The UK financial services regulators (the Financial Conduct Authority (FCA), the Payment Systems Regulator (PSR), the Bank of England (BoE) and the Prudential Regulation Authority (PRA)) and the European Supervisory Authorities (ESAs) are closely monitoring the COVID-19 situation and have all taken measures to seek to protect markets and consumers and to ensure firms have adequate contingency plans in place.

The outbreak comes at a pivotal time for financial services regulation; a series of proposals on the regulatory framework for operational resilience are currently out for consultation (see our alert here). Operational resilience is a key priority for the regulators and COVID-19 has brought this to the limelight.

This alert sets out the measures taken by the regulators to date and key points firms should be aware of at this time.

Financial Conduct Authority

The FCA has published various statements and webpages on COVID-19, focussed on the financial sector's response to the outbreak. It has significant resources and dedicated teams handling the situation and it "stands ready to take any steps necessary to ensure customers are protected and markets continue to function well." In a speech delivered by Nausicaa Delfas, Executive Director of International and a member of the Executive Committee at the FCA, on 6 May 2020, Ms Delfas noted that the FCA has been working with national and international partners to share insights on market developments for the orderly functioning of markets and coordinate responses where necessary. She reminded firms to consider the medium- to longer-term implications and their post crisis recovery strategy including preparing for the end of the Brexit transition period. Following the Prime Minister's statement on 10 May 2020, the FCA has stated that there is no change to its previously published advice until there is further regulatory guidance.

  • Regulatory change – the FCA published an updated webpage on 1 May 2020 stating it is delaying activity which is not critical to protecting consumers and market integrity in the short-term, to allow firms to focus on supporting their customers. This includes extending the closing date for responses to consultation papers and Calls for Input until 1 October 2020, as well as, postponing publications and other activity.
  • Impact on consumers - on 11 March 2020, the FCA published a webpage expressing their support and guidance for consumers. It warned consumers to be aware of potential scams, for example pensions transfers or high-return investment opportunities and made customers aware of their rights under insurance policies and ongoing efforts to ensure access to cash (see below). Importantly, the FCA provided practical guidance on how consumers can protect themselves against scams and seek further guidance, and emphasised that firms should treat customers fairly during this period. Firms should notify the FCA of the impact of any initiatives going beyond usual business practices to be provided the appropriate support. In a press release on 1 April 2020, the FCA provided further guidance to savers, urging them to carefully consider any decisions about their pensions and long term investments. The FCA will work with The Pensions Regulator and Money and Pensions Services to tackle any additional risks arising from the current uncertainty.
  • Financial relief for customers – on 9 April 2020, the FCA confirmed the implementation of temporary financial relief measures for customers facing a financial impact from COVID-19. The measures, which have fully applied from 14 April 2020, are intended to complement the government's support to mortgage borrowers and renters , and the assistance to furloughed employees and the self-employed. The FCA will expect firms to: offer a temporary payment freeze on loans and credit cards for up to three months, provide at zero interest an overdraft facility of up to £500 for up to three months and ensure overdraft customers are not worse off in overdraft prices for the next 90 days. The FCA announced another package of temporary measures on 24 April 2020 to support customers. The key measures include a three-month payment freeze on motor finance payments including protecting Personal Contract Purchase balloon payments, buy-now pay-later agreements, rent-to-own agreements and pawnbroking agreements, as well as a one-month interest-free payment freeze to customers of high-cost short-term credit arrangements (including payday loans). The subsequent measures came into force on 27 April 2020.
  • Mortgages – the FCA is liaising with the industry on the approaches mortgage providers may take to support consumers, for instance lenders should provide a payment holiday of up to 3 months with no resulting additional fee or charge, and has provided guidance for firms. In addition, on 1 May 2020, the FCA published a statement on their support for mortgage prisoners. In it, they extended the window during which they expect firms to contact consumers about switching options by 3 months, to 1 December 2020. The FCA also noted that they have written to some mortgage firms expressing the importance to treat customers on variable rate mortgages fairly.
  • Access to cash – the FCA is with working with the BoE and the Payment Services Regulator to ensure access to cash and stability with electronic payment providers given the potential changes in transaction numbers. They have also voiced their concerns about firms reminding consumers to be aware of fraud and protecting personal data. Similarly, the FCA has stated that banks and building societies are considered as providing essential functions and should remain open where possible.
  • Withdrawals from restricted access accounts – the FCA updated its webpage on 5 May 2020 setting out its expectations of firms handling requests from customers to withdraw funds from restricted accounts. The FCA expects firms to treat customers fairly, communicate effectively and consider the needs of vulnerable customers. It does not, however, expect firms to offer access to all customers or unlimited access to funds but rather to consider the impact of COVID-19 on an individual basis.
  • Unsecured debt products – the FCA's rules already give firms the flexibility to act in the best interests of the customer. In response to the financial pressures' customers may face in the current climate, the FCA has provided greater flexibility "to customers in persistent credit card debt" by relaxing their rules on the suspension of credit cards.
  • Insurance products – Christopher Woolard, interim Chief Executive of the FCA, said "[w]e expect all firms to be clear and not misleading whenever they communicate and be fair and professional in how they deal with their customers." Insurance providers should make consumers aware of the scope of their cover and any exemptions, with information "on firms' websites in a clear, concise way". The FCA has provided specific information for consumers and expectations of firms. Further, the FCA published a 'Dear CEO' letter on 15 April 2020, to insurance firms reminding them of the essential service they provide to customers and the need for clear, accurate and timely information being provided. It encouraged firms to assess and settle claims quickly, including part payment of a claim, and reminded firms of the option to use the Financial Ombudsman Service for faster decisions in some cases.
  • Business interruption (BI) insurance – on 1 May 2020, the FCA announced its intention to seek a judgment from the courts to resolve some contractual uncertainty in BI insurance policies. It will bring relevant cases to court regarding the meaning and effect of some BI insurance policy wordings and are working to identify a sample of cases. The FCA also provides some general guidance and its expectations of general insurance firms and expects them to still meet their obligations when handling claims and any complaints.
  • Product value (insurance products) – the FCA published a guidance consultation on 1 May 2020 for insurers and insurance intermediaries to consider the value of their products. The proposed guidance sets out the FCA's expectations of what firms should be doing to identify material issues with their product value and their ability to deliver good customer outcomes, only where these need to be reassessed in light of coronavirus. The FCA welcomes comments by 15 May 2020 and expects to bring the measures into force by the end of May 2020.
  • Insurance and premium finance firms – in the FCA's updated webpage on 7 May 2020, it published guidance consultation for insurance and premium finance firms in dealing with customers in temporary financial difficulty. Firms should re-assess the risk profile of the consumer, consider if there are better suited alternative products that can be offered, work with the consumer to avoid the need for cancellation of necessary cover and waive associated fees including cancellation fees. The FCA aims to bring the guidance in force on 15 May 2020.
  • Operational resilience - the FCA's first statement on COVID-19, published on 4 March 2020, focussed on the sector's response to the outbreak and resilience. It noted that the FCA expects all firms to have contingency plans in place to deal with major events and that it is working closely with a wide range of firms to review contingency plans, including "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 made clear they expect firms to still meet their compliance and regulatory requirements, although they have no objections if firms meet the standards and undertake the activities from backup sites or staff working from home.
  • Financial resilience – on 17 April 2020, the FCA released an updated statement reminding firms that capital and liquidity buffers are for use at times of stress. Firms should have sound management of their financial resources, and plan ahead including maintaining up-to-date wind-down plans. Any steps taken should reduce the harm to consumers and firms should voice any capital requirement concerns with the FCA and, if applicable, the PRA. Firms should carefully consider if any discretionary distribution of capital is prudent in the current climate and the FCA made clear that non-bank lenders must appropriately implement IFRS9's standards to reasonably reflect the potential impact of COVID-19.
  • Senior Managers and Certification Regime (SMCR) - on 3 April 2020, the FCA and PRA set out their expectations relating to the SMCR for solo-regulated and dual-regulated firms, which are summarised in our special two-part alert: Part 1 (solo-regulated firms) and Part 2 (dual-regulated firms).
  • Key workers in financial services - following the UK Government's advice on maintaining educational provisions for key workers, both the FCA and PRA have provided guidance on the roles that may be considered essential for the provision of financial services to avoid the disruption of the "real economy or financial stability". The regulators have recommended that the Chief Executive Officer SMF1 is accountable for ensuring an adequate process so that only roles meeting the definition of 'key financial workers' are designated. Where a firm does not have a SMF1, the most relevant member of the senior management team should be responsible for this process. The FCA also published a statement on 27 March 2020, stating it was the responsibility of the relevant Senior Manager, or equivalent person, to identify which employees are unable to perform their jobs from home and have to travel to the office or business continuity site.
  • Digital sandbox – the FCA published a statement on 4 May 2020, announcing its plans to bring forward a digital sandbox. The proposed digital sandbox will provide innovative firms enhanced regulatory support for the challenges posed by COVID-19. The FCA will provide more information on their webpage in due course and invites stakeholders to express their interest.
  • Information security – the FCA updated its webpage on 6 May 2020 to provide guidance to firms on information security. The FCA noted the increase in cyber criminals, and the related disruption of essential services and potential harm to consumers and market integrity. While alternative ways of working from home are required for business continuity, the FCA expects firms to ensure adequate controls are in place and prioritise information security.
  • Financial crime – on 6 May 2020 the FCA published guidance on firms applying their systems and controls to prevent the increase in financial crime during the coronavirus. In light of the operational challenges from COIVD-19 firms should change their risk appetite, and while this may involve the need to re-prioritise or reasonably delay some activities firms must not weaken their controls and ensure there is a clear plan to return to the regular review processes.
  • Market trading and reporting – the FCA expects firms to consider the broader control environments in these new working circumstances and satisfy ordinary recording and reporting standards and requirements. While the FCA understands there may be difficulties in doing so, firms should consider steps they could take to mitigate outstanding risks and liaise with the FCA as necessary.
  • Regulatory reporting - on 22 April 2020, the FCA published a webpage introducing temporary measures extending the submission deadline (by 2 months) for certain regulatory returns. In addition, the FCA has waived the administrative fee for late returns for SMEs (paying less than £10,000 in fees and levies in 2020/21).
  • Payment Accounts Regulations (PAR) reporting – on 7 May 2020, the FCA extended the deadline to receive the reporting submissions under the PAR for the reporting period 1 March 2018 to 29 March 2020, until 30 June 2020 (originally 30 April 2020).
  • Supervising reporting under the Securities Financing Transactions Regulations (SFTR) – following a statement by the European Securities and Markets Authority (ESMA), the FCA updated its SFTR webpage on 26 March 2020. The FCA will not prioritise supervision of the SFTR reporting obligations between 13 April 2020 and 13 July 2020 (including securities financing transactions under the Markets in Financial Instruments Regulation). The FCA has also concurred with the recent statement from the European Securities and Markets Authority (ESMA) (as revised on 26 March 2020) regarding upcoming changes to the tick size regime for certain firms. Consistent with its approach in the market during this period, the FCA will "not prioritise supervision of the new requirements at this time" and "expect[s] firms to focus on minimising the potential for operational disruption."
  • Short selling – the regulators in Austria, Belgium, France, Greece, Italy and Spain have all issued temporary short selling prohibitions in the wake of extreme volatility in trading and the FCA has drawn attention to these on its website. While the FCA did introduce a small number of temporary short selling prohibitions in relation to specific financial instruments (which have now expired), the FCA published a statement on 23 March 2020 in which it announced that it had decided not to introduce a similar ban to those introduced by other European Competent Authorities as it has no evidence that short selling has been the driver of recent market falls. The FCA said "[w]e will continue to co-ordinate with our international partners and take all actions within our power where necessary to safeguard orderly markets." Nonetheless, in line with an ESMA decision, the FCA has amended its threshold for notifying net short positions from 0.2% to 0.1% of issued share capital and confirmed on 31 March 2020 that the required systems changes have now been made.
  • Property fund suspensions – the FCA agreed with the decision of managers of open-ended commercial real estate (CRE) funds to temporarily suspend dealing. "In such situations, a fair and reasonable valuation of CRE funds cannot be established," and continued dealing will not in the best interests of fund investors, the FCA said in a statement.
  • LIBOR transition – in a statement made on 25 March 2020, the FCA, BoE and Working Group on Sterling Risk-Free Reference Rates discussed the impact of COVID-19 on the transition from LIBOR to SONIA. The current assumption is that LIBOR will still be phased out by the end of 2021 and in a subsequent joint statement published on 29 April 2020 this was reiterated. To ensure stability in the credit markets during the transition, the RFRWG recommends that by the end of Q3 2020 lenders should be able to offer non-LIBOR products, by the beginning of Q4 2020 any LIBOR-referencing loan products should have clear conversion contractual arrangements and all new LIBOR-referencing products that expire after 2021 should cease. Additionally, the FCA, BoE and RFRWG will continue to assess the impact of COVID-19 and provide further updates in due course.
  • Business loans pursuant to the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Bank Loan Scheme (BBLS) - the FCA has stated that in assessing the creditworthiness of a customer applying for a regulated credit agreement for business purposes, a lending firm may take a range of income and expenditure information into account. In an updated statement on 4 May 2020, the FCA provided further guidance on the relationship between their rules and the loan schemes, as well as managing financial crime by relaxing the customer due diligence requirements (see our detailed business loan support insight article here and further Government guidance here). It also released correspondence between Mr Woolard and Caroline Wayman, Chief Ombudsman and Chief Executive of the FOS, discussing the approach to dealing with complaints concerning the CBILS and the BBLS.
  • Business cooperation under competition – in a statement released by the FCA and PSR on 27 March 2020, the regulators confirmed they will take a consistent approach to their competition law enforcement activity in the financial services sector pursuant to the Competition Act 1998 and/or the Treaty on the Functioning of the European Union.
  • Lloyd's of London market update – in a press release on 26 March 2020, Lloyd's confirmed that the market is in a strong position to weather the impact of COVID-19 and support its customers and business partners.
  • Certified and assessed persons directory – on 25 March 2020, the FCA updated its webpage on its directory of certified and assessed persons. The directory, which was due to be published by the end of March 2020, will be delayed by at least a month. Additionally, until the data is published, dual-regulated firms can either regularly update their information or provide a bulk update once the new launch date is confirmed.
  • Client assets – on 6 April 2020, the FCA published a webpage relating to compliance with the Client Assets sourcebook (CASS). It provides guidance on, among other things, handling cheques, CASS audit reports, physical asset reconciliations, depositing client money, notification of CASS breaches, a firm's CASS classification and firms' delays to improvement projects.
  • Communications to customers – the FCA published two webpages on 7 April 2020 providing guidance to firms on the financial advice they can provide to consumers. The FCA is concerned that some firms, that do not provide investment or life assurance advice, or pensions advice, may be contacted by customers seeking advice. In these circumstances it recommends that firms be prudent, consider the customers background information if appropriate, act in their best interests and communicate clearly and fairly. The FCA goes on to provide examples of communications that would not constitute personal recommendations, which can help firms develop their own approach, and provides risk factors in the current climate. Crucially, firms must avoid providing regulated advice and should consider referring customers to the appropriate advisers.
  • Handling of complaints – the FCA published an updated webpage on 7 May 2020 clarifying their position of firms complaint handling. Handling complaints remains an important function and the FCA expects firms to prioritise the following: customers who have been offered redress should be paid promptly, prompt and fair resolution of complaints, and sending timely holding responses if necessary. Firms should, in particular, take account of vulnerable customers in these circumstances and maintain the quality of complaint handling. Claims management companies should also give firms extra time to give a final response to complainants before referring them to the FOS to handle the complaint. If firms are experiencing any difficulties, they should contact their supervisory contact or the FCA directly.
  • Pensions reforms – in its updated webpage, on 6 April 2020 the FCA stated that they expect firms to implement the rules on communicating certain pension information to consumers as soon as possible. While firms may be experiencing minor delays in implementing the rules, which came into force on 6 April 2020, any delay later than 31 May 2020 should be communicated to the FCA. Further, on 7 April 2020, the FCA published the COVID-19: Deferral of Commencement (Pension Transfers, Investment Pathways, Platform Switching, Access to Insurance) Instrument 2020 (FCA 2020/15), which delayed implementation of various other pensions related policies.
  • Expectations for funds – the FCA published a webpage on 6 April 2020 with its rules and guidance on the operational and financial challenges funds are facing. The FCA has stated it does not have a supervisory concern about virtual general meetings although firms should consider their own arrangements and obligations to unitholders, agreed to accept electronic signatures on applications to authorise funds or approve changes to funds during this period and expects firms to ensure compliance with limits on value at risk. On 22 April 2020, the FCA also agreed to temporarily relief to certain fund managers and funds, by providing an extra two months to publish their annual reports and an extra month for half-yearly reports (the FCA must be notified to take advantage of this forbearance).
  • Listed Companies - for more information on listed companies including Market Abuse Regulation (MAR) announcement obligations, shareholder meetings and delays in corporate reporting and transactions notifications see our detailed insight article here.
  • Cross-border payments regulation – on 16 April 2020, the FCA updated its webpage to remind firms of its expectation that they comply with the currency conversion transparency requirements for both card-based transactions and credit transfer, arising out of the revised Cross-border Payments Regulation, which applied from 19 April 2020. However, the FCA will adopt a reasonable approach to how it enforces compliance.
  • Business plan – the FCA published its 2020/21 business plan on 7 April 2020. The business plan has a chapter dedicated to the FCA's priorities, objectives and actions in dealing with the COVID-19 pandemic. The FCA stated that, going forward, it will focus on ensuring efficient market functioning, protecting the vulnerable in society, minimising the impact of firm failure, tackling scams and ensuring consumers and small firms are fairly treated.
  • Wet-ink signatures – on 20 April 2020, the FCA published a webpage stating that their rules do not explicitly require wet-ink signatures in agreements and that the FCA would accept electronic signatures for fund-related and mutual societies applications/forms. Firms should, however, consider the validity of electronic signatures as a matter of law.
  • Professional qualification exams – while firms are still expected to ensure that all employees have the relevant qualifications, on 21 April 2020, the FCA stated that the obligation to ensure an employee has attained the appropriate qualifications within the required 48 months, pursuant to TC 2.2A.1R, will be extended by an additional 12 months if the examinations were cancelled or postponed by the provider or the employee. The FCA will adopt this approach until 31 October 2020 and firms will need to record their reasons for granting any extension to an employee.
  • Professional indemnity insurance for financial advisers – on 21 April 2020, the FCA stated that professional indemnity insurance (PII) cover remains available in the market and firms need to have PII policies in place to maintain operational resilience.

The FCA published a 'Dear CEO' letter on 31 March 2020, discussing their updates to firms providing services to retail investors. The letter addresses the following topics:

  • Regulatory approach -the FCA has had voluminous requests for changes to its approach from trade associations and firms. It is taking a tripartite approach to how it responds to these requests. Where it has power to make the changes in question and it believes they will support firms and customers, it will make the changes prioritising them according to the harm or urgency involved. Where changes will support firms and customers but require co-ordination with HM Government or other European authorities, it will pursue these, but they may take more time. Finally, there are a small number of instances where the FCA does not believe the requests are in the interests of consumers or would impair its ability to manage the crisis. In these cases, the FCA will refuse the request. Where requests are considered to be opportunistic and designed to undermine consumer protection, the FCA will reflect on what this tells it about the firm involved or conduct in the sector.
  • Client identity verification - firms are expected to continue to meet their verification obligations but can be flexible in how this is achieved (e.g. a firm can ask a client to submit a 'selfie' or video).
  • Best execution - firms should still be considering the various factors, venues or brokers used to achieve best execution. The FCA will not take enforcement action for a failure to publish RTS 27, RTS 28 and Article 65(6) reports before the end of June.
  • Portfolio management services or holding retail client accounts with leveraged investments - the FCA will provide supervisory flexibility over the mandatory 10% portfolio depreciation notifications until the end of September 2020 (subject to certain client safeguards).
  • FCA policy work streams - the FCA has provided an update on the implementation deadlines for a number of initiatives. The rules for two initiatives (investment pathways and platform switching provisions) have already been made and have been referred to the Board for further consideration. Its ongoing work with firms providing defined benefit transfer advice will continue. The policy statement on pension transfer advice has been delayed to Spring 2020. Follow-up work on assessing the suitability of advice, which centred on retirement income advice, has been paused.
  • Financial resilience - Government schemes to assist firms can be used to help firms plan how they will meet debts as they fall due and remain solvent in the immediate period, but government loans cannot be used to meet prudential requirements.

The FCA published a 'Dear CEO' letter on 15 April 2020, to banks on lending to SMEs. The letter acknowledges the efforts by the banking sector in accommodating the Government initiatives, in particular the CBILS. While the activity of lending to an SME sits outside the FCA's scope, the SMCR defines the responsibilities and accountability of Senior Managers in banks and their responsibilities in the activity of lending to SMEs. In the letter, the FCA also announced the establishment of a new small business unit to coordinate the management of small business issues including: ensuring regulated firms are providing adequate support, gathering market information on their treatment by financial services firms, and responding to any issues identified. In a subsequent 'Dear CEO' letter, dated 28 April 2020, the FCA stated that it expects financial firms to continue to provide strong support to customers and ensure fair treatment of corporate customers preparing to raise equity finance. If banks fail to meet their obligations to treat customers fairly and act in the best interests, distort competition, undermine market confidence or call into question a firms and individuals integrity, they risk breaching the FCA's rules and principles. The FCA will not hesitate to take action and it urged firms to review the current systems and controls.

Payment services and systems

The PSR stated that it expects firms to take reasonable steps to manage the evolving risks and any development that occurs in relation to coronavirus, and to report to them any issues that may arise. Its key priority is ensuring the UK's payment systems continue to work well and accordingly, it has amended its rules and regulations. The key updates and information are as follows.

  • Confirmation of Payee (CoP) – on 20 March 2020, the PSR published an update on the implementation of Confirmation of Payee (CoP), which aims to reduce fraud and misdirected payments in electronic bank transfers. In light of the significant pressure currently facing the directed banks, the PSR has permitted a delay in the roll out of CoP until 30 June 2020. Nevertheless, the PSR expects banks to provide appropriate protection to people and take steps to ensure customers are not disadvantaged from the delay, including refunding victims of fraud if CoP would have prevented it from happening.
  • Contactless payments limit increased - UK Finance announced the spending limit for contactless card payments will increase to £45 from 1 April 2020. The changes were in consideration before the COVID-19 pandemic but following several other European countries increasing their limits, the process was expedited.
  • PSR Annual Plan and Budget 2020/21 - on 31 March 2020 the PSR published its Annual Plan and Budget for the year 2020/21. While the Annual Plan and Budget was drafted before the emergence of COVID-19, the PSR has stated that payment systems are essential and the work will continue albeit on a revised timeline.
  • Access to cash – the PSR released a webpage on 8 April 2020 providing an update on its work supporting access to cash during this crisis. The PSR's priority is ensuring access to cash for consumers which ensuring safety of firms' workforces and it is working with the other members of the Joint Authorities Cash Strategy group in this regard. The webpage contains a series of FAQ's in relation to cash and payments, which the PSR will update periodically.
  • Annual perceptions survey – the PSR is reviewing its timeline to reach out to stakeholders to take part in the annual perceptions survey and it will follow with more details in due course.

The FCA released an updated statement on 30 April 2020 on Strong Customer Authentication (SCA) and the impact of COVID-19. It stated that firms are expected to protect customers and monitor their fraud rates to take swift action if they notice their rates rising. In light of the increased pressures faced by firms, the FCA has introduced some changes:

  • it will give the industry an additional 6 months to implement SCA for e-commerce (until 14 September 2021 from the initial 14 March 2021). In this regard, the FCA requires e-commerce firms to continue to manage their fraud risk and take all necessary steps to comply with the revised timeline, and expects UK Finance to develop a detailed phased implementation plan as soon as possible.
  • it will consider on a case-by-case basis the next steps for firms that have not met their SCA requirements for online banking which have applied since 14 September 2019 (with an adjustment period until 14 March 2020). The adjustment period included time for third-party providers (TPPs) to migrate their customers to new or modified interfaces and the ability for account servicing payment service providers to provide TPPs with access to certain data.
  • firms processing contactless transactions should have made every effort to comply with SCA by 14 March 2020. However, the FCA is very unlikely to take enforcement action if a firm fails to apply SCA to cumulative payments exceeding €150 or five consecutive contactless transactions, but only if the firm has the necessary fraud monitoring tools and systems in place, and mitigates the risks. Further, in light of the recent concerns within the charity sector of disruption to contactless donations as a result of the new SCA requirements, the FCA stated that due to the social benefit and low risk of fraud, they encourage firms to work with the charity sector as they currently do now.

Bank of England and Prudential Regulation Authority

The Bank of England and the PRA have announced a series of supervisory and policy measures designed to help UK businesses and households "bridge across the economic disruption that is likely to be associated with COVID-19". We have summarised the key measures and announcements made to date.

  • Treating customers fairly - at the press conference announcing the first set of special measures, on 11 March 2020, Andrew Bailey, Governor of the BoE, stressed that banks must treat their customers fairly: "[o]ne of the FCA's core principles is treating customers fairly. The system is now in a much more resilient state, we expect them to treat customers fairly, that is what must happen. They know that, they are in a position to do that, there should be no excuses. But we at the FCA and Bank of England will be watching this very carefully."
  • Assessment on the position of major UK banks – The BoE's financial policy summary record (FSPR) of the March 2020 FPC meetings was published on 24 March 2020. The focus, as expected, was on the financial stability risks facing the market as a result of the economic disruption caused by COVID-19. The FSPR highlighted the measures taken and noted that major UK banks are well placed to "withstand severe market and economic disruption". The BoE, FCA and HM Treasury also sent a joint letter to UK banks expressing their appreciation of the action already taken and highlighting the importance of implementing the various measures. In addition, the BoE and major UK banks released a joint statement assuring the public they have "put in place a range of measures which give enormous scope to the financial system to provide help to both businesses and households during these extraordinary times. The UK’s banks are in a strong position to provide further support to the economy and are ready and willing to do so."
  • Reduction in Bank Rate and new Term Funding Scheme – at a special meeting on 19 March 2020, The Monetary Policy Committee (MPC) voted to reduce the Bank Rate from 0.25% to 0.1% (a record low) and extended the newly introduced TFSME (which provided additional incentives for Small and Medium-sized Enterprises (SMEs)) by increasing the Initial Borrowing Allowance from 5% to 10%. The MPC also voted unanimously to increase the BoE's holdings of UK government bonds and sterling non-financial investment-grade corporate bonds by £200 billion. The various measures, backed by the issuance of central bank reserves, are intended to support consumer confidence, increase liquidity in the market and incentivise banks and building societies to support SMEs that typically bear the brunt of market contractions. Further, on 2 May 2020, the BoE stated that TFSME participants will in future be able to extend the term of some of the funding accessed via the TFSME to align with the 6-year term of loans made through the BBLS.
  • UK Countercyclical Capital Buffer (CCyB) - to further support banks supplying credit to the UK economy, the Financial Policy Committee (FPC) has reduced the UK CCyB rate to 0% for at least 12 months (i.e. until March 2022 at the earliest). The FPC predicts the impact of COVID-19 to be "sharp and large", but temporary. The release of the buffer should therefore bridge the credit gap to shelter businesses through the disruption.
  • Systemic Risk Buffer – on 9 April 2020, the PRA announced its decision to maintain ring-fenced banks Systemic Risk Buffer rate as set in December 2019. The rate will be reassessed in December 2021 to take into account the impact of COVID-19 on firms' balance sheets.
  • Prudential Regulation Committee (PRC) Supervisory Guidance - in conjunction with the MPC and FPC measures, the PRC has set out its supervisory expectation that banks should not use the extra liquidity and policy actions to increase dividends or other distributions, such as bonuses. Additionally, and in light of the fall in government bond yields, the PRC has called on insurance companies to use the flexibility in Solvency II regulations to support market functioning.
  • Annual stress test – the BoE's annual cyclical scenario has been cancelled to allow the major banks to focus on meeting the needs of UK households and businesses. Together with the measures to reduce the CCyB (see above), the regulators expect all elements of a banks’ capital and liquidity buffers to be drawn down as necessary. In furtherance of this objective, the PRA published a set of questions and answers on 20 April 2020 for banks on the use of liquidity and capital buffers.
  • IFRS 9 and COVID-19 – the BoE recognises the importance of a forward-looking measure of losses but asks firms provisioning into the expected credit loss to be both reasonable and supportable. The PRA published a 'Dear CEO' letter on 26 March 2020, discussing the measures taken in light of COVID-19 to safeguard the financial stability of markets and firms. The letter provided guidance on (i) consistent and robust IFRS 9 accounting and the regulatory definition of default; (ii) the treatment of borrowers who breach covenants due to COVID-19; and (iii) the regulatory capital treatment of IFRS 9. Following clarification sought by some insurance firms, the PRA published a follow-up note on 23 April 2020 for PRA-regulated insurers. In the note, it clarified that the Dear CEO letter does not address insurers' internal assessments of loan creditworthiness and the treatment of unrated assets, but it can nonetheless be considered of wider application. Firms should 'make well-balanced and consistent decisions' and give weight to the established long-term economic trends. Equally, breaches to loan covenants, as a result of COVID-19, do not indicate long-term credit risk and insurers will need to use their own judgement to determine the associated credit risk. In this regard, the PRA also directs firms to their Supervisory Statement (SS) 3/17 ‘Solvency II: Illiquid, unrated assets'.
  • Open-ended funds – the planned survey covering c.300 funds has been delayed, with a subsequent impact on the FCA consultation that would have followed.
  • Supervisory engagement with firms and FMIs – non-critical supervisory programmes will be delayed, the PRA's approach to Senior Manager Function applications will be considered to reduce the burden involved, responses to the BoE's and PRA's consultations on operational resilience policy development will be delayed to 1 October 2020 (in line with the FCA, see above), Internal Ratings Based models implementation will be delayed, the first meeting of the Financial Services Regulatory Initiatives Forum will take place as soon as possible in April 2020 to assist co-ordination of the regulatory initiatives, and new legislation will be introduced to enable implementation of Basel 3.1 (which has been delayed, see below).
  • Covid Corporate Financial Facility (CCFF) – on 18 March 2020, the BoE and HM Treasury announced they will launch a CCFF on 23 March 2020 to provide additional help to firms experiencing a disruption to their cash flows (see our detailed business loan support insight article here and our article on the suitability of the Coronavirus Large Business Interruption Loan Scheme (CLBILS) for your business).
  • Contingent Term Repo Facility (CTRF) – the BoE, on 24 March 2020, activated the CTRF, which allows market participants to borrow from the central bank reserves secured against less liquid assets, to "alleviate frictions observed in money markets". On 24 April 2020, the BoE announced that it will continue to offer 3-month and 1-month term CTRF operations on a weekly basis, with the final operation scheduled on 29 May 2020.
  • Regulatory treatment of the CBILS and CLBILS – on 27 April 2020, the PRA published a statement on the regulatory treatment of CBILS and CLBILS. The statement considered whether guarantees provided by the Secretary of State for Business, Energy and Industrial Strategy are eligible for recognition as unfunded credit risk mitigation (CRM) under the Capital Requirements Regulation (575/2013) (CRR). The PRA found that the guarantee does not contain features that would render it ineligible but encouraged firms to review the relevant legislation, rules and guidance and where necessary seek independent advice. Lenders are expected to use their judgement when making credit decisions and use the range of information at their disposal.
  • Treatment of the BBLS - on 4 May 2020, the PRA published a subsequent statement on the CRM eligibility of loans under the BBLS, in which they reiterated their views above. The PRA also discussed the leverage ratio treatment of loans under the BBLS. It offered a modification by consent for banks subject to the UK Leverage Ratio Part of the PRA Rulebook to exclude loans under this scheme from the leverage ratio total exposure measure, if they choose to do so.
  • Dividends, share buybacks and bonuses – the PRA also released a statement on 31 March 2020, in which it welcomed the decision of the seven largest systemically important UK deposit-takers to suspend dividends and share buybacks until the end of 2020, and to cancel payments of any outstanding 2019 dividends in response to a request from the PRA. The PRA also expects the banks to not pay any cash bonuses to senior staff as a precautionary step in the current economic climate. On the same day, the PRA also wrote to UK insurers reminding them of their responsibility to carefully consider whether any distributions to shareholders or staff bonuses are prudent and consistent with their risk appetite and their importance in supporting the real economy. Correspondingly, on 8 April 2020, the PRA announced that some insurance companies have decided to pause dividends.
  • Regulatory reporting and disclosure amendments – on 23 March 2020, following on from recommendations by the European Insurance and Occupational Pensions Authority (EIOPA) (see below), the PRA released a statement outlining the acceptable delays to regulatory reporting for UK insurers. In the statement, the PRA listed the acceptable delays to aspects of harmonised regulatory reporting and the PRA-owned regulatory reporting for the year-end after 31 December 2019 but before 1 April 2020. Further, on 2 April 2020, the PRA published a statement to outline its approach to regulatory reporting and Pillar 3 disclosures following the EBA's statement on the same. The PRA listed the acceptable delays to CRR and BRRD reporting (which does not include information on liquidity coverage ratio, liquidity monitoring metrics and institutions' liability structure) and to PRA-owned regulatory reporting, where the original remittance deadlines fall on or before 31 May 2020. The PRA also provided guidance on using the old version of the Branch Return Template, funding plans of credit institutions, possible additional ad-hoc reporting on key prudential metrics and their flexibility in the publication timeline of firms' Pillar 3 disclosures. On 7 May 2020, the PRA correspondingly published a statement, consistent with the BoE's approach to stress testing, setting all Pillar 2A requirements as a nominal amount, instead of a percentage of total Risk Weighted Assets to alleviate unwarranted pressure.
  • Basel 3.1 standards – the PRA released a joint statement with HM Treasury appreciating the decision by the Group of Central Bank Governors to delay the implementation of Basel 3.1 standards by one year, allowing banks to focus on the immediate operational and financial issues caused by COVID-19.
  • Resolution measures – the PRA published a series of further measures on 7 May 2020 in response to the COVID-19 pandemic. The changes are a part of the PRA's shift in approach as explained in the PRA's statement from 7 May 2020 on reprioritising work in light of the COVID-19 pandemic to alleviate the operational burden on firms. The following areas of the PRA's work have been re-prioritised: climate change risk mitigation, resuming full supervisory engagement on LIBOR from 1 June 2020, including data reporting at the end of Q2, postponing the next Insurance Stress Test to 2022 and not publishing the results of last year's test (IST2019), and that firms are not expected to update their Stressed VAR 12-month period. On 7 May 2020, the PRA published a joint statement with the BoE announcing the following changes to resolution measures. The PRA delayed the first Resolvability Assessment Framework cycle by one year and published a direction for modification by consent that modifies rules in the Resolution Assessment Part of the PRA Rulebook. The PRA webpage sets out the process for firms that choose to take up the modification by consent. They also extended by a year the timings for major UK banks and building societies to submit their first reports on preparations for resolution (until October 2021) and to publicly disclose a summary of the reports (until June 2022). Similarly, the compliance deadline for the BoE's Statement of Policy on valuation capabilities to support resolvability has been extended by three months to 1 April 2021. The BoE has also provided an update for firms on the Minimum Requirement for Own Funds and Eligible Liabilities.
  • PRA 2020/21 business plan - The PRA published its 2020/21 business plan on 9 April 2020, which addresses the impact of COVID-19 and the PRA's plans for the coming year. In particular, as a result of COVID-19, the PRA has cancelled the 2020 annual cyclical scenario stress tests, delayed the publication of the 2019 biennial exploratory scenario result, is working with individual firms to postpone less critical elements and extended consultations periods where suitable.
  • Agency Network briefing event – the BoE held an Agency Network briefing event on 20 April 2020, given by Deputy Governor for Monetary Policy, Ben Broadbent, and Chief Economist, Andy Haldane, to provide an update on the actions the BoE has taken to help firms and households.

