On 17 March 2020, the UK Financial Conduct Authority (FCA) released information for regulated firms setting out its expectations of their responses to the COVID-19 pandemic¹

In broad terms, the FCA recognises that COVID-19 is likely to have a significant effect on the financial services industry in the UK, in terms of its impact on consumers and firms alike. However, it goes on to set a clear expectation on the part of the Regulator that firms should take reasonable steps to prepare to meet the challenges posed by the spread of the virus.

While the FCA’s announcement contains tailored information for different types of product, there are a number of key messages that occur throughout.

OPERATIONAL RESILIENCE

Given that COVID-19 represents an unprecedented threat to the financial system, and in view of the fact that the FCA and the PRA have both prioritised operational resilience as key parts of their business plans for 2020, it seems unsurprising that operational resilience should loom large in their thoughts at this time.

The FCA’s guidance is clear that it expects firms to be prioritising operational resilience during the pandemic. Where changes need to be made to business processes, or there is greater reliance on technology (for example as a result of increased home working), the FCA will expect firms to have thoroughly thought through the implications of these changes and taken steps to mitigate any increased risks arising as a result.

The FCA will, in many cases, be proactively considering firms’ contingency plans and firms should expect that FCA supervisors will provide feedback where they consider that a firm is running increased risks without any commensurate enhancements to its controls.

While, therefore, we expect the FCA to be flexible in allowing firms to respond to the pandemic as it progresses, it is clear that the FCA will expect firms to continue to comply with the requirements of the regulatory system.

IMPACT ON FIRMS’ CONTROL ENVIRONMENTS

The FCA recognises that the move to significant levels of home working will give rise to challenges in firms’ control environments. The guidance is clear that firms must consider the impact of these changes on the control environment as a whole, particularly relating to market conduct. In the market conduct space, this might include enhanced monitoring, and taking additional ex-post steps (such as internal reviews) to mitigate any increased risks arising as a result of home working.

The FCA is clear, however, that it will continue to identify, and deal with, market abuse throughout the period of the pandemic. So firms should not expect the regulator to turn a blind eye to issues arising in this difficult period. However, if a firm has taken reasonable steps to address any weaknesses in the control environment arising out of changes to working patterns as a result of COVID-19, one might expect the FCA to give such mitigation due weight should any issues arise.

DEALING WITH CONSUMERS

Supporting Consumers

The FCA’s guidance makes clear that it expects firms to provide “strong support and service” to consumers during the pandemic. It goes on to cite good examples in different parts of the industry of actions firms are taking to support consumers, including:

• allowing consumers enhanced access to cash (for example by permitting early withdrawal of fixed term deposits); and
• granting mortgage repayment holidays to consumers who are in financial difficulty as a result of the pandemic.

The key point to note here is that the FCA expects firms to adopt a reasonable approach when dealing with consumer requests. It clearly does not consider limitations contained in existing product terms to be a reason – in and of themselves – for firms refusing to assist consumers who have been adversely affected by the pandemic. Rather, the FCA is asking firms to work flexibly with consumers to deal with their particular circumstances.

In terms of risk management, firms will need to consider the extent to which they will seek evidence from consumers of specific COVID-19 detriment before acting, recognising not only that the impact is likely to vary significantly as between individual consumers, but also that – in a fast-moving situation – the precise impact may in many cases be difficult to assess when consumers may be in need of rapid assistance.

Complaints handling

The FCA encourages firms that are unable to meet complaints handling deadlines due to the pandemic to make contact with the regulator to discuss this, and notes that it understands the pressure firms are under. Firms who cannot deal with complaints promptly should write to the complainant to explain any delay.

While this is clearly not intended to be a free pass, the FCA is clearly signalling that it will look sympathetically on genuine delays caused as a result of COVID-19 staff absence. That said, firms should ensure that their COVID-19 planning takes account both of business-as-usual complaints volumes and any potential spike in complaints arising from the pandemic (e.g. in the insurance sector, potential increases in volumes arising out of rejected claims). The FCA will expect firms to make a reasonable effort to respond to complaints in good time, and even during the pandemic its sympathy for systemic failures in complaints handling may well be relatively limited.

DELAYS TO REGULATORY INITIATIVES

Recognising the impact that the pandemic is having on the industry, and the FCA’s ability to supervise, the FCA has decided to delay a number of open consultations and other regulatory initiatives. A full list can be found on the FCA web-site, but it is clear that the impact will be to delay a number of key initiatives, including:

• the FCA’s proposed guidance on identifying and dealing with vulnerable consumers; and
• various policy initiatives relating to climate risk, including integrating climate issues into firm decision-making.

For consultation papers and calls for input, the FCA’s intention appears to be to extend the period for response to 1 October 2020. For other regulatory initiatives, the FCA has indicated that it will provide updates in due course as to when those initiatives will proceed.

OUR VIEW

The FCA is clearly torn between recognising the difficulties that the COVID-19 pandemic poses operationally and financially for the industry, and the requirements of its operational objective to secure an appropriate degree of protection for consumers. So while the guidance represents a shift in approach that reflects the new reality, firms should not necessarily view it as the FCA significant reducing its intensity of supervision. The FCA has been open with the industry that it may revise its guidance as the pandemic progresses, and while it is clearly sympathetic to the issues firms are already facing, its expectations are clear - that firms must continue to operate within the bounds of the regulatory system, however flexibly it is applied. This may mean that we see more prescriptive guidance issued if in due course the FCA perceives there to be a reduction in the protection afforded to consumers, or it considers there is a real threat posed by misconduct to the integrity of the financial markets.

Firms should therefore make sure they continue to review (and update) their contingency and disaster recovery plans on a regular basis to respond to evolving circumstances. For example, it will be vital for firms to be alive to the impact of a large increase in staff absence on the firm’s ability to provide services to consumers, and to comply with regulation. Where a firm has identified pinch points it should consider potential mitigating actions, such as cross-training staff, bringing in temporary resource, or relying on the help of external advisers as needed.

Finally, where COVID-19 impacts firms’ ability to comply with specific FCA rules (e.g. around phone recordings), they should reach out to the FCA to discuss the situation, with a view to agreeing a way forward with the regulator, if possible.