April Regulatory Update

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Joint FCA and PRA statement Senior Managers and Certification Regime (SM&CR) and coronavirus (Covid-19): expectations of dual-regulated firms

The statement reaffirms the expectation that firms directly affected by coronavirus will need to keep their governance arrangements under review.

The obligation on firms to update and resubmit a Statements of Responsibilities (SoRs) if there are ‘significant changes’ to Senior Management Functions (SMFs) responsibilities is set in statute. There is no fixed statutory deadline for firms to do this. FCA Handbook includes non-exhaustive examples of potential ‘significant changes’.

The regulator is aware that ‘significant changes’ to an SMF’s responsibilities may be required in this period, due to sickness or any other temporary situations, as a result of coronavirus issues.

The regulators expect firms to resubmit relevant SoRs as soon as reasonably practicable, taking into account the current circumstances. They also indicated their understanding that firms may take longer than usual to submit revised SoRs in the present environment.

The FCA’s and PRA’s rules allow individuals to perform SMFs without approval for up to 12 weeks in a consecutive one-year period if their firm experiences an SMF vacancy that is (a) temporary; and/or (b) reasonably unforeseen. This is sometimes referred to as the ‘12-week rule’. This has since been extended to 36-weeks where it relates to the unforeseen absence of a senior manager due to Covid-19.

Firms should also update their PRA and FCA supervisors of any furloughing of one or more SMFs via email or phone.



FCA announced additional primary market measures to aid listed companies

The events surrounding the coronavirus (Covid-19) pandemic are unprecedented. The impact on peoples’ health and the health of companies in the real economy is significant and widespread. It is likely that many companies will turn to UK capital markets to raise money to support their recovery.

On 8 April 2020, the Financial Conduct Authority (FCA) announced a series of measures to help these companies raise new funding whilst retaining an appropriate degree of investor protection.

The package includes a combination of temporary policy interventions and reminders of some existing options for companies and their current and prospective shareholders. These include:

  • Clarity on the FCA’s expectations about the due diligence supporting ‘working capital statements’ in share prospectuses, given the significant economic uncertainties caused by coronavirus
  • The ability to apply to the FCA for waivers to ensure that shareholder approval can be sought for certain transactions without the need to hold a general meeting given government guidelines on social distancing
  • Welcoming recent industry work on placings of new shares to agree sensible steps to balance the pre-emption rights of existing shareholders with the need for these transactions to be done as efficiently as possible given the economic environment
  • Encouraging eligible companies to make use of the new simplified prospectus, introduced by the Prospectus Regulation last year. These prospectuses, recognising that the investor base has access to a range of information already relating to the issuer, remove the need to include information such as organisational structure, capital resources, remuneration and benefits and board practices.

These measures, taken together, provide certainty for issuers and their advisors on the FCA’s expectations during this crisis.  This should facilitate new capital being raised efficiently in order to support UK listed companies and the wider economy with the need to ensure that shareholders are properly informed, consulted where required, and their rights are respected.

This guidance was applied on 8 April and the FCA is not conducting a formal consultation in this instance but welcomes feedback from stakeholders on these measures, and on any future actions or clarifications which stakeholders consider would further support effective UK capital markets.

The FCA also reminded market participants and issuers that during the period in which these temporary measures apply, they continue to be subject to the requirements set out in the Market Abuse Regulation which, among other things, require important disclosures to investors.



Credit cards (including retail revolving credit) and coronavirus: FCA draft guidance and rules for firms 

The FCA published its draft guidance on 9 April 2020. The guidance applies to regulated firms who issue credit cards and retail revolving credit products. It also applies to firms that have acquired these debts. It does not apply to business credit cards.

This guidance applies in the unprecedented circumstances arising out of coronavirus (Covid-19) and its impact on the financial situation of customers of credit card firms and retail revolving credit providers (such as store card issuers and catalogue lenders). It is not intended to have any relevance in circumstances other than those related to coronavirus. The FCA guidance is intended to provide help to those who might be having temporary difficulty in making their credit card or revolving credit payments due to a loss of or reduction in their income as a result of coronavirus (or income of other members of their household) or to those who expect to experience such difficulties. Where a customer was in pre-existing financial difficulty, the existing forbearance rules and guidance in CONC would continue to apply.  For instance, if the firm is considering suspending, reducing, waiving or cancelling any further interest or charges, deferring payment of arrears or accepting token payments for a reasonable period of time.

The FCA will review this guidance in the following 3 months, in the light of developments regarding coronavirus.

Customers whose payments have been deferred under this guidance should not have the use of their cards or credit facility suspended, except where the firm acts in accordance with its obligations under section 98A of the Consumer Credit Act 1974, for example in the event of fraud.

This guidance came into force on 14 April.

