As the Covid-19 landscape continually evolves, so do the challenges facing firms. Enactment of business continuity plans to enable large scale remote working is being replaced with how best to return to an office environment, to cite one example.
Similarly, regulatory priorities have also evolved. The mid-March slump affecting global equity indices and other asset classes prompted regulators to prioritise the orderly functioning of markets. Almost 3 months’ on from this, the UK Financial Conduct Authority (“FCA”) believes that markets are now functioning in an orderly manner, a sentiment echoed by other national regulators who have, for instance, withdrawn various temporary short selling bans.
Since March, other regulatory themes have emerged. Presently, the FCA has a focus on prioritising the impact on consumers: keeping public access to essential banking services; protecting the most vulnerable in society; and supporting consumers with the immediate shocks created by the crisis. More thematically, the FCA is emphasising operational and financial resilience, and ensuring that firms act with integrity.
Regarding individual financial institutions, the FCA has sought to achieve a compromise between these regulatory priorities on one hand and allowing forbearance where firms might have difficulties in complying with certain requirements. This forbearance is not intended to encourage firms to conclude that their compliance risk profile is lower. Instead, it should act as a prompt for firms to re-calibrate this risk profile, and to apply this to areas where it is most needed.
Financial crime – another regulatory ‘hot topic’ – is a case in point. The FCA believes that whilst markets are now functioning in an orderly manner, market participants should not take their eye off the ball regarding market abuse risk – a point amplified in their recent Market Watch publication.
This publication highlights both an anticipated increase in primary market activity, as issuers of financial instruments seek additional capital, and potential disruption to firms’ processes for dealing with inside information, due to home working.
Hence, the market abuse risk profile of many firms has changed; the FCA expects such firms to respond appropriately to this.
This can be contrasted with, for instance, the FCA initiative to increase the timeframe for providing audited financial statements to the regulator via GABRIEL, in response to issues in obtaining timely audit sign-off, and a similar initiative adopted by UK Companies House.
Regulators and financial institutions are tasked with formulating an appropriate regulatory response – the former via rule changes, guidance and other industry engagement, and the latter interpreting these in the most appropriate manner given their particular circumstances. This is not easy. We are in unchartered waters; the shocks to the financial system due to Covid-19 has very different characteristics compared to, for example, the aftermath of the 2008 financial crisis. A ‘one size fits all’ approach to such events would be wholly inappropriate.
This might be the time for industry participants to consider whether the regulatory ramifications of Covid-19 will be temporary – pending a continued winding down of the government imposed Covid-19 measures – or with longer term implications. This might in part depend upon two factors: (1) whether there is a sustained economic downturn occurs in the aftermath of Covid-19; and (2) the extent to which society has to come up with a ‘new normal’ way of doing things, long after this particular virus has abated.