The FCA's covid update & what it means for you

The FCA has set out its approach to a range of issues for firms stemming from the coronavirus pandemic.

The FCA's covid update & what it means for you

9 Apr 2020

Graeme Stewart

In a Dear CEO letter published last week, the FCA discusses requests to adapt its regulatory stance in light of the challenging environment we are in. 

Here we look at the regulator's responses to those requests, including issues such as capital adequacy, Mifid II 10 per cent drop reporting and verifying clients' identities. 

Capital adequacy

The letter makes it clear that, at least for now, the coronavirus crisis won't lead to a relaxation in the amount of capital firms must hold.
The FCA says:

  • "Government schemes to help firms through this period can be used to help firms plan for how they will meet debts as they fall due and help firms remain solvent in the immediate period

  • "Government loans cannot, however, be used to meet capital adequacy requirements as they do not meet the definition of capital."

This is pretty stark stuff. It makes clear that firms looking at applying for government-backed loans as a result of the crisis must consider what the specific purpose of the loan is.
The regulator stresses it's open to dialogue with firms, trade associations and consumer organisations so it can understand how the crisis is affecting both markets and clients.

But at present, it seems there'll be little flexibility in how it allows firms to meet their financial resources requirements.
The FCA’s expectation is that firms actively plan and manage their financial resilience and liquidity during the crisis.

Any firms concerned about being able to meet their capital requirements, or pay debts as they become due, should contact their FCA supervisor with their plan for the immediate period ahead. 
Firms doing this need to consider that the FCA has already been approached with “requests that… [the FCA] believe are not in the interests of consumers… [and] consider to be opportunistic and designed to undermine consumer protection."

The FCA says it “will reflect on what this tells us about the firms involved or conduct in the sector."

Mifid II 10 per cent drop reporting

The FCA has announced it has suspended any enforcement action around these rules until 1 October 2020, as long as firms:

  • have issued at least one notification to clients within the current reporting period saying their portfolio has decreased in value by at least 10 per cent; and
  • subsequently provide updates through their website, other public channels such as social media or generic client communications. These communications should update clients on market conditions, explain how clients can check their portfolio value and invite clients to contact the firm if they wish; or
  • choose to cease providing 10 per cent drop reports for any professional clients.

Client identity verification

Social distancing guidance continues, but firms must still comply with the money laundering regulations.

To support this, the FCA has given examples of how firms can identify clients remotely. These include:
  • accepting scanned documentation sent by email, preferably as a PDF;
  • seeking third party identity verification to support what's been provided by the client, such as from their lawyer or accountant;
  • asking clients to submit ‘selfies’ or videos;
  • relying on due diligence carried out by others such as the client’s main bank account provider, though this should reflect where appropriate agreements are in place to provide access to data;
  • using commercial providers who assess data sources to verify documents;
  • gathering and analysing additional data to assess evidence provided by the client such as geolocation, IP addresses, verifiable phone numbers;
  • verifying phone numbers, emails and physical addresses by sending codes to the client’s address to validate access to accounts; and
  • seeking additional verification once restrictions on movement are lifted for the relevant client group.
Dealing with clients remotely increases the potential for financial crime, so it's as important as ever that firms assess the risks clients pose together with what they intend to do.
If firms can arrange video meetings with clients then this may make the process easier.

If appropriate, firms can ask clients to have their documents with them at the meeting and show them on screen, before they send copies by email.
Electronic identity verification is another potential solution to dealing with clients remotely.  

Defined benefit pension transfers 

During the pandemic, the FCA says it will continue its work with firms providing defined benefit transfer advice.

Yet the policy statement on pension transfer advice, which is likely to introduce the contingent charging ban, has now been delayed until spring 2020.

This could mean May or June or once the immediate crisis is over.

Coronavirus job retention scheme 

HM Revenue & Customs has published details of how the job retention scheme will work. The guidance shows which employers can make a claim under the scheme, and which employees they can claim for.
It also shows how firms what they'll need to make a claim and how to go about it.
The online service for making claims isn't available yet, but is expected to be ready by the end of April.

Retail Mediation Activities Return (RMAR)

As we're now in April, many firms will be at or close to their business year end. This means their full year RMAR will be due for submission to the FCA.
The FCA letter makes no mention of this, and the regulator has so far given no indication that there'll be any changes to the requirement for completing the RMAR or the date when it becomes due.

We suggest firms should be preparing sooner rather than later to complete their return by the due date.
We're aware that because of the lockdown caused by Covid-19 some firms no longer have access to their offices, and it seems likely that some accountancy firms will be in a similar position.
It's unlikely though that the FCA will accept this as an excuse. 
This is because firms are required to have adequate contingency plans in place so they can continue to operate in the event of an emergency. These details should be included as part of firms’ business continuity plans.

That said, tese obligations may not apply to accountancy firms who will naturally focus on their own regulatory obligation to submit statutory accounts within nine months of the firm’s financial year end.
The regulator expects firms to continue to provide accurate and timely data to it. Where firms are unable to access this, they should use their ‘best endeavours’ to produce as accurate a return as possible.

This may involve using existing management information to report on areas such as the firm’s annual turnover, or the number of initial client advice events.
The deadline for completing the RMAR is 30 working days from the day after the firm’s reporting period ended.

Firms with reporting periods ending on 5 April 2020 will have a deadline of 20 May 2020, allowing for the Easter and early May bank holidays.

There is more information from the FCA on the coronavirus response here, with this page being regularly updated