Legal briefing | Financial Services Regulation |

Regulatory measures for financial services firms

Overview

As the COVID-19 (coronavirus) outbreak worsens in Europe, the Financial Conduct Authority (FCA) and the European Securities and Markets Authority (ESMA) are working to try and mitigate its impact on the financial markets, financial services firms and their customers.

Some of the actions being taken are set out below.

 

1. Regulators set out expectations for firms on COVID-19

The FCA and ESMA have set out their expectations for UK and EU regulated financial services firms in respect of the COVID-19 outbreak. 

These are set out in the following statements:

https://www.fca.org.uk/news/statements/covid-19-coronavirus

https://www.fca.org.uk/firms/information-firms-coronavirus-covid-19-response

https://www.esma.europa.eu/press-news/esma-news/esma-recommends-action-financial-market-participants-covid-19-impact

https://www.esma.europa.eu/sites/default/files/library/esma35-43-2348_esma_statement_on_covid-19_telephone_recording.pdf.

 

Firms should take note of these expectations and, where necessary, take appropriate action.

  • Contingency plans: Firms are expected to have contingency plans in place to ensure business and operational continuity and to be ready to apply them.  The FCA has said that firms should review their current arrangements and take reasonable steps to ensure they are prepared to meet the challenges and risks posed by COVID-19.  Contingency plans of UK firms may be subject to review by the FCA.

  • Financial position: The FCA requires firms to manage their financial resilience and actively manage their liquidity. Firms should report to the FCA immediately if they believe they will be in difficulty.

  • Regulatory obligations: The FCA expects UK firms to take all reasonable steps to meet their regulatory obligations. Firms should also provide strong support and service to customers and be clear and transparent.

  • Offsite working: The FCA has also said that it has no objection to UK firms making use of backup sites or having staff working from home provided that firms are still able to meet regulatory standards and consider the broader control environment. Firms must continue to take all steps to prevent market abuse risks which could include enhanced monitoring or retrospective reviews.

  • Telephone recording: In the case of firms' telephone recording obligations, the FCA has said that where firms are unable to record calls, they should notify the FCA and consider steps to mitigate outstanding risks such as enhanced monitoring or retrospective review.

    ESMA has also provided a statement to the effect that firms which are unable to comply with the standard MIFID II telephone taping requirements should adopt alternative arrangements.  This could include using recordable electronic communications instead of telephone calls.   If recording is not practicable at all then ESMA states that firms should consider alternative steps to mitigate the risks of the lack of recording which could include written minutes or notes of telephone conversations.  In that case, clients should be notified that written records will be taken instead of recording.  Firms should also ensure enhanced monitoring and ex-post review of relevant orders and transactions and seek to restore full telephone recording as soon as possible.

  • Regulatory data: The FCA has said that firms which experience difficulties in submitting their regulatory data are expected to maintain appropriate records and submit the data as soon as possible.

  • Fund Management: ESMA expects asset managers to continue to apply existing regulatory requirements on risk management and to react accordingly.

Both the FCA and ESMA are continuing to monitor developments.

2. Short selling

In connection with the COVID-19 outbreak, ESMA has temporarily lowered the reporting threshold for holders of net short positions in shares traded on an EU regulated market to include positions which reach or exceed 0.1% of the issued share capital.

The FCA has also been restricting short selling in certain EU traded securities on a day by day basis to support action taken by some EU regulators. 

 

 

3. Securities Financing Transactions Regulation and MiFIR

Securities financing transaction reporting obligations for credit institutions, investment firms and relevant third country entities apply as of 13 April 2020.   

However, in order to allow such entities to focus on business continuity and deal with issues arising from COVID-19, ESMA has issued a statement that competent authorities should not prioritise supervisory action in respect of these requirements until 13 July 2020.  This could include, for example, competent authorities not taking enforcement action for failure by such entities to comply with the reporting obligations during that time.  ESMA also states that competent authorities should apply their supervisory powers in a proportionate manner. 

The statement can be found here

In addition, ESMA has indicated that it is not necessary to register Trade Repositories (who receive the reported information) ahead of 13 April 2020.

Similarly, in respect of the new tick size regime for systematic internalisers under the Markets in Financial Instruments Regulation (which applies as of 26 March 2020), ESMA also states that competent authorities should not prioritise their supervisory actions until 26 June 2020.  Again, any supervisory powers should be applied in a proportionate manner.

Please see the ESMA statement here



4. FCA Activity

Separately, the FCA has said that it is reviewing its work plans to delay or postpone activity which is not critical to protecting consumers and market integrity in the short-term. This will include extending the closing date for responses to open consultation papers and Calls for Input until 1 October 2020 and rescheduling most other planned work.  

Routine business interactions are being scaled back and the FCA will currently only contact firms on business-critical requests and responses to the current situation.

 

 

5. Identifying key workers

Children of a limited number of "key workers" may be eligible for care in school during the current school closures and the FCA has provided some guidance on the identification of “key financial workers” (https://www.fca.org.uk/firms/key-workers-financial-services).

The FCA defines a key financial worker as someone who “fulfils a role which is necessary for the firm to continue to provide essential daily financial services to consumers, or to ensure the continued functioning of markets”.

The FCA states that it is for firms to decide who is essential for these purposes and recommends that the Chief Executive Officer Senior Management Function (SMF1) be accountable for this process (or if there is no SMF1, the most relevant member of the senior management team).

As part of this, firms should first identify the activities, services or operations which, if interrupted, are likely to lead to the disruption of essential services to the real economy or financial stability. They should then identify the individuals that are essential to support these functions and any critical outsourcing partners.

The types of roles that the FCA suggests may be considered essential includes:

  • Individuals essential in the overall management of the firm, e.g. SMFs.
  • Individuals essential in the running of online services and payments processing.
  • Individuals essential in the operation of trading venues and other critical elements of market infrastructure.
  • Risk management, compliance and audit staff.
  • Individuals that provide essential support to the above roles, such as finance and IT staff.

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