RegulationOct 1 2020

What the regulator will focus on during the pandemic

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What the regulator will focus on during the pandemic

But since it swept the globe in March, the coronavirus pandemic has topped the to-do list at the City watchdog, with the regulator repeatedly warning this year the crisis could force some advice companies to fold and leave the market. 

The FCA pressed pause on certain “non-critical” aspects of its regulatory timeline in March as it scrambled to support businesses in focusing on clients as the pandemic took hold.

Key Points

  • The FCA has delayed non-critical work
  • Financial resilience is a hot topic for the FCA
  • The regulator has adapted to 'virtual' visits

But while the delay to non-critical work is temporary, certain aspects of the regulatory landscape in the financial services sector are expected to face permanent change in the wake of the crisis. 

Governance and oversight 

The extra pressures of the pandemic will be no excuse for senior managers and certified persons to take their eyes off the ball, with the FCA warning earlier this year it would still take action over misconduct during the pandemic.

Frank Brown, managing consultant and head of risk and transformation at Bovill, said governance would remain key in the coming months. 

He said: “For firms operating under the Senior Managers and Certification Regime, those holding a senior management function and certified functions should ensure that their actions and behaviours during the pandemic were in line with regulations.

“Senior managers in particular should ensure they can evidence and justify the ‘reasonable steps’ they have taken. 

“This is something we believe the regulator will be hot on as the crisis winds down, so firms should take a proactive approach.” 

Multiple warning bells have already been sounded by experts this year urging advisers not to put their requirements under the SMCR “on the back burner”, despite an extension to the regulatory deadline.

Monique Melis, managing director and global head of compliance and regulatory consulting at Duff & Phelps, agreed the FCA would use the SMCR to enforce its expectations that companies should have acted in the best interests of clients amid the crisis.  

Ms Melis said: “The regulator already has the tools to attack this in many ways, using the guiding principles already in place and which now have a much stronger overlay with the SMCR rules.

“The sector hasn’t seen very intrusive supervision over the past couple of years because there have been other things that have taken up the attention of the regulator. But I think that will change.” 

Lessons learnt from 2008

Ms Melis also urged the wealth management and advice industry to heed lessons learnt from the financial crash of 2008.

She said: “What we found at that time in the industry was the advice was very fragmented and did not always act in the best interest of the customer, which of course is an FCA principle.

“Where they let themselves down was [that] very often they didn’t understand that their client’s circumstances had changed.

“They didn’t appreciate the advice that was maybe suitable before the crisis was not suitable during or after the crisis and they never changed the model portfolios as a result.”

Ms Melis said in some cases advisers were not aware clients had recently divorced or suffered a bereavement and their investment needs had therefore changed. 

She added: “If you ask me, I think this is extremely pertinent today.”

Resilience 

Mr Brown at Bovill said the issue of resilience would be “critical” for advice companies in the wake of the pandemic. 

He said: “Rather presciently, the Prudential Regulation Authority and FCA had already started a conversation on the subject before the Covid-19 crisis hit, and it is expected that they will return to the subject, with vigour, in light of the past six months.

“In advance of regulator action, firms should capture the learning from the current situation and consider how they can use it to better serve customers in the future.”

The issue of financial resilience among the companies it regulates also remains a hugely important factor for the regulator, and one it has shown to be eager to police amid the coronavirus crisis with the use of mandatory surveys sent to advisers. 

Just last month Alex Roy, head of consumer distribution policy at the FCA, told FTAdviser’s Financial Advice Forum that ensuring companies remained financially stable remained a priority for the City watchdog. 

It came as Mr Roy also confirmed the FCA was set to delay more work in response to the pandemic, after the regulator warned earlier this year it could be “months” before it managed to address its priorities. 

John Coley, head of risk consulting in EMEA at Norton Rose Fulbright, said the pandemic had prompted businesses to rethink operational resilience with an increased emphasis on enhanced governance and oversight.

Mr Coley said: “Firms may see an increase in information requests from regulators so they will need to demonstrate that they have dynamic and robust systems and controls to mitigate changing and, in some cases, increasing compliance risks.

“With extended forbearance being offered to various segments of the market in some cases, it is not yet clear what the longer-term impacts may be.”

In April, the FCA relaxed its rules requiring advisers to inform a client if their portfolio drops by 10 per cent or more compared to its valuation at the beginning of the quarterly reporting period.

The flexible approach to the requirements under the Markets in Financial Instruments Directive II is in place until October and was welcomed by an industry striving to keep clients calm amid some of the biggest market falls seen in modern times. 

Mr Coley warned businesses should be prepared to adapt to an “evolving market and regulatory expectations at short notice”. 

Virtual supervision

Throughout lockdown the advice industry adapted en masse to servicing clients from their kitchen tables and make-shift offices, with virtual meetings touted to become a permanent feature in the industry. 

Noline Matemera, partner at law firm TLT LLP, predicts the FCA will also embrace remote working and supervise companies virtually for the foreseeable future. 

She said: “Physical firm visits, interviews of individuals, and meetings in a socially distanced world will probably go quietly into the night.

“Coronavirus has made it more acceptable for the PRA and FCA to conduct all manner of regulatory engagement virtually.

“An interesting by-product has been the speed at which meetings have been convened and matters progressed. For a public authority, this can only be viewed as a good thing in these uncertain times.”

Rachel Mortimer is a senior reporter for FTAdviser and Financial Adviser

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