Payment deferrals

’Payment deferral’ means an arrangement under which a firm permits the customer to make no payments (or a token payment not exceeding a £1 where firms’ system will not allow a zero payment) under their credit card or revolving credit agreement for a specified period without being considered to be in arrears.

Firms can choose to make the enquiries they consider necessary in order to judge if a payment deferral serves the customer’s interests but there is no expectation under this guidance that the firm investigates the circumstances surrounding a request for a payment deferral.

Firms are not prevented from continuing to charge interest during the 3-month period. If the consumer is unable to resume payments at the end of this period because of payment difficulties at that time, they should contact the firm.  The firm should work with the customer to resolve these difficulties in advance of payments being missed. Where a customer, who received a payment deferral as a result of circumstances relating to coronavirus, is entitled to forbearance under the regulator’s existing rules, with this being said, the FCA would expect any interest accrued during the 3-month period to be waived.

Firms should ensure that there is no negative impact on the customer’s credit file because of the payment deferral.

Some of the Consumer Credit sourcebook rules are being amended in these exceptional circumstances – see: CONC 6.7.5R and CONC 6.7.27R to 6.7.40G

The FCA reminded the firms they have to always follow Principle 6 – firms must review their prices to consider whether they are consistent with the obligation to treat customers fairly in the light of the exceptional circumstances arising out of Covid-19.



FCA Published CP20/6: Regulated fees and levies: rates proposals 2020/21

The FCA are consulting on the proposed regulatory fees and levies for the next financial year (1 April 2020 to 31 March 2021). This applies to all fee payers.

Taking into consideration the impact of Covid-19, the FCA aims to ensure that the smallest firms are protected by proposing a freezing of minimum fees. 71% of firms that are small enough to only pay minimum fees will see no change in the fees they pay.

To help medium and smaller firms, the FCA are proposing to extend the period for paying their fees by two months to 90 days. 89% of firms will have until the end of 2020 to pay their fees and levies. Larger firms will be expected to pay their fees under the usual payment terms.


FCA Dear CEO letter – lending to small businesses

The FCA published a Dear CEO letter concerning lending to small businesses on 15 April 2020.

SMEs are vital to the economy and unprecedented circumstances bring significant challenges to the financial position of many from the loss of revenue ad the disruption of cash flow.

The Government has introduced a package of measures to support business and its employees. A priority for the Chancellor, the Governor, the Bank of England and the FCA is ensuring the benefit of these measures are communicated to the business and the consumers.

The activity of lending to SMEs sits outside the scope of the FCA. However, the Senior Managers and Certification regime (SMCR) defines the accountability and responsibilities of the senior managers in banks. With the aforementioned, the FCA expects that for each bank, that lends to SMEs, there is a Senior Manager with clear responsibility of that activity.

The FCA recently recognised as an industry code the Lending Standards Board’s Standards of Lending Practice for Business Customers. This code will be something the regulator will consider in how Senior Managers and other relevant employees under the SMCR discharge their duties.

The UK watchdog  expects CEOs to take reasonable steps, along with their board, to ensure that the Senior Manager(s) with responsibility for small business lending is discharging his/her responsibilities suitably.

The FCA’s objective will be to ensure that there is not a repeat of the historic issues in the treatment of SMEs. The regulator will take into account of the fact that, consistent with the objective to pass credit to firms, banks may now be making different judgements and adopting a different risk tolerance than they would prior to the COVID-19 pandemic in order to support SMEs.

The FCA has established a new small business unit, headed by one of its senior leadership team, Andrew Wigston.



FCA published ‘Dear CEO’ letter to insurance firms regarding the conduct of business interruption claims

The regulator published a “Dear CEO” Letter on 15 April 2020 with which it addressed the insurance firms.

The FCA set its expectation that firms are supposed to consider very carefully the needs of their customers and show flexibility when treating them. The purpose of this letter is to focus specifically on conduct in relation to business interruption (BI) insurance.

Insurers and brokers have an essential role to play in supporting their clients who may not be clear if they have an appropriate cover in place. Firms are  expected to communicate clearly, accurately and in timely manner.

The FCA found out that most policies have basic cover, do not cover pandemics and would have no obligation to pay out in relation to Covid-19. Although disappointing to some, the regulator will not intervene in such circumstances.

For policies where it is clear the company has an obligation to pay out, it is extremely important that claims are settled quickly.

A key objective to the FCA, to ensure that financial pressure on policyholders is not exacerbated by slow payments. The regulator expects companies, when they cannot pay a claim in full, that they are to adopt an approach of making an interim payment. If companies disagree to this, they should share their grounds for reaching that decision and outline how they think this represents a fair outcome for customers.

Where payments are disputed for small businesses, it is possible to fall within the jurisdiction of the Financial Ombudsman Service who will in due course share details of the approach it will be taking in relation to complaints about business interruption insurance.



The FCA published its Complaints Data

The FCA publish two different types of data every six months: firm specific data for individual firms and aggregate (or total) figures for the industry.

The total number of complaints reported by firms in the second half (H2) of 2019 was 6.02m.

  • 62% of the complaints received during this period were related to Payment Protection Insurance (PPI).
  • The volume of complaints related to PPI increased from 2.12m to 3.71m between the first (H1) and second half (H2) of 2019.
  • Excluding PPI complaints, the volume of complaints received increased from 2.18m to 2.31m between 2019 H1 and H2.
  • The most complained about products were PPI, current accounts, credit cards and other general insurance products.



FCA proposed help for motor finance and high cost credit customers

On 17 April 2020, the FCA announced another proposed package of measures to directly support consumers facing payment difficulties due to coronavirus (Covid-19). The range of temporary measures cover motor finance and high cost credit agreements, which include:

  • high-cost short-term credit (including payday loans);
  • buy-now pay-later (BNPL);
  • rent-to-own (RTO); and
  • pawnbroking

For motor finance, the FCA expects firms to provide a 3-month payment freeze to customers who are having temporary difficulties meeting finance or leasing payments due to coronavirus. If customers are experiencing temporary financial difficulties due to coronavirus, firms should not take steps to end the agreement or repossess the vehicle.

The FCA has also proposed that:

  • Firms should not change customer contracts in a way that is unfair.  For example, firms should not try to use temporary depreciation of car prices caused by the coronavirus situation to recalculate Personal Contract Purchase (PCP) balloon payments at the end of the term. The fair treating of customers will be observed when terms are adjusted.
  • Where a customer wishes to keep their vehicle at the end of their PCP agreement, but does not have the cash to cover the balloon payment due to coronavirus-related financial difficulties, firms should work with the customer to find an appropriate solution.

The FCA proposed that high-cost short-term credit (including payday lending) firms will be expected to provide a 1-month interest-free payment freeze to customers facing payment difficulties due to the coronavirus pandemic. This shorter period reflects both the much shorter length of most loans and, given that interest rates tend to be higher than for other high cost credit products, prevents firms from accruing additional interest during the freeze period. After the end of the freeze, the firm should allow the consumer to pay the deferred payment in an affordable way – whether for example, by 1 single payment after the end of the term or by a number of smaller instalments.

High-cost-short-term-lenders are also reminded, like all lenders, to consider whether immediate formal forbearance may be more suitable if a customer was already in financial difficulty before the impact of coronavirus.

For other credit products, the FCA are proposing that firms that enter into RTO, BNPL, or pawnbroking agreements will be expected to provide a 3-month payment freeze to customers facing payment difficulties due to coronavirus.

The regulator is proposing that firms should also take the following steps in relation to specific products:

  • pawnbrokers should extend the redemption period for the 3-month freeze period or, if the redemption period has already ended, agree not to serve notice to sell an item that has been pawned for that period. If the firm has already informed the consumer, they intend to sell the item, they should suspend the sale during the payment freeze
  • if a BNPL customer is within the promotional period, firms should extend this by the length of the payment freeze
  • RTO firms should provide a 3-month payment freeze. In addition, if a customer needs the goods during the guidance period, repossession should not take place
  • if social distancing means that pawnbrokers and RTO firms are unable to redeem, collect or repossess goods, they should not pass on any additional charges or fees to the consumer

As for most of the FCA’s other loan freeze arrangements, firms will be able to continue to charge interest during the payment freeze (except in the case of high-cost short-term credit). However, in the event that a customer requires full forbearance that interest should be waived. If a customer was already in financial difficulty, the FCA has existing forbearance rules which apply. These will include for example the firm considering suspending, reducing, waiving or cancelling any further interest or charges, deferring payment of arrears or accepting token payments for a reasonable period of time.

The measures outlined above by the FCA do not prevent firms from providing more favourable forms of assistance to any customer, including a longer payment freeze if appropriate.

These measures were enforced on the 27 April and customers can request a payment deferral.



FCA Published a Dear CEO Letter on Ensuring fair treatment of corporate customers preparing to raise equity finance 

The FCA published a Dear CEO Letter on 28 April 2020 on ensuring fair treatment on corporate customers, who prepare to raise equity finance.

The regulator is concerned that tying clients to additional services, or demanding fees for services not provided is not in the best interests of those clients, distorts competition, undermines market confidence and calls into question firms’ and individuals’ integrity. This is also likely to increase overall transaction costs for corporates trying to raise money.

Such conduct could be a breach of FCA rules and Principles. Firms are required to observe proper standards of market conduct (PRIN 5), act with integrity (PRIN 1), and in the best interests of clients (COBS 2.1), and prevent or manage conflicts of interest (SYSC 10.1). Firms and relevant individuals should also consider the requirements under Senior Managers and Certification Regime, including the individual conduct rules. Clauses in agreements that restrict clients’ choice of providers for future business could also be a breach of COBS 11A.2.