What firms can do now
Financial firm compliance leads can begin by focusing on key areas that may place firms under increased scrutiny following the pandemic.
Anticipate unintended consequences of amending the regulatory timeline
One of the first regulatory responses to COVID-19 was to cancel or delay regulatory initiatives. In the United Kingdom, for example, the Bank of England’s annual stress testing was cancelled while timing has been amended for 52 out of 80 regulatory initiatives,1 including Basel 3.1. Consultations such as climate-related disclosure and operational resilience2 also were delayed.
Note, not all initiatives were delayed:
- The onshoring of regulatory regime as the Brexit transition period ends on December 31, 2020.
- Products and markets should be transitioned away from LIBOR by December 31, 2021.3
Amendments to the regulatory timeline were intended to preserve operational capacity—but may yield unintended consequences. Consultation periods were extended to October 1, 2020, suggesting firms should expect a substantial volume of finalized policies around year-end. Associated implementation dates may require careful coordination with regulators.
As firms deal with strained financial and operational capacity resulting from COVID-19, they should be efficient in managing evolving regulatory change and prioritize as best they can.
Increase focus on customer protection
Financial firms have been front-and-center in channeling government stimulus aid. For example, the UK’s Coronavirus Business Interruption Loan Scheme (CBILS) involved more than 40 banks to channel government support via the British Business Bank.4
As a result, commercial lending and commercial banking conduct have gained the spotlight, but only a small share of these fall under Financial Conduct Authority (FCA) rules. More than likely, greater regulatory scrutiny is to come.5 In a recent “Dear CEO” letter, for example, the FCA called out concerns around fair treatment of corporate customers when negotiating new or existing debt facilities.6
As commercial lending needs are expected to grow in preparing for the aftermath of COVID-19, businesses should step up equity finance, rather than increase their debt pile, as urged by the Bank of England Governor.7 Doing so puts the fair treatment of corporate customers and commercial banking conduct in even sharper focus.
For financial institutions, this may allude to new regulatory initiatives in support of unleashing private capital while protecting customers. This could mean a greater role for the United Kingdom’s established conduct regimes (SMCR) in the oversight and updating of processes to facilitate the deployment of private capital.8
Expand stress testing scenarios
Given current financial projections, scenarios around economic stress testing might seem limited. The UK’s Bank of England projected GDP could fall by 14 percent in 2020,9 three times more severe than the assumed decline in its latest stress testing scenarios.10 Economic recovery could take a U-, V-, W- or L-shape. Recovery scenarios are further complicated when trying to consolidate the impact of government support packages across countries and sectors.
To date, stress testing has focused on economic swings versus operational disruptions. That emphasis may need to change—during the pandemic fraud concerns, disruptions to communication networks and prolonged absence of critical staff have posed a greater threat.
In response, firms should consider a wider range of scenarios, including operational resilience and prudential stress testing domains. Firms may need to reconsider everything from model development to validation rules.
Change expectations on operational resilience
UK regulators are consulting for the industry’s views on operational resilience (FCA Consultation Paper 19/32; Prudential Regulation Authority Consultation Paper 29/19),11 opening the door for firms and regulators to assess new norms that may emerge post-pandemic.
While created primarily to address IT failures, regulatory assumptions over operational resilience have been challenged by new norms emerging during COVID-19. In the UK, remote working has proved effective and appears lasting in financial services.12 Firms’ IT systems have remained resilient and cloud platforms have delivered their promises of scalability and flexibility. These call for a more balanced view of people vs. technology risks in the supervisory scope.
Offshoring is another area that may evolve. As multiple services are disrupted during a pandemic, previously outsourced services may suddenly become more essential to consumer protection. For example, when customers can’t access their bank branches, call centers become more critical. In crises—like the pandemic—that affects multiple geographies, the balance of cost efficiency and concentration risk efficiencies may need to shift regarding offshoring hubs and overall global resilience.
With regulatory scrutiny over operational resilience evolving, embedding a culture of resilience is key to harnessing the ‘emergence measure’ and technology investment made during COVID-19.
Steps to take now
Financial firms can pursue these actions to help them navigate the COVID-19 pandemic: