COVID-19 – FCA Regulatory Update

Coronavirus Updates for firms

9 April 2020

The threat of COVID-19 has a significant impact on public health and the wider economy.

The FCA has declared that it is working closely with firms in the financial services sector to ensure they take all reasonable steps to mitigate the consequences of the virus.

Following the recent statements by the FCA and PRA in relation to the impact of coronavirus on financial services firms, this update summarises regulatory expectations and provides updates below:

Obligations under MLR

The FCA’s new proposals are applicable to firms regarding their obligations under the Money Laundering Regulations (MLR) and particularly, the procedures used for verifying a customer’s identity.

Given the challenging situation, verification can be done remotely, when appropriate safeguards and additional checks are in place. Some examples are:

  • accepting scanned documentation sent by e-mail (PDF preferably);
  • seeking third-party verification of identity to corroborate that provided by the client, such as from the customer’s lawyer/ accountant;
  • asking clients to submit ‘selfies’ or videos;
  • place reliance on due diligence carried out by others, such as the client’s primary bank account provider, where appropriate agreements are in place to provide access to data; and
  • use commercial providers who triangulate data sources to verify documentation provided.

Supervisory flexibility for client order handling

The FCA will show supervisory flexibility over best execution until the end of June. While the FCA expects that firms continue to meet their compliance obligations, including client order handling, the FCA will show leniency if the firms do not publish RTS 27 and RTS 28 reports by 1 April 2020, as long as they are submitted no later than 30 June 2020.

Flexibility on MiFID II 10% depreciation rule

The FCA intends to take a flexible approach to the MiFID II 10% notification rule when a portfolio depreciates in value. Given current market volatility, and in response to questions from firms that provide portfolio management services, the FCA will not take action against firms as long as at least one notification to clients has been issued regarding a decrease of 10% or more within a current reporting period, and clients are kept updated through regular website and social media updates. This relaxed regime will continue until the end of September.

FCA pauses policy implementation

The FCA has delayed its upcoming policy statement on pension transfer advice, including contingent charging. Follow up work on assessing the suitability of investment advice has been paused and the firms involved have been notified.

Capital adequacy issues

In response to concerns about how the government schemes should be treated, the FCA has already published guidance in 26th March for financial resilience and prudential issues. The FCA has announced that government-backed loans can be used to meet debts and support firms financially, but they cannot be used to meet capital adequacy requirements. 

The FCA warns: “if a firm is concerned it will not be able to meet its capital requirements, or its debts as they fall due, they should contact their FCA supervisor with its plan for the immediate period ahead”.

Bank of England letter to the seven largest deposit takers

In a letter sent out on 31st March to the seven largest UK deposit-takers, the PRA expects banks to cancel payments of any outstanding 2019 dividends and not to pay any cash bonuses to senior staff, including all material risk-takers.

FCA expectations of solo-regulated firms on SMCR

The Senior Managers and Certification Regime (SM&CR) enables firms to allocate responsibilities among senior managers.

The FCA does not expect to be notified for any temporary arrangements made in relation to absences or other temporary changes in responsibilities caused by the pandemic. However, firms should keep a record internally and it must be available if requested.

The internal record will include the firm’s Statement of Responsibilities (which should be updated to reflect changes as soon as practically possible), role profiles and Responsibilities Maps during the coronavirus period.

The FCA plans to issue a Modification by Consent regarding the “12-week rule” , with the FCA announcing:

The 12-week rule allows an individual to cover for a Senior Manager without being approved, where the absence is temporary or reasonably unforeseen, and the appointment is for less than 12 consecutive weeks.

 If the temporary arrangements are to last longer than 12 weeks as a result of the pandemic, firms can notify the FCA and the period can last for up to 36 weeks. As a result, firms can also allocate the prescribed responsibilities of the absent senior manager to another approved senior manager.

It is worth saying that the FCA allows staff to be furloughed but for individuals performing required functions – e.g. the Compliance Officer or Money Laundering Reporting Officer (MLRO), they should only be furloughed as a last resort.

FCA proposals for temporary relief on consumer credit products

The FCA has made proposals for temporary measures designed as a stopgap to help customers who face problems repaying certain credit products. The products include overdrafts; credit cards; store cards and catalogue credit; personal loans.

FCA Consultation papers and Publications in delay

A number of consultation papers and calls for input have been delayed until 1st October and a large number of publications due before the end of June have also been delayed, with further updates to be given in due course.

FCA business plan 2020/21 released 

Finally, the FCA has published their annual business plan which sets out the priorities for 2020/21. The highest priority is a comprehensive and integrated solution to the impact on financial services firms caused by COVID-19.  In accordance with the FCA business priorities announced on 7th April, the regulator aims to ensure that its business plan:

  • protect the most vulnerable – ensuring that they can get the financial services and the help they need
  • tackle scams – helping consumers avoid the scams that spring up as the pandemic develops
  • ensure fair treatment for consumers and small firms – making sure that firms give strong and clear support to customers, recognising challenges that everyone is facing
  • keep markets working well – ensuring that markets remain orderly
  • mitigate firm failures – mitigating the impact on consumers where firms fail in these challenging circumstances – reduce the impact of firm failures
  • working with partnership with the Government, the Bank of England and other regulators

In order for the FCA to transform the regulatory approach for its operation,  the regulator aims to adopt a productive approach which focuses more on the outcomes they want to achieve instead of narrow compliance, investing in data analysis capability, improve intelligence management, and last but not least continue to ensure markets function smoothly. This approach will help consumers:

  • rely on safe and accessible payments to receive their pay or benefits, settle bills and access cash
  • do not get into unaffordable debt and are treated well if they do
  • make effective investment decisions about their savings, and are not exposed to risky or poor value products
  • are offered fair value products in a digital age and are not at risk of being treated unfairly in the pricing and other terms they receive

Given the catastrophic impact of coronavirus, the FCA will freeze fees and levies for the smallest 71% of firms. In addition, the FCA will give small and medium-sized firms an extension of the deadline until the end of 2020 to pay their fees.