Coronavirus (COVID-19)—What does it mean for financial services?

Coronavirus (COVID-19)—What does it mean for financial services?

The outbreak of coronavirus (COVID-19) has now been characterised as a pandemic by the World Health Organisation and has spread across the globe, with profound implications for financial markets and the world economy as a whole. This news analysis considers what the outbreak means for financial services in the UK and EU and surveys the regulatory response so far.

Financial regulators in the UK and EU have reminded firms of the importance of contingency planning. Regulated firms should consider their operational resilience and ensure that they continue to be able to serve their customers. They should also evaluate the impact on business continuity, financial contracts and their regulatory obligations.

Regulators have also taken actions to support the economy, cutting interest rates and reducing the countercyclical capital buffer (CCyB) so that banks can continue to lend to businesses through the crisis. However, the Prudential Regulation Authority (PRA) has warned banks not to take advantage of these measures to increase dividends or employee bonuses.


FCA statement on coronavirus

On 4 March 2020, the Financial Conduct Authority (FCA) issued a statement in which it said that it is working closely with the Bank of England (BoE) to review the contingency plans of a wide range of firms. This includes assessments of operational risks, the ability of firms to continue to operate effectively and the steps firms are taking to serve and support their customers.

The FCA said it expects firms to take all reasonable steps to meet their regulatory obligations. For example, it expects firms to be able to enter orders and transactions promptly into the relevant systems, use recorded lines when trading, and give staff access to compliance support. It has no objection if firms undertake these activities from backup sites or with staff working from home, provided they continue to meet these standards.

The FCA said it is in discussions with firms and trade associations and will keep its guidance under review as necessary.


LSB expectations

The Lending Standards Board (LSB) also expects registered firms to have contingency plans in place. In a statement issued on 11 March 2020, it said that it will engage with individual firms and expects to be updated promptly should there be a change in operations, a need to work from back up sites or for staff to work from home, all of which it has no objection to.


ESMA recommendations

On 11 March 2020, the European Securities and Markets Authority (ESMA) made a number of recommendations to financial market participants in light of the continuing impact of the coronavirus outbreak on financial markets. In particular:

  • Business continuity planning—all financial market participants, including infrastructures, should be ready to apply their contingency plans, including deployment of business continuity measures, to ensure operational continuity in line with regulatory obligations
  • Market disclosure—issuers should disclose as soon as possible any relevant significant information concerning the impacts of coronavirus on their fundamentals, prospects or financial situation in accordance with their transparency obligations under the Market Abuse Regulation
  • Financial reporting—issuers should provide transparency on the actual and potential impacts of coronavirus to the extent possible based on both a qualitative and quantitative assessment on their business activities, financial situation and economic performance in their 2019 year-end financial report if these have not yet been finalised or otherwise in their interim financial reporting disclosure
  • Fund management—asset managers should continue to apply the requirements on risk management, and react accordingly

ESMA said it continues to monitor developments in financial markets and is prepared to use its powers to ensure the orderly functioning of markets, financial stability and investor protection.


ECB guidance for significant institutions

The European Central Bank (ECB) sent a letter to all significant institutions on 3 March 2020, reminding them of the ‘critical need’ to consider and address potential pandemic risk in their contingency strategies. The ECB said it expects supervised entities to review their business continuity plans and consider what actions can be taken to enhance preparedness to minimise the potential adverse effects of the spread of the virus.

According to the ECB, preparations for employee safety and business continuity should include consideration of challenges arising due to the inability of employees to perform their usual tasks, which could impact operational capabilities, as well as constraints of key third-party outsourcers and suppliers to maintain critical processes.

Appropriate actions could include the following:

  • establishing adequate measures of infection control in the workplace, which could include systems to reduce infection transmission and worker education
  • assessing the extent to which contingency plans include a pandemic scenario which provides for scaling measures commensurate with the institution’s geographic footprint and business risk for the particular stages of a pandemic outbreak
  • assessing how quickly measures foreseen under the pandemic scenario of the contingency plan could be implemented and how long operations could be sustained under such a scenario
  • assessing whether alternative and sufficient back-up sites can be established
  • assessing and urgently testing whether large scale remote working or other flexible working arrangements for critical staff can be activated and maintained to ensure business continuity
  • proactively assessing and testing the capacity of existing IT infrastructure, also in light of a potential increase of cyber-attacks and potential higher reliance on remote banking services
  • assessing risks of increased cyber-security related fraud, aimed both to customers or to the institution via phishing mails, etc.
  • entering into a dialogue with critical service providers to understand whether and to ascertain how services continuity can be ensured

The ECB said that it is working with national supervisors to monitor the actions planned and/or already undertaken by banks, and it expects institutions to reach out to their joint supervisory team (JST) immediately if they identify significant shortfalls when carrying out these checks. The JST should also be informed immediately of any significant developments.


