Nearly three months after lockdown measures were introduced, the pandemic continues to dominate the regulatory agenda through a stream of rapid consultations, Dear CEO letters and the implementation of temporary guidance and measures.
Early regulatory responses were largely re-active and there have been clear challenges around their prioritisation and sequencing (eg, PRA’s Dear CEO to banks on IFRS 9 and capital requirements triggering a need for clarification to insurers).
There are only faint signs of a return to ‘BAU regulation’ (eg, pushing ahead with LIBOR replacement, deferred benefit pension transfer measures and the re-commencement of planned Skilled Person activity).
Regulation and government policy have become more entwined
Regulatory policy has been forced to mirror government policy (most notably in the case of the government’s emergency loan schemes), but this jars against the regulators’ core philosophy of independence - or as Tracey McDermott, former Acting Chief Executive of the FCA previously put it: “at the heart is the need for an independent, confident regulator who makes decisions based not on what will please a particular group or be politically expedient in the short term but on the basis of a fair and objective assessment of the facts and what will deliver the right long term solutions1”.
As temporary measures expire and government’s focus shifts back to Brexit, regulators will be left standing with a heap of difficult decisions (such as the transition from payment holidays to potential loan defaults). In marked contrast to the previous financial crisis, a renewed debate on the societal role of banks seems inevitable.
Rapid consultations can have sub-optimal outcomes
Consultations through the crisis have been necessarily swift. But under these conditions, there is an increased chance of insufficient scrutiny (both inside and outside the regulator) or unplanned changes in approach (see business interruption below).
It is encouraging to see certain overly short consultations being extended, even if only slightly, in response to firms’ feedback, including for those less mature or resilient sectors. In the case of the recent temporary proposed guidance for payment services providers, this allows for “fuller discussion and better considered responses on this important issue”, which leads one to question which other consultations could have also benefited from more deliberation.
A catalyst for digitisation
The pandemic has, of course, been a real-time exercise in firms’ and the regulators’ operational resilience. Subtle indicators of shortcomings continue to be flagged by the regulators, such as the FCA’s statement on firms’ handling of paper-based processes.
Digitisation is commonly viewed as an enabler for improved resilience, but for many firms, resources to invest will be scarce given the needs of a growing population of vulnerable customers through what is likely to be a prolonged economic fall-out.
The future shape of regulation can pivot on prominent legal outcomes
The insurance industry looks on with keen interest as the FCA’s progresses its test case to clarify ambiguity in business interruption (BI) policies. Based on the FCA’s shift from its initial position (which seemingly downplayed the relevance of BI cover to the crisis), its current approach may be a consequence of the FCA’s somewhat delayed formation of a small business unit (three weeks after lock-down) and subsequent feedback from those companies. Historically, the FCA has lacked effective channels to engage with the small business community and so its position has been based on incomplete and uneven evidence. In contrast, the FCA is now providing regular and detailed updates on the progress of its BI test case.
Meanwhile, as one case commences, another - Adams v Carey Pensions – comes to a long-awaited conclusion. Whilst very specific in its deliberations (the duties of a SIPP administrator operating execution-only business), the verdict may well have more far-reaching consequences to all firms (essentially underlining the significance of contractual terms with customers and clarifying that guidance not in the FCA Handbook cannot be used as a “statutory construction”). For example, this ruling in the longer term may reduce the amount and importance of non-Handbook guidance that the FCA provides off the back of its thematic work. The FCA has always wanted to be agile and more ‘fleet-of-foot’ but this could mark a turn towards more hard policy and formal rulemaking, which will necessarily be much slower.
The history of regulation shows it can pivot sharply on, and be shaped by, legal outcomes (Equitable Life, and Plevin for PPI, to name but two). Given the omnibus nature of the BI test case, there is therefore more uncertainty around the outcome than the FCA would like.
A need to re-evaluate decision-making through the crisis and beyond
The crisis and the sudden shift to home-working, has required senior managers to take a raft of rapid decisions, many of which were initially designed to be temporary. Where controls have been relaxed or lines of defence blurred, these decisions should be reassessed. There are fundamental questions for Senior Managers around whether these new arrangements are appropriate and sustainable for the next phase and beyond; and indeed, whether anything has been missed through this turbulent period. The meaning of “reasonable steps” under SM&CR is likely to be a scrutinised through a COVID-19 lens at some point and staying on top of the adjustments you have made should be a core element of hygiene.
So, where do we go from here?
The conventional boundary between prudential and conduct regulation (a.k.a. “Twin Peaks”) is being blurred as financial resilience takes on greater significance within the FCA’s remit and the economic fallout is emerging across the real economy.
Meanwhile, regulators will need to navigate the unwinding of temporary measures, regain control of their agenda and remove unwelcome ambiguity (e.g. debate around potential impacts to customers’ credit ratings resulting from payment holidays). It would not be surprising if the tapering of government measures is extended to ease the transition, with temporary regulations moving in step. Contingency planning on the part of regulators and firms should not rule out a second spike in the pandemic later this year.
To discuss any of the issues in the video above, or to register for future live events, contact Paul Staples.
Footnotes
- Speech by Tracey McDermott, Acting Chief Executive, FCA, delivered at Bloomberg, in the City of London, on 4 February 2016, London.
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