COVID-19 - suspension of non-essential financial services regulation – a risky approach?
The ongoing COVID-19 pandemic requires financial services firms to focus their resources on dealing with customers in financial difficulties in addition to facilitating the various Government initiatives including the Coronavirus Business Interruption Loan Scheme.
The Prudential Regulation Authority (PRA), the Financial Reporting Council (FRC) and the Financial Conduct Authority (FCA) have released a joint statement which, amongst other things, sets out how some areas of their regulatory work will be either suspended or relaxed during the pandemic.
Historically, some firms have been seen to have taken advantage of their customers in times of economic upheaval. For example, RBS’ Global Restructuring Group following the 2008 financial crisis. In this time of significant economic upheaval, will the COVID-19 related changes to regulatory supervision lead some firms to repeat history?
Regulatory oversight during the pandemic
On 20 March 2020, the Bank of England and PRA set out a range of measures designed to divert resources towards weathering the effects of COVID-19.
For example, the PRA stated that non-critical data requests, on-site visits and deadlines would be postponed. Crucially, Section 166 reviews would be paused also. Section 166 of the Financial Services and Markets Act 2000 imposes an important regulatory mechanism whereby the PRA and FCA are able to appoint a skilled person (for example, a law firm) to produce a report on a firm under investigation. Such reviews form a key part of the weaponry available to the PRA and FCA to exert supervisory scrutiny over firms, particularly where non-compliance with regulatory requirements is suspected. The reviews are often a precursor to enforcement action being taken against firms or regulated individuals.
Similarly, on 3 April 2020, the FCA updated its information for firms on its coronavirus response noting that it had put on hold some of its ongoing regulatory work. In particular, it delayed the publication of its much-anticipated guidance for firms on the fair treatment of vulnerable customers.
It is clear that the regulators have adopted the approach of decreasing the extent of their regulatory oversight to ease the burden on their own resources as well as the resources of regulated firms during the pandemic. This contrasts with the position prior to the outbreak of the pandemic with, for example, the PRA publishing a letter in October 2019 announcing a city-wide review into the quality of financial reporting by financial services firms. Fast forward five months, and the situation reads very differently.
Whilst the decision to suspend elements of regulatory oversight in the current climate is understandable in circumstances where firms are under pressure to devote resources to assisting customers suffering financial difficulties, there may be unintended consequences. Given the current significant economic upheaval, some customers will be in an extremely vulnerable state. Otherwise viable businesses may be teetering on the edge of insolvency and need to be treated fairly and with forbearance in order to make it through the pandemic.
This is the time that firms need to be acting fairly towards their customers. It is, however, clear that firms with less regulatory oversight during this time may be at risk of falling into bad habits over the coming months, just when their customers need them the most. Given the PRA’s stated intentions prior to the pandemic it seems a return to the normal standard of regulation and supervision will bring with it a backlog of requests and scrutiny from the relevant authorities. Will the changed state of the regulatory framework and decisions over the next few months add to the backlog even more? Only time will tell.