive of the FCA, has indicated that the FCA expects lenders to continue to work with customers, giving support to those who need it.
Against this background, and the likelihood that many customers will continue to experience ongoing financial hardship over the next few months, the FCA reviewed the original guidance and published updated guidance on 4 June 2020 (with further clarifications on 16 June 2020). The revised guidance extends the period during which a payment holiday (now referred to as a payment deferral) can first be requested by a further three months, to 31 October 2020. The updated guidance also sets out in detail the FCA’s expectations when dealing with those customers who are approaching the end of their existing three month mortgage payment holiday.
The guidance is being kept under review and expires on 31 October 2020. However, there may be interim changes and as such, firms should check the FCA website for the latest iteration. The guidance for home finance providers 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 guidance 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 that they may experience payment difficulties in the current circumstances and wish to receive a payment holiday, unless the firm agrees with the customer a different option that the firm considers to be in the best interests of the customer. The guidance confirms that a payment deferral may not be in the customer’s best interests if the customer is already in payment shortfall. Firms are reminded to raise the option of a payment holiday when interacting with customers if the customer provides information that suggests they may be experiencing or reasonably expect to experience payment difficulties as a result of circumstances related to coronavirus. 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.
Following a request for a payment holiday a firm should give a customer adequate information so that the customer is able to make an informed decision about the support offered. Where possible, the information should include personalised information on the impact on the customer’s mortgage payments and/or on the term of the mortgage contract. 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. However, firms should explain to the customers that while their worsening status will not be reported to their credit file, lenders may take into account other information when making future lending decisions, including for example, information provided by applicants or bank account information.
The updated guidance also provides more clarity on the steps a firm is expected to take as the customer’s payment holiday approaches its end. In particular, the FCA expects the home finance provider to take reasonable steps to contact the customer to work out what the customer can afford to re-pay or how to access further support where that is needed. The guidance then sets out the approach the firm should take according to whether the customer is able to resume making payments under their mortgage or whether they need further help.
For those customers who can afford to re-start repayments the FCA has indicated that it is likely to be in their best interests to do so. In these cases, the firm should provide the customer with information on the options for repaying the sums covered by the payment deferral. Where the missed payments are to be capitalised, the firm must give the customer personalised information about the impact of capitalisation on the periodic payments under the mortgage and the term of the mortgage and make it clear that the customer could pay more over the life-time of the mortgage as a result of capitalisation.
For those customers who cannot afford to re-start their payments firms are expected to provide further support. For some customers it may be appropriate for them to make smaller payments for a time (so a partial deferral) but for others, where the customer continues to be in temporary financial difficulty, the firm is expected to offer further support which may include extending the payment holiday for a further three months.
The FCA has also highlighted that where a firm has dealt with a customer who has reached the end of their deferral period before the revised guidance came into effect, the firm should check that the steps the firm agreed with the customer were consistent with the revised guidance and if not, the firm should take reasonable steps to contact the affected customer to give the customer the opportunity to take up any further help that they may be eligible for under the updated guidance.
The FCA guidance reminds firms that a payment holiday is just one option and firms can still offer other alternatives if it is appropriate to do so in the individual circumstances of the case and the firm reasonably considers it as being in the best interests of the customer. The FCA guidance also refers to other measures which may be more favourable to customers, such as offering a payment deferral of fewer than three months, providing an extension to the mortgage term or reducing or waiving interest altogether and sign-posting the customer to other sources of debt advice, particularly in cases where the customer is seeking a further payment holiday. The FCA has also confirmed that the guidance is relevant to customers regardless of whether or not they are in shortfall.
The FCA also expects firms to train its staff on implementing the FCA guidance and to keep records of how any process was designed so that the options presented to the customer are consistent with the customer’s best interests.
In respect of repossessions the guidance states that (absent exceptional circumstances) firms should not commence or continue repossession proceedings against customers before 31 October 2020 irrespective of the stage that the repossession proceedings have reached and the guidance does not provide any exemptions to this stark requirement. 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.
Although certain aspects of the original FCA guidance have been updated by the FCA in the revised guidance there remain numerous questions for firms seeking to implement the guidance and support their customers. We are discussing these issues with our clients and are happy to discuss particular issues with firms.
In a Dear CEO letter to firms providing services to retail investors issued on the 31 March, the FCA announced that there will be supervisory flexibility over the requirement to provide 10 per cent depreciation notifications, which applies to firms providing portfolio management services or holding retail client accounts that include leveraged investments. The letter confirms that, for a six month period running to 1 October 2020, no enforcement action relating to 10 per cent depreciation notifications will be taken where a firm has issued at least one such notification to retail clients within the current reporting period and has subsequently provided updates through public channels or non-personalised client communication. In addition, no enforcement action will be taken where a firm chooses to cease providing 10 per cent depreciation reports to professional clients. We await further developments regarding regulatory forbearance.
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.
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.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, June 2020