Search covid

On 11 February 2021, the FCA published the results of its latest Financial Lives survey. The annual survey provides a wealth of information about consumers’ attitudes towards managing their money, the financial products they have and their experiences of engaging with financial services firms.

The executive summary is in two parts. In the first part, the FCA looks at how the market has evolved since its first Financial Lives survey in 2017 to early 2020. The FCA looks in particular at how many UK adults had low financial resilience or were otherwise not well positioned to deal with the financial impacts of the COVID-19 pandemic. In the second part, the FCA focuses on the impacts of COVID-19 on UK adults’ financial lives, drawing largely on its bespoke COVID-19 focused survey from October 2020.

In terms of the impact of the COVID-19 pandemic the headlines from the survey include:

  • COVID-19 has reversed the positive trend in vulnerability. There are now 27.7 million adults with characteristics of vulnerability – and so at greater risk of harm.
  • COVID-19 has had a profound impact on adults’ financial situations but has not affected the finances of all groups in society equally. Three in eight adults (38% or 20m) have seen their financial situation overall worsen because of COVID-19; 15% (7.7m) have seen it worsen a lot. Groups that have been particularly hard hit include: the self-employed, adults with a household income less than £15,000 per year, those aged 18-54, and BAME adults.
  • An additional 3.5 million adults now have low financial resilience. Nearly 16 million adults (30%) expect their household income to fall in the next six months, rising to under half (45%) of those who already have low financial resilience.
  • There is limited take-up of debt advice during the COVID-19 pandemic, so far, among those who need it most, but the service is valued by those who have used it.
  • Most people have not changed their opinion of financial service providers because of COVID-19. COVID-19 has had a small impact on consumers’ trust in financial services institutions. On balance, banks have seen a small improvement in being trusted: 17% of adults trust them more, while 15% trust them less. Consumers’ views of banks and mortgage lenders appear to have been shaped a great deal by their experiences of applying for mortgage payment deferrals, which, on balance have been positive.
  • COVID-19 has acted as a catalyst to speed up digital trends, but not all consumers have been able to cope without access to cash.

On 11 February 2021, the European Parliament issued a press release reporting that targeted adjustments to MiFID in response to the COVID-19 pandemic were adopted with 339 votes in favour, 294 against and 57 abstentions. Changes to the Prospectus Regulation, which, create a temporary, short-form “EU recovery prospectus” (until 31 December 2022), were also adopted with 585 votes to 50 and 55 abstentions. This simplified document presents information about a company and the securities that it offers to the public. It should help companies to raise the capital they need to rebuild their business quickly in the wake of the pandemic.

On 29 January 2021, the European Banking Authority (EBA) published its third COVID-19 implementation report which provides clarifications on questions that have been raised with it. The implementation report includes questions and answers on the guidelines on moratoria which is accompanied by a summary overview of the general payment moratoria in place in the EU. The implementation report also covers questions and answers in relation to the implementation of the guidelines on COVID-19 reporting and disclosure. The guidelines on moratoria and COVID-19 reporting and disclosure have both been developed under tight deadlines and, therefore, providing clarification of certain sections is deemed to be of broader interest to the industry and the public. The report also includes commentary concerning the criteria that institutions should adopt with regard to operational risk in the context of COVID-19. The purpose of the criteria is to reduce inconsistencies in the calculation of capital requirements and supervisory reporting related to operational risk.  The report also includes clarification on the likely identification of a COVID-19 triggered downturn period and its incorporation into downturn loss given default estimation. Finally, the report provides clarification on the treatment of COVID-19 public guarantee schemes as a form of credit risk mitigation under the advanced internal ratings based approach.

On 17 March 2020, we reported that the FCA had published a new webpage containing information for firms regarding the COVID-19 pandemic. On 6 May 2020, we further reported that the FCA had added a new section to this webpage concerning information security. On 8 January 2021, the FCA updated the text that appears on this webpage under the heading ‘Market and Reporting’.

