COVID-19: FCA ANNOUNCEMENT ON KEY WORKERS IN FINANCIAL SERVICES AND OTHER ISSUES

The FCA has published a series of measures and regulatory guidance on how financial services firms should deal with the coronavirus (COVID-19) pandemic. In our previous client notes, “Planning in a Time of Pandemic: Considerations for Regulated Financial Institutions in the US, EU and UK” and “Short Sale Bans in Response to the COVID-19 Pandemic,” we have addressed general issues that arise for regulated firms and certain specific measures in areas such as short selling,^[1] consultation papers^[2] and telephone recordings.^[3]

On 18 March 2020, the U.K. Prime Minister Boris Johnson announced, in an unprecedented public broadcast in peacetime, significant new restrictions on business activities and the closure of schools. However, key workers are expressly permitted to continue working and travelling to work and are allowed to continue to send their children to school. One of the industries identified as critical is financial services. The FCA has now given guidance to firms, including advice on identifying financial services “key workers” who are unrestricted by government measures from continuing to work, on site where necessary, and whose children may continue to use schools. U.K. financial services firms must therefore identify and notify such key workers of their status, a significant undertaking for human resources and compliance departments of institutions already under pressure to deal with the pandemic and the challenges of remote working.

The FCA is working with the U.K. Government, the Bank of England (BOE), the Payment Systems Regulator and financial services firms to guarantee the ongoing protection of consumers and the functioning of markets in the wake of the global health emergency. Details of recent measures taken by the BOE in response to the crisis can be found in our client note “COVID-19: Bank of England Announces Policy Measures for Financial Market Participants.” The FCA will provide ongoing updates, guidance and information for firms in the coming weeks as the COVID-19 situation develops.

Key Workers in Financial Services

On 19 March 2020, linked to Mr. Johnson’s announcement, the U.K. Government published guidance advising that schools should close to students unless their parents are key workers who are critical to the COVID-19 response or work in one of a series of other critical sectors, and have no other childcare.^[4] Financial services were identified as being among the critical sectors for the Government’s purposes. “Key workers” in financial services firms are described by the Government as staff “needed for essential financial services provision (including but not limited to workers in banks, building societies and financial market infrastructure).” We understand by this that firms are being asked to ensure that key services such as those available in bank branches or via online banking and exchanges, clearing houses and central securities depositories should continue to operate as normal. It is unclear from this statement whether other financial services industries such as insurance,^[5] asset management and brokerage are included, since they are not named. However, where these are involved in customer provision of financial services, our view is that they would be.

On 20 March 2020, the FCA published guidance on how financial services firms should identify key workers within their organizations.^[6] The guidance describes a key financial services worker as one 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” and provides that firms themselves are best placed to decide which of their staff fit this description.

According to the FCA, firms can take the following steps to help identify key financial services staff:

• 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;
• identify the individuals that are essential to support these functions; and
• identify any critical outsource partners who are essential to continued provision of services, even where these are not financial services firms.

A non-exhaustive list of the types of roles that may be considered as providing essential services is set out in the guidance and includes individuals essential for the following functions:

• overall management of the firm (e.g. those that fall within the Senior Managers Regime);
• operation of trading venues and other critical elements of market infrastructure;
• running of online services and processing;
• running of branches, and provision of essential customer services (e.g. dealing with customer queries, client money or access to cash and payment services);
• facilitation of corporate and retail lending and administering the repayment of debt;
• risk management, compliance and audit functions (and any other functions required for firms to comply with customer needs and regulatory obligations); and
• support functions for the above, such as finance and IT staff, but only where they cannot provide their services from home.

A number of functions remain in grey areas. For example, outsourced service providers may be categorized as “support functions”, depending on how critical the services are to firms. Key external service providers of support, such as law firms and accountancy firms, may also fall within “support functions”, depending on the circumstances. Key employees in internal legal departments will likely qualify, for example, where they support key functions or are related to the compliance or general counsel’s office. However, it would be up to firms themselves to designate such persons. Firms will also need to consider whether secondment arrangements or other additional documentation are necessary to support categorization of key employees needed on site (or at their employer’s office) to deal with particular situations. The FCA has advised that it expects the number of financial services workers required to be physically present should be considerably smaller than in a “business as usual” scenario and every possible step should be taken by employers to facilitate workers being able to operate from home. In particular, it has clarified that the following workers should not be expected to travel into work in order to provide their services:^[7]

• Financial advisers;
• Staff who are able to securely trade shares and financial instruments from home;
• Business support staff who cannot provide their services from home or are looking after specialist equipment or technology; and
• Claims management companies and sellers of non-essential goods and credit.

The FCA advises firms to consider issuing a letter to all individuals they identify as key workers that clearly identifies them as such and that can be presented to schools on request. Although these certification arrangements are currently limited to schooling issues, it is possible that in future a similar test will be applied for access to other public services, such as transportation, travel or testing, depending on how the crisis develops.

Other FCA Actions and Announcements in Response to COVID-19

The FCA has provided a series of industry updates, announcements and guidance on its “FCA information for firms on coronavirus (Covid-19) response” page.^[8]

FCA Work Programme

The FCA is reviewing its work plans with a view to postponing activity which is not essential for the short-term protection of consumers or market integrity. It has already announced an extended deadline of 1 October 2020 for responses to all open FCA consultation papers and calls for input.^[9]

Capital Markets

On 26 March 2020, the FCA, Financial Reporting Council (FRC) and Prudential Regulation Authority (PRA) published a joint announcement on their measures to support the capital markets through COVID-19. These include granting companies an additional two months to publish their audited annual financial reports and publishing guidance for companies and PRA-regulated firms on the preparation of financial statements in light of the pandemic.^[10]

Market Trading and Reporting

Firms should continue to comply with their obligations to record calls and should notify the FCA where this becomes impossible. Submission of data for trade reporting purposes should continue as normal to the extent possible. Where firms encounter difficulties in data submission, they should keep records and submit the data as soon as possible, contacting the FCA with any concerns they may have. Firms should also focus on minimizing the risks of operational disruption resulting from COVID-19 at this time. The FCA intends to comply with the Public Statement issued by the European Securities and Markets Authