In brief

In brief

  • Financial firms face not just a pandemic, but a rapidly evolving regulatory environment.
  • With a focus on certain key areas, firms can take steps now to mitigate current shock waves from COVID-19.
  • As the UK works through the pandemic, the time to reassess and plan ahead is nearing, and we’ve outlined actions firms can take to ready themselves.


The regulatory function aims to be prepared—but the scale and scope of the COVID-19 pandemic is overwhelming existing regulatory assumptions. The pandemic shines a light on regulators’ need to revise existing regulatory expectations, particularly around emphasis and timing.

Current short-term fixes, such as postponing timelines and freeing up resources, should likely yield to more—not less—regulatory oversight, with heightened focus on commercial banking conduct, stress testing scope and operational resilience.

We assessed the regulatory landscape and affirmed the need for change. Our findings are described in our report, Preparing for post COVID-19 in the UK: Defining moments from the regulatory landscape.

Current short-term fixes, such as postponing timelines and freeing up resources, likely will yield to more—not less—regulatory oversight.

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:

1. Set expectations

Step up regulatory engagement to understand evolving expectations and the implementation timeline.

2. Allocate budget

Fine-tune investment budget allocation and regulatory change portfolio, and plan for longer implementation timelines for in-flight programs.

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3. Stress test

Expand stress testing scenarios and reconsider model development and validation rules.

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What to do as the pandemic eases

When COVID-19 begins to recede, financial firms can take several forward-thinking steps, beginning with considerations around broader regulations to accommodate a wider playing field.

Post pandemic: Broaden the financial regulatory perimeter

Given the temporarily lower regulatory hurdles due to COVID-19, cash-rich firms from adjacent industries may be tempted to expand into financial services. We’ve already seen technology firms making moves via acquisitions and organic growth, given the combined cash and marketable securities of the five largest firms now exceed US$560 billion.13

This activity reinforces financial regulators’ need to broaden the perimeter, and to consider increasing cross-industry and cross-border collaboration.

Here is where the existing financial regulatory framework may affect non-financial services (FS) firms, particularly large tech organizations:

1. Expanding credit provision outside traditional FS:

Non-FS firms are unlikely to have credit assessment tested through a full financial cycle to prove they can maintain credit supply in a downturn.

2. Non-FS firm’s access to and use of financial data:

This is driving increased oversight on data rights, meaning complexity and potentially overlapping requirements.

3. Impact on incumbents’ ability to generate capital

To provide financial stability, regulators are encouraged to keep tabs on this alongside concentration risks in service provision among third parties to FS.

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Steps to take in the future

In preparing for post COVID-19, financial firms can ready themselves to pursue these steps:

  1. Assess the impact of a post COVID-19 industry and regulatory landscape on business model.
  2. Provide and manage resilience data ready for supervisory engagement.
  3. Expect regulatory agenda on emerging risks (e.g., climate change risk) to re-emerge quickly.

Regulatory and government positions are likely to remain dynamic for the time being. By taking steps now, financial firms can ease the challenge for themselves.

References

1 “UK regulators delay two-thirds of new measures in response to Covid-19,” Financial Times, 7 May 2020.

2 “Coronavirus (Covid-19): delayed activities and regulatory change,” Financial Conduct Authority, 21 May 2020.

3 “Regulatory Initiatives Grid,” Financial Conduct Authority, 7 May 2020.

4 “Coronavirus Business Interruption Loan Scheme (CBILS) – Current Accredited Lenders and Partners,” British Business Bank.

5 “UK regulator says coronavirus is first test of post-2008 banking rules,” Financial Times, 20 April 2020.

6 “Ensuring fair treatment of corporate customers preparing to raise equity finance,” Financial Conduct Authority, 28 April 2020.

7 “Bank governor Andrew Bailey warns companies to raise equity, not increase debt pile,” The Times, 21 May 2020.

8 “Recapitalisation Group – Interim update,” TheCityUK, June 2020.

9 “Monetary Policy Report,” Bank of England, May 2020.

10 “Stress testing the UK banking system: key elements of the 2019 annual cyclical scenario,” Bank of England, March 2019.

11 “Building operational resilience: impact tolerances for important business services and feedback to DP 18/04,” Financial Conduct Authority, December 2019. “Prudential regulation,” Bank of England.

12 “Virus is busting myth that finance employees can’t work from home,” Financial News, 29 March 2020.

13 “Big Tech goes on pandemic M&A spree despite political backlash,” Financial Times, 27 May 2020.

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