COVID-19 has now been interrupting almost every aspect of work and life for so long, it's hard to remember what "normal" is. Or, maybe more accurately, what normal was. The summer holidays have ended, the furlough scheme is beginning to wind down, every effort has been made to have schools able to open and stay open, and the Government is encouraging people to get back to work. But what does this actually mean for the financial services industry? Obviously, the regulators cannot simply lift all the measures that have been in place for the best part of six months, and say "right, as you were then". In this article, written for Compliance Monitor, Emma Radmore of Womble Bond Dickinson looks at what the new regulatory normal might look like, and where FCA might hope to be by the end of 2020.
Where we've been
Before we can look forward, it is worth taking a few minutes to look back. From March, both PRA and FCA have been busy trying to help firms to help themselves, their staff and their customers. They have needed to provide support in three broad areas:
- Prudential regulation: which has taken the form of reminding firms (particularly dual regulated firms) about the liquidity and capital buffers they have, and how to make use of them, and in giving some leeway on regulatory reporting deadlines
- Operational and governance standards: which has taken the form of guidance on outsourcing and contractual issues, and on how to remain compliant with wider SYSC requirements and the SMCR
- Customer issues: the most wide ranging area of the guidance and the most intricate, and which has taken the form of requiring firms to put in place measures to treat all customers fairly and help those suffering financial difficulties resulting from the pandemic.
Also, both nationally and internationally, various planned changes have been delayed, from Basel 3.1 to the introduction of the Financial Services Directory, and consultations either delayed or extended. All this with a view to allowing firms to focus on what has been critical as they sought to adapt their businesses to a largely remote working environment and the new risks their customers faced.
Helping customers – a brief chronology
So far, FCA has published the following guidance:
On 19 March, FCA published guidance for insurance firms. The guidance focussed on travel and health insurance, in terms of exemptions and renewals. FCA stressed that it did not expect to see policyholders' ability to claim impacted by circumstances over which they had no control. A particular problem it foresaw was with travel insurance, where there were likely to be (and have been) many disputes over coverage of cancelled holidays. On the one hand, FCA said it did not expect to see firms paying out where a claim was clearly excluded, but on the other firms should be clear in their communications with policyholders about relevant exclusions. It also noted that firms would need to have in mind the reasonable expectations of consumers when considering varying the terms of a product or withdrawing it, especially when consumers were due to renew.
On 20 March, FCA published guidance for firms that offer or sell mortgages. The guidance told firms to give customers who asked to a payment holiday a holiday of up to 3 months, regardless of whether the customer was in payment shortfall already, and that if firms believed customers were in difficulties, they should offer the holiday. The guidance specifically said that firms did not have to make detailed enquiries or carry out affordability assessments where varying mortgage terms solely for forbearance or to avoid shortfalls. The guidance also said firms should not be commencing or continuing repossessions.
On 9 April, FCA told firms selling most loan and retail banking products:
- to offer customers a temporary payment freeze for up to 3 months on personal loans and credit cards;
- to give customers with arranged overdrafts on their main current accounts up to £500 interest free for up to 3 months; and
- to ensure any customer making use of these measures would not see an adverse effect on their credit files.
On 24 April, FCA published similar measures for motor finance and high cost credit agreements – but limiting the payday lending loan freeze to one month because of the short-term characteristic of the product and to prevent accrual of particularly high additional interest during the freeze period.
On 14 May came guidance for insurance and premium finance firms on dealing with customers in financial difficulty. Similar to the loan and mortgage guidance, FCA asked firms to consider whether, if a customer cannot meet premium payments, they should consider both payment deferrals (between 1-3 months, but potentially for longer) and look to check that the product was both necessary for the customer to have and appropriate in the current circumstances. Above all, customers should not be without necessary cover, or need to pay an increased amount for it.
On 2 June FCA updated its mortgages guidance, to extend it until 31 October.
On 3 June FCA published guidance for firms on product value and coronavirus.
On 1 July, FCA extended the measures for loan and retail banking products until 31 October, with a few tweaks. Firms have to contact customers coming to the end of a first payment freeze, to see whether they can resume payments or part payments, because FCA thinks it would be in the customer's interest to do so if it were possible, and to discuss what options customers could have. FCA also told firms to advise customers about the debt help and money guidance resources that might help them.
On 15 July, FCA similarly extended the measures for motor finance and high cost credit, but stressing that it is in a customer's best interests to return to some form of payment if this is at all possible.
On 31 July, FCA issued a call for input, seeking views on what should happen to mortgage and consumer credit customers reaching the end of a second deferral period. It sought views on several issues, and the responses have already informed its consultation on mortgages discussed below and will form part of an expected consultation on further measures for consumer credit due in mid-September. On the same day, it updated firms about its expectations on how they should be helping consumers understand their routes and rights to refunds.
On 11 August, FCA extended its May guidance for insurance and premium finance firms so that it will apply until 31 October.
On 26 August, FCA opened a short consultation on mortgages (requiring comments by 1 September, giving minimal time for detailed responses, given the bank holiday weekend). It is conscious that the current guidance is due to end on 31 October, by which time some consumers may be coming to the end of a second deferral period. FCA wants to get the balance right so that firms continue to work with customers who are still facing payment difficulties, and should look at the options available. Forbearance should still be available with appropriate flexibility but there are a number of factors firms will have to take account of when assessing the most appropriate action. While the June guidance will still apply in terms of reporting to CRAs, new forms of support will need to start being reported, and customers made aware of the implications. Firms should also, where appropriate, be able to continue possession proceedings, but of course only when absolutely necessary and in line with FCA rules – and still subject to restrictions where the property is needed for shielding or isolating or is in an area for which a lockdown is in force.
Separately, FCA has published several other updates, including on what financial crime prevention controls firms should have in place over the crisis period, how client money and asset protection should be priorities, and guidance for payments firms.
Business Interruption Insurance Test Case
Meanwhile, FCA undertook a test case involving several insurers and many sets of policy wordings, to assess how firms were addressing business interruption insurance claims. FCA sought emergency court guidance on how several commonly used phrases and clauses should be interpreted. The case took place during the last two weeks of July, and judgment will be published on 15 September. Following judgment, there will be the possibility of an appeal. In the meantime, FCA wrote to firms in March and April, setting out its expectations on how they should be dealing with customers generally, and SMEs in relation to business interruption cover in particular. One tenet was that firms cannot be expected to pay out where a claim is clearly not covered, however disappointing that may be to the policyholder. But, equally, where it is clear that there is an obligation to pay, firms should be paying promptly – and FCA has encouraged interim payments where part of a claim is clearly payable but part may not be.
At the moment, we are in the odd position whereby temporary guidance is still in place, and new temporary guidance will be made, so that firms will not be completely back to business as usual in their dealings with customers for the foreseeable future. But it is clear that they should always have in mind the need for a gradual return to something more approaching normal. For some firms, the new normal may be becoming apparent – where paperless systems and remote working have proved successful. For these firms, the time has come to make changes to policies, procedures and manuals that reflect the foreseeable future. For other firms, the future is still unclear – while banks and building societies have made increasing efforts to open and keep open branches, other firms that traditionally rely on face-to-face meetings may still be in a transition process towards a return to the office or mechanisms for meeting clients. And, of course, all firms will need always to have in place a contingency plan in the event of an outbreak of COVID-19 on their premises or among their staff, or a local or national lockdown. Much is not clear, and cannot be clear, but what is clear is that the time for forbearance (for firms' compliance, even if not quite yet for customers) is coming to an end.
The bulk of the SMCR had kicked in for all firms in December 2019, but implementation was not complete. FCA had to balance the need to make sure firms were compliant with its principles so that consumers remained protected, with acknowledging the pressures firms were working under. As a result, FCA made several relief measures, including:
- an extension of the 12-week rule to allow firms to appoint different individuals to fulfil SMF functions during the pandemic
- an extension of deadlines for the completion of required exams
- an extension of the deadline for firms to complete their first round of fit and proper assessments and to provide information for the Directory – firms now have until 31 March 2021 to do this, and the Conduct Rules will also not take effect until that date
- a 2 month extension to the deadline for submission of the complaints data summary due on 31 August, so that the data for complaints covering reporting periods ending during the first half of 2020 must now be published no later than 31 October 2020
- permitted deferral of CPD, in exceptional circumstances. While FCA is clear that employees should be able to complete CPD while working remotely it does understand that in some firms the requirements for independent verification may be impractical.
But, throughout, FCA has stressed firms need to remain compliant, and, for instance, if they have reason to believe any member of staff is not fit and proper, they must take immediate action.
Now, firms will need to check their governance arrangements properly reflect the new normal they have been adopting, including checking that their SORs, policies and procedures are up to date. They will also need to be considering the HR impact of employees, variously, continuing to work from home or returning to work. Employees will have different needs and concerns, and present different risks from both a compliance and personnel perspective, and firms must be alive to this.
Firms will be needing to reassess what has happened during lockdown, in case they need to take further measures to ensure compliance. For example, firms will have needed to take a novel approach to customer due diligence in circumstances where they would normally have met customers face to face. It may be that the alternative measures they took are adequate, but in some cases firms will have made a note to carry out further checks when it becomes possible – and where they have done this, they will need to keep careful watch on when they are able to carry out the further measures they deemed appropriate.
Also, FCA has deferred application dates for rule changes and new rules, and given extra time for various reports and returns to be made. Firms need to have noted all these dates, and be sure they will be in a position to comply when required.
Finally, FCA has started to consult on various non-COVID-19 related measures, including a number of consultations which were originally scheduled to have been published before now. Firms will need to ensure they have the resource properly to consider and respond to consultations that are key to their business.
We are certainly going to see firms continue to deal with large levels of complaints about how they have dealt with customers during the pandemic. FCA and FOS have already published various guidance, and it is clear that, as firms complete their reviews of complaints, FOS is braced for the influx. We can expect many complaints about insurance policies that have not paid out where consumers and SMEs expected them to (rightly or wrongly) and there will be significant work for the relevant parts of the insurance market in assessing current and future and reassessing past claims in the light of both the judgement in the Business Interruption Insurance test case and any pronouncements that may (in fact, almost certainly will) come from FCA as complaint themes become clear. FOS has already noted, as of the end of August, 3,500 complaints related to COVID-19, over half about insurance-related, but a fair few about refusals of payment deferral applications and, from SMEs, on declines in CBILS and BBLS applications. FCA has already stressed that firms must handle complaints as efficiently as possible with no reduction in quality, and has noted its expectations on responsible senior managers to check prompt payments and vulnerable customers (whether individual or SME) are appropriately treated.
Last, but most certainly not least, is how firms will be dealing with customers in the coming months. How they do this will depend on their business and customer base, but will also dictate their response in each of the categories discussed above. As FCA Guidance mutates over the coming months, firms will need to adapt appropriately. For firms in the consumer and SME lending and insurance space, there will be no BAU for quite some time to come. Some things are clear – such as the need for a policy for treatment of customers coming out of payment holidays, or who may still need forbearance. Firms will also need to take accounts of the upcoming Breathing Space regulations and prepare to adapt their policies and procedures to comply with these. For insurers, much work will be done on policy scope and wordings, looking at how products should be adapting to the risks, and how to treat renewals of products that may no longer be fit for purpose.
Increasingly, it seems, they will need to have in mind what the "normal" rules are, but issues of affordability, communication and acting in the best interests of the customer will not be normal. Even a crystal ball cannot tell how quickly the temporary measures will change, when they may end or whether they may need to be reimposed. If there is a second wave, though, the risks will not be quite the same, and regulation will have to adapt in any event. Firms will need to make sure their plans and their resourcing will be ready to deal with changes, whatever form they may take, and sometimes in short order.
What can we conclude? Mainly, that "normal" is going to be a moveable feast well past the end of 2020, but that so far as possible, the financial services world needs to adopt the best form of "business as usual". In some respects, firms can (and sometimes must) return to compliance with the rules as they were before lockdown. But treating customers fairly and acting in their best interests has taken on new aspects, and these will evolve as the circumstances of individuals and businesses change. And when and how they will changes will depend not least on three very unknown factors – COVID-19, the economy and Brexit.