In the midst of the COVID-19 pandemic, the FCA published information on Tuesday on its response to the situation and the steps it expects firms to take in dealing with it. In this article we've outlined our top 8 tips for firms trying to maintain business as usual, treat their customers and employees fairly and satisfy their regulator.
1. In the coming weeks and months it will be key for both firms, and their senior managers, to take "reasonable steps" to try and meet the challenges of dealing with COVID-19. This is clear from the information published by the FCA on Tuesday and from the perspective of the Senior Managers Regime. The definition of "reasonable" is clearly subjective, but in this unprecedented situation proactivity and early senior management engagement will evidently assist in mitigating enforcement risk.
Operational Resilience and Business Continuity
2. Operational resilience has been high on the FCA's agenda for some time and is currently the subject of joint consultation papers by the FCA, PRA and Bank of England (operational resilience being "the ability of firms and financial market infrastructures and the financial sector as a whole to prevent, adapt, respond to, recover and learn from operational disruptions" as defined in the consultation). This was reiterated in the FCA's Sector Views published in February and was again reinforced in the information published by the FCA earlier this week. An obvious focus of the FCA under this heading will be firms' business continuity plans. Many have executed these already, but those which have not should be conducting tests (if not already completed) to ensure that they are effective. This is particularly the case for firms which deal with retail customers directly. Firms should ensure that they accurately document the testing and gap analysis conducted, together with the decisions taken (and the governance around those decisions) to close any gaps identified.
3. It is unrealistic to expect that firms will not experience problems and the FCA appears to have acknowledged this. However, given the likely prolonged period of remote working, firms will need to deal with any teething problems experienced efficiently and effectively in order to minimise the risk of criticism from the FCA. Published enforcement outcomes over the last few years suggest that firms' response times, both in terms of the identification and rectification of any problems, are key.
4. Firms' systems and controls for the prevention and detection of market abuse have been an area of focus for the FCA for some time, the risks surrounding mass remote working have again brought this to the forefront of the FCA's agenda. The FCA has specifically stated that firms should be considering the risks of market abuse where employees are working remotely and whether enhanced monitoring may be appropriate. The FCA's latest Primary Market bulletin, which was also published on Tuesday, reiterated that "issuers should be aware that their own operational response to coronavirus may itself meet the requirements for disclosure under MAR". Firms should ensure that their consideration, testing and analysis of market abuse risks in this working environment are clearly documented alongside any actions taken to mitigate them.
5. Firms' mitigation of conduct risk more broadly will also inevitably be on the FCA's radar over the coming weeks. Again, firms' testing of their systems and controls in order to mitigate this risk in a remote working environment will be key. Firms should ensure that they periodically reassess whether there are any additional conduct risks arising out of a remote working environment and deal with these appropriately and efficiently as and when they arise.
6. It is clear that firms will be expected to minimise the impact of COVID-19 on consumers in every sense. The FCA will not only be expecting firms' business continuity plans and operational resilience to ensure that their service to consumers remains consistent, but the regulator has also stated that it expects consumers to be given flexibility, for example in relation to their mortgage payments. Firms will need to ensure that they strike the right balance between putting consumers' interests first whilst also maintaining their own liquidity and financial resilience, all of which the FCA has said are important.
The Principles for Businesses
7. The importance of the FCA's Principles for Businesses (the "Principles") is long established and a failure to act in accordance with one or more of the Principles is nearly always at the heart of enforcement action. Firms should not forget this when operating in this extraordinary environment and the FCA will undoubtedly be looking to firms to act in accordance with the Principles, and in the spirit of the rules, rather than maintaining strict policies which might, for example, be perceived to result in consumer detriment. Similarly senior managers should have the senior manager conduct rules in mind when reacting to COVID-19.
8. Maintaining an open dialogue with the FCA will be more important for firms now than ever. The FCA appears to have accepted that we are operating in extraordinary times, but they expect to be kept informed if firms are unable to meet their requirements, for example in relation to recorded lines. Firms will need to consider their Principle 11 obligations very carefully and balance those against the need to understand fully, and rectify, any issues which are identified. If any gaps are identified in a firm's business continuity plans which are likely to cause harm to customers, for example, then this is likely to trigger a Principle 11 notification obligation. Similarly, if a firm realises that it is going to have insufficient regulatory capital, a Principle 11 notification obligation is likely to be triggered. Another important consideration for firms will be the timing of any notifications as recent enforcement outcomes have shown that the timing of notifications is key and the FCA expects to be informed of problems sooner rather than later.
The last few days have shown that both the regulator and the regulated are more uncertain than ever about the challenges that we will all face in the coming weeks and months. The tenor of the FCA's communications suggests that it is prepared to be forgiving provided that firms take reasonable steps to deal with those challenges. Only time will tell whether, in practice, this proves to be the case.