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Financial services regulation beyond COVID-19

Paul Staples Paul Staples

Watch our financial services regulation webinar to find out what regulators are planning in response to the current circumstances.

As part of our financial services regulation event series, David Morrey, Partner and Head of Investment Management, and Gavin Stewart, Regulatory Director and former Bank of England, FSA and FCA regulator, met to discuss the latest themes arising from the regulatory response to the crisis. In a wide-reaching discussion, they consider how the regulators are adapting to the crisis, what will be top of their worry list and what it will mean for firms during the next few months and beyond.

Watch the full recording below and read on for a summary:

Regulatory priorities are being re-set and activities delayed, but only temporarily

Financial services regulators have had to quickly assess their existing activities and triage emerging risks. This has been a tactical response to determine what activities can safely be delayed.

The consequences are likely to be sub-optimal. For now, this exercise affords financial services regulation and firms some breathing space through the crisis, but in turn creates a backlog of challenges into late 2020 and early 2021. An unintended consequence or casualty of this exercise may well be the de-prioritisation of the FCA’s competition agenda, at least in the medium term.

Regulators’ responses vary and do not naturally coalesce

The Prudential Regulation Authority’s (PRA) toolkit has been seen to be more immediate and acute around capital and liquidity. In contrast, the FCA has more levers at its disposal, but these are generally slower, more subtle and need to be targeted.

Pre-crisis, the twin peaks system anticipated a healthy friction between the PRA and the Financial Conduct Authority. This is arguably counter-productive now, as co-ordination becomes essential. Attempts at this can be seen in the recent Regulatory Initiatives Grid, which aims to help firms understand and plan for those initiatives that may have a significant operational impact on them. Unlike the previous financial crisis, senior PRA regulators, including Andrew Bailey, bring experience from both sides of the fence, which should better equip them for the current crisis.

Financial services regulation reporting loosens, but is falling short

Regulators have relaxed various reporting requirements to reduce the burden on firms. However, reporting is generally of a backward-looking or point-in-time in nature. This raises the question as to whether, in its current form, it is fit for purpose for such a situation. Post-crisis, this criticism is likely to accelerate the agenda on digital regulatory reporting. Meanwhile, many firms will have to respond to an increased number of ad-hoc data requests from the regulators, which can be onerous and require careful management and co-ordination.

A rock and a hard place

At this time, financial services regulators will not want to over-burden firms and this is evident in many of their actions to date, particularly when rapid consultations do not allow for any formal impact assessment. But there will be an over-riding determination not to miss anything.

The unintended consequence of this dynamic is that previously high-profile agendas can be seemingly de-prioritised (eg, financial crime guidance, published 6 May 2020). Irrespective of the continual wave of regulatory announcements, firms should not lose sight of their own regulatory priorities.

Previous blind spots highlighted

It’s no coincidence that the FCA has set up a new small business unit for the first time. We only need to look back to the Global Restructuring Group's investigation and interest-rate hedging product review for examples of misconduct. Small and medium enterprises are at the epicentre of the crisis and outcomes here will be one of the future measures of success or failure.

The significance of SM&CR will become clear

Reactive regulation is likely to leave gaps in prescriptive detail. There is an emerging implied reliance on senior managers to make the right decisions and follow the spirit, as well as the letter, of the rules. This will embed the Senior Managers and Certification Regime and may positively build regulator-firm relationships in a new mould.

Trade-offs between economic necessity and loosening regulations

An over-riding priority has been the rapid distribution of lending through emergency government loan schemes (eg, CBILS and BBLS). This has required a rapid rewiring of certain statute (eg, credit-worthiness assessments) and ad-hoc communication with relevant bodies (eg, Financial Ombudsman Service). But for firms, these types of deviation might cause operational complexity in the short term and regulatory risk in the longer term as long-standing conventions are broken.

Temporary rules and guidance are not easily unwound

The current time-frame for the temporary regulations enacted in the last few weeks looks unrealistic in the context of what is likely to be an extended and a bumpy exit from the crisis. For example, the package of measures to support consumers in financial difficulty due to coronavirus are well-intentioned, but the mechanisms for firms to implement them are far from clear amid an ongoing pandemic.

Financial services regulation architecture may need to be redefined

Financial services regulation structures are generally built to avoid a repeat of the previous crisis. The current situation will bring a much broader group of firms under prudential pressure than during the financial crisis of 2008/09. In response, the FCA is likely to be necessarily up-skilling and bolstering its own prudential expertise behind the scenes. This will raise the prominence of prudential requirements across FCA-regulated firms, but also blur the conventional line that distinguishes the PRA, as the prudential regulator, from the FCA, as the conduct regulator. The crisis could conceivably re-open the debate around those systemically important firms that are within the scope of PRA regulation, notably the very largest asset managers.

And finally, the road ahead is unclear…

Just like the government’s response, at the time of writing, the regulators’ roadmap for this crisis is currently far from clear and will be evolving for some time. While firms have generally adjusted well to the ‘new norm’, uncertainty will continue to pervade the months ahead and approaches for returning to the office are only now being thought through.

To discuss financial services regulation issues further, contact Paul Staples.

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