The updated text provides that:

“At the start of the pandemic, if your firm moved to an alternative site or a working from home arrangement, we asked you to consider the broader control environment in view of the new circumstances.  Given the extensive duration of these arrangements, we now expect you to record all relevant communications (including voice calls) when working outside the office.  You should continue to take all steps to prevent market abuse risks. This could include enhanced monitoring, or retrospective reviews. We will continue to monitor for market abuse and, if necessary, take action. You should also submit regulatory data without undue delay. If you have any concerns about meeting your obligations due to coronavirus, you should contact us via your regular supervisory channels as soon as possible.

We’ve provided updates on our expectations of listed issuers in our November 2020 Policy Statement on European Single Electronic Format (ESEF) reporting and in subsequent Primary Market Bulletins.

Our Supervisory Statement on the Operation of the MiFID Markets Regime sets out how we will operate the pre and post-trade transparency regime for the secondary trading of financial instruments after the end of the EU withdrawal transition period.

Market Watch 63 was published on 27 May 2020 and sets our expectations of market conduct and discipline in the context of coronavirus.

Any future updates regarding our expectations of market participants, including listed issuers, will be made using our usual communication channels, including:

  • supervisory communications
  • Market Watch
  • Primary Market Bulletins”

On 8 January 2021, the ISDA published a paper on COVID-19 and CCP risk management frameworks.

The paper is based on the feedback that the ISDA Clearing Member Committee received from central counterparties (CCPs) and how their risk management frameworks reacted to the pandemic. The ISDA found that CCPs have dealt with the pandemic well although some issues have emerged including procyclical initial margin (IM) requirements exacerbating market stress at certain points and clearing members lacking timely information about back testing breaches and procyclicality in margin models. The paper contains recommendations to address both of these points.

The ISDA Clearing Member Committee recommends that anti-procyclicality (APC) tools are calibrated to ensure margin increases in response to volatility are less extreme in the future. The paper also recommends greater transparency of CCP models to enable predictability of margin levels during benign and stressed markets for clearing participants. This would include what APC measures the CCP adopts. A standard for the measurement of procyclicality in CCP models should also be introduced, enabling the ratio between margin in stressed versus normal times to be measured in a common way.

The ISDA Clearing Member Committee also notes that public quantitative disclosures published by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions are produced by CCPs on a quarterly basis with a lag of another quarter. As a consequence, participants had to wait until late June / early July 2020 for information from March 2020. Information for April was reported five months later. The paper recommends that the frequency of these disclosures should be increased, at a minimum, for essential data points like IM, default fund contributions and back testing breaches to monthly disclosures.

On 21 December 2020, the European Banking Authority (EBA) updated its report on the implementation of selected COVID-19 policies.

The report was first published on 7 July 2020 and then updated on 7 August 2020 to provide additional clarity on the implementation of the reporting and disclosure framework in the context of the COVID-19 measures. In the latest update to the report the EBA has included additional FAQs in section 2 in relation to the guidelines on moratoria, and amended some FAQs in order to align them with the requirements stemming from the reactivation of the guidelines on moratoria on 2 December 2020. Also the EBA has amended section 3 on operational risk in order to include answers to an additional question raised by institutions and Member State competent authorities (NCAs) on general aspects concerning the COVID-19 related operational risk events and losses and on how to identify and quantify the “one-off” attribute of the COVID-19 operational risk costs. The EBA has reviewed section 4 of the report to include additional questions that have been raised by the NCAs and credit institutions for the implementation of the COVID-19 reporting and disclosure guidelines, together with the answers to these questions. Finally, the EBA has inserted new sections 5 and 6 which provide clarity on the interaction of the COVID-19 pandemic with the draft regulatory technical standards on the specification of the nature, severity and duration of an economic downturn in accordance with Articles 181(3)(a) and 182(4)(a) of the Capital Requirements Regulation, the guidelines on downturn loss given default (LGD) estimation, as well as the treatment of COVID-19 related public guarantee schemes for credit.

On 18 December 2020, the following were published:

In April 2020, the PRA and FCA set out their expectations to help dual-regulated and solo regulated firms apply the Senior Managers and Certification Regime (SM&CR) following the exceptional circumstances arising from the COVID-19 pandemic. In particular, the regulators offered some additional flexibility in the application of the SM&CR rules to these firms. As firms have adapted to the impact of the pandemic over the past few months, the regulators’ current expectation is that firms’ application of the SM&CR rules returns to normal. Firms should be aware that some of the previously available provisions providing flexibility will end on 7 January 2021 and that the relevant modifications by consent will end after 30 April 2021. The regulators have provided further detail on what this means in their updates.

In June 2020, the FCA set out its expectations to help firms using Appointed Representative (AR) arrangements apply the Approved Persons Regime (APR) during the COVID-19 pandemic. The FCA has now issued an update stating that some of the previously available provisions will end on 7 January 2021 and that the relevant modifications by consent will end after 30 April 2021

On 16 December 2020, the Financial Action Task Force (FATF) published a paper providing entities with additional information on COVID-19 related money laundering and terrorist financing risks. The paper covers both changes in predicate offences and changes in money laundering and terrorist financing activity. It provides selected case studies, displaying criminal activity that has occurred since the beginning of the pandemic and highlights the changes in criminal activity. A

longer list of case studies provided by jurisdictions around the world is attached as an annex.

Following the decision of the High Court in Financial Conduct Authority v Arch and others [2020] EWHC 2448 (Comm), the Financial Conduct Authority (FCA) has decided to publish guidance in respect of the evidence and methodologies which policyholders may use to prove the presence of Covid-19. Although some aspects of the High Court decision have been appealed to the Supreme Court (judgment is pending), declarations of the High Court relating to proving the presence of Covid-19 are not subject to appeal. The draft guidance is open for consultation until 18 January 2021.

For regulated firms (both insurers and intermediaries) the FCA says that the guidance sets out firms’ obligations under the Principles for Businesses (PRIN), the Insurance Conduct of Business sourcebook (ICOBS) and the Dispute Resolution: Complaints sourcebook (DISP).

Methodologies for enabling policyholders to satisfy the minimum requirements of their policy were discussed in the High Court case. By publishing this guidance the FCA is inviting insurers who doubt the appropriateness of the Court’s methodology to explain their reasons for doing so. In other words, the FCA guidance is being established on the basis of ‘comply or explain’.

The High Court case considered the extent to which non-damage business interruption policies responded to the pandemic. The guidance relates to claims under contracts in force during the pandemic and which require the policyholder to provide the presence of Covid-19 within a particular area. The FCA proposes that the guidance cease to have effect on 31 December 2021.

The draft guidance covers the following areas:

  • Chapter 2 sets out how policyholders should use the guidance. This includes the types of wordings for which the guidance is relevant and examples of the evidence that should be submitted.
  • Chapter 3 sets out guidance for insurers and insurance intermediaries. The guidance states that insurers should provide fair consideration and assessment of any evidence submitted by policyholders to prove the presence of Covid-19 where it is required under the policy. Where the insurer submits counter-evidence it must clearly explain the basis on which the policyholder’s evidence does not discharge the burden of proof. The FCA makes a couple of suggestions as to how insurers might assist policyholders with their claims. For example, where one policyholder has proved that Covid-19 was present, the insurer should not require other policyholders to provide the same when making a claim.
  • Chapters 4, 5, 6, 7, 8 and 9 consider different types of evidence and methodologies for establishing Covid-19 numbers.

View: FCA publishes draft guidance for policyholders on proving the presence of covid-19 within a particular area

 

On 25 November 2020, the European Parliament published the amendments that it had adopted on the proposed Directive amending MiFID II as regards information requirements, product governance and position limits to help the recovery from the COVID-19 pandemic. The next step is for the Council of the EU to adopt the proposed Directive.