Measures taken by the BoE and PRA

On 11 March 2020, the BoE announced a package of measures to support UK businesses and households through the economic disruption that is likely to be associated with the coronavirus outbreak. Among other things, the Financial Policy Committee (FPC) has reduced the UK CCyB rate to 0% of banks’ exposures to UK borrowers with immediate effect, in order to support bank lending to businesses during the crisis. The FPC expects to maintain the 0% rate for at least 12 months, so that any subsequent increase would not take effect until March 2022 at the earliest.

The release of the CCyB reinforces the expectations of the FPC and the Prudential Regulation Committee that all elements of banks’ capital and liquidity buffers can be drawn down as necessary to support the economy through this temporary shock.

In a statement accompanying these measures, the PRA said that banks should not increase dividends or other distributions, such as bonuses, in response to these policy actions. It has advised that a Senior Manager should scrutinise any proposals related to dividend distributions or share buybacks and be prepared to discuss these with the PRA. Proposals to amend bonus pools should also be scrutinised by the Chair of the Remuneration Committee or relevant Senior Manager.

The PRA also set out a number of considerations that firms should take into account when deciding whether to use their capital buffers.

In addition, the PRA also said that it is willing to accept applications from insurance companies to recalculate the transitional measures ‘transitional measure on technical provisions’ under Solvency II as at 31 March 2020. Firms will need to be able to demonstrate that a material change in risk profile has occurred.


ECB and EBA actions to help banks

On 12 March 2020 the ECB announced a number of measures to provide temporary capital and operational relief for its directly supervised banks. The ECB will allow banks to operate temporarily below the level of capital defined by the Pillar 2 guidance, the capital conservation buffer and the liquidity coverage ratio. The ECB considers that these temporary measures will be enhanced by the appropriate relaxation of the CCyB by the national macroprudential authorities.

The ECB will also allow banks to partially use capital instruments that do not qualify as common equity tier 1 (CET1) capital, such as additional tier 1 or tier 2 instruments, to meet the Pillar 2 requirements (P2R). This brings forward a measure that was initially scheduled to come into effect in January 2021, as part of the latest revision of the Capital Requirements Directive (CRD V).

In response to the outbreak, the European Banking Authority (EBA) has postponed the EU-wide stress test until 2021 so that banks can prioritise operational continuity. In a statement issued on 12 March 2020, the EBA also encouraged national competent authorities to follow the ECB’s example and make full use of the flexibility embedded in the regulatory framework to support the banking sector where appropriate.

The EBA also recommended that competent authorities plan supervisory activities, including on-site inspections, in a ‘pragmatic and flexible’ way, and consider postponing those deemed non-essential. Competent authorities were also encouraged to give banks some leeway in the remittance dates for some areas of supervisory reporting.


Complaints handling

It is possible that banks and insurance companies could start receiving coronavirus-related inquiries and complaints about travel and medical insurance policies, and goods and services bought with credit (for example, where an event is cancelled and people are seeking a refund via their credit provider). If consumers are not satisfied with the response they receive, they may complain to the Financial Ombudsman Service (FOS).

To date, FOS has received only a few complaints related to the impacts of coronavirus. However, it says that it is monitoring the situation. It has advised businesses to be fair in their assessment and handling of complaints involving coronavirus, and to follow guidelines and advice from the relevant government and regulatory bodies.

For more information, see here.

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About the author:

Chris is a member of the New York Bar with more than two decades of experience as a financial services and capital markets lawyer in London. Before joining LexisNexis in 2016, Chris worked as a Senior Professional Support Lawyer at Linklaters LLP, supporting the firm’s market-leading Financial Regulation Group, with a particular focus on MiFID II. Chris also worked as Legal Analyst at Bloomberg, where he drafted analytical articles on EU, UK and US financial services law and regulation for Bloomberg journals and developed practical guidance content for the award-winning Bloomberg LAW legal research platform. Prior to that, Chris was a partner in the U.S. law group at Allen & Overy, advising issuers and underwriters on a wide range of capital markets and corporate finance transactions including SEC-registered and Rule 144A debt and equity offerings and mergers and acquisitions, as well as providing general U.S. securities law advice. He also co-founded the firm’s Microfinance Working Group and advised on a variety of matters including two landmark securitisations of loans to microfinance institutions.

Chris has written extensively on legal and regulatory issues for numerous publications and lectured on financial regulation, microfinance and capital markets.