European measures

The European Systemic Board (ESRB) has published an overview of the various measures taken by Member States, EU institutions and national authorities. Similiarly the ECB has published a webpage showing the measures taken by macroprudential authorities in various Member States complementing and reinforcing the ECB's measures. We have highlighted the key measures below.

European Securities and Markets Authority

ESMA published an initial public statement on 11 March 2020 highlighting the ongoing priority of ensuring business continuity, and making various recommendations to financial market participants. The recommendations include specific reminders to issuers of the need to disclose any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situation as soon as possible in accordance with the Market Abuse Regulation, and providing transparency in any financial reporting disclosures. Further, on 20 March 2020, ESMA extended the response date for all ongoing consultations due to close on, or after, 16 March 2020 by four weeks to allow institutions to focus on their core operations.

ESMA has also issued a public statement on the recording requirements of telephone conversations pursuant to MiFID II. ESMA acknowledges that recording may not be practicable in certain circumstances, but it expects firms to mitigate any potential risks and to use all possible efforts to restore recording of telephone conversations as soon as possible.

In line with other central banks, the ECB has announced a €750bn Pandemic Emergency Purchase Programme (PEPP) to buy public (including Italy and Greece) and private sector debt across the eurozone. Purchases under the PEPP will be conducted in a flexible manner for maximum impact and alignment with other measures by the ESAs. Further, the ECB announced measures providing added flexibility to banking supervision to ensure that its directly supervised banks can continue to fulfil their role to fund households and corporations. To this extent it introduced supervisory flexibility to its treatment of non-performing loans and encouraged banks to avoid excessive procyclical effects when applying the IFRS 9 international accounting standard (an approach consistent with ESMA). The ECB also activated capital and operational relief measures already announced amounting to €120 billion, which could be used to absorb losses or potentially finance up to €1.8 trillion of lending. On 27 March 2020, the ECB released a statement advising banks to be prudent when deciding dividend payments and share buyback schemes. It stated that banks should be forward-looking and preserve liquidity to support households and businesses.

On 16 April 2020, the ECB announced a temporary reduction in capital requirements for market risk by allowing banks to reduce a supervisory measure, the qualitative market risk multiplier, to adjust for the market volatility and retain market liquidity.

European Banking Authority (EBA)

On 12 March 2020 from the EBA released a public statement announcing its decision to postpone the EU-wide stress test exercise to 2021 to allow banks to prioritise supporting their customers and address the key operational challenges they may be facing. The EBA also reminded national competent authorities (NCAs) and banks of the flexibility in capital and liquidity regulations.

The EBA subsequently released two statements on 25 March 2020, providing clarity on the functioning of the prudential framework and addressing consumer and payment issues in light of COVID-19. The ECB called for flexibility and pragmatism in the application of the prudential framework and clarified that, in case of debt moratoria, there is no automatic classification in default, forborne, or IFRS9 status. Nonetheless, it asked institutions to ensure adequate risk management measures are in place, to use the measures in compliance with EU law and ensuring consumer protection remains a priority. The EBA also emphasised the importance of contactless payments and encouraged payment services providers to use the maximum thresholds available.

Following on from the EBA's statement on the prudential framework, on 3 April 2020, the EBA published a final report containing guidelines on the legislative and non-legislative moratoria on loan repayments. It clarified that the payment moratoria do not trigger classification as forbearance or distressed restructuring if the measures are taken based on market led initiatives. The EBA also recognised the importance of accurate and transparent monitoring and recording of the scope and effects of COVID-19 on the market, and urged institutions to consider the longer term financial difficulties that may be faced. On 22 April 2020, the EBA released a statement on the application of the prudential framework to mitigate the impact of COVID-19 on the EU banking sector. The statement addressed the following: a postponement of the revised market risk reporting requirements (Fundamental Review of the Trading Book (FRTB)), a deferral to the implementation of the final two phases of the framework for margin requirements for non-centrally cleared derivatives and flexibility under the Capital Requirements Regulation (575/2013) (CRR) to mitigate the increase in aggregated amounts of additional valuation adjustments (AVAs). In conjunction, the EBA also published a final report on the proposed amendments to the regulatory technical standards (RTS) on prudent valuation under the CRR.

European Insurance and Occupational Pensions Authority

On 17 March 2020, the EIOPA published a statement on actions to mitigate the impact on the EU insurance sector. They emphasised the need for insurers to take steps for business continuity and urged national authorities to give flexibility and offer operational relief. Similarly, the EIOPA stated insurance companies should preserve their solvency capital positions (under Solvency II) to protect the industry and the insured. To ensure the EIOPA's priorities are consistent, they have extended or delayed projects where input from NCAs and/or the industry is foreseen. In a statement on 2 April 2020, the EIOPA also urged all (re)insurers to temporarily suspend all discretionary dividend distributions and any planned share buy backs. They stated, in the current turbulent market it is prudent for insurers to protect their capital position.