Introduction
Regulators are actively engaging with Firms in order to better understand the challenges that exist and ensure that customers are protected and markets continue to function well. Whilst Firms will understandably be focused on keeping their businesses on track, Regulators will expect Firms to take all reasonable steps to comply with their regulatory requirements.
Regulators have also made it clear that they expect Firms to consider the needs of customers when responding to the challenges posed by COVID-19 and are expecting Firms to go beyond usual ‘business practice’. In this regard, the Financial Conduct Authority (FCA) has made it clear that it does not expect Firms to exercise contractual rights based solely on legal technical grounds, rather that consideration should also be given to the impact this may have on customers. Regulators will expect Firms to communicate clearly and early with their customers to address any challenges and concerns.
Regulators acknowledge the challenges that COVID-19 poses and are updating their approach as the situation develops, so Firms should continue to monitor developments to ensure that they understand Regulators’ expectations.
Business continuity and testing
Key issues to consider:
- Firms should review and continue to monitor whether their BCPs appropriately cater for the disruption caused by COVID-19. To the extent that the existing BCP does not adequately address the Firm’s existing control framework, additional measures and processes should be agreed upon by the board/senior management, and, where appropriate, documented in a risk-appropriate BCP.
- Regulators will expect proactive engagement from the board and senior management. Material issues should be escalated to the appropriate level and an audit trail of decisions should be maintained. Firms need to ensure that they have a clear governance framework in place to manage the business during this period. The framework needs to be clear about who is accountable within the Firm for managing each aspect of the business during this time. In turn, senior managers will need to consider and understand the nature of their responsibilities and ensure that any decisions taken are appropriately recorded. Regulators will expect Firms to appoint a senior manager with responsibility for business continuity and managing the impact of COVID-19.
- Consideration should be given to whether roles and responsibilities between senior management and employees need to be reallocated and whether an alternative ‘key man’ policy is required to mitigate the risk of key individuals being absent for prolonged periods of time.
- Firms will need to continue to monitor the impact of COVID-19 on products, operational processes, infrastructure, systems and controls, geographical risks and clients’ services.
- Firms should monitor when notifications should be made to Regulators, market infrastructure providers and customers.
Capital
The Financial Policy Committee (FPC) in the United Kingdom has reduced the countercyclical capital buffer rate for UK banks to 0 per cent in relation to their exposures with immediate effect.
In the Eurozone, the European Central Bank (ECB) has stated that it 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. Banks will also be allowed to partially use capital instruments that do not qualify as common equity tier one capital, for example, additional Tier 1 or Tier 2 instruments, to meet the Pillar 2 requirements. 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.
The rationale for the FPC and ECB measures is to encourage banks to lend into a market that badly needs finance.
There has been no announcement yet from the FCA about a similar approach to relaxing capital requirements in relation to solo-regulated investment firms. If an investment firm is experiencing difficulties in meeting its full capital requirements, then the FCA should be notified as soon as possible. If requested on a temporary basis, it is possible that some regulatory forbearance could be granted around Pillar 2 or the debt/equity ratios in the composition of own funds.
Market trading and reporting
The FCA has noted that Firms are moving to alternative sites and, in some cases, staff are working from home. In this context, Firms have to consider the control and oversight environment in these new circumstances. Firms should continue to record calls, but the FCA has acknowledged in its recent statement that in some cases this may not be possible. Firms should notify the FCA if they are unable to meet the recording requirements.
Firms should consider what mitigating steps they could take if they are unable to comply with their obligations to record voice communications.
Such steps might include enhanced monitoring, or retrospective review once the situation has been resolved. In the United States, the Commodity Futures Trading Commission requires that a written record of the oral communications should be maintained in order to take advantage of their ‘no-action’ relief. The written record should include the date, time, participants and subject matter details of all calls that cannot be recorded due to displacement of staff.
If Firms have difficulties in submitting their regulatory data, the FCA expects them to maintain appropriate records during this period and submit the data as soon as possible. If Firms have concerns, they should contact the FCA as soon as possible.
Short-selling bans
The FCA has not itself initiated any bans on short selling but has reminded UK regulated Firms of the bans imposed by the authorities in Spain, Italy, France and Belgium.
FCA Firms need to be familiar with these bans and their scope.
The European Securities and Markets Authority has announced a reduction in the reporting threshold for private disclosure of short sales from 0.2 per cent to 0.1 per cent. The FCA has said that it is working to make technological changes to its systems to receive the new data. In the meantime, Firms should continue to report according to existing thresholds.
Financial Conduct Authority
The new Governor of the Bank of England, Andrew Bailey, has stated that traders should not exploit the current situation and that short sellers should stop what they are doing. It is unclear at this stage whether the UK authorities will do more to curtail short selling.
Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you may face related to COVID-19.
For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at COVID-19@reedsmith.com.
Client Alert 2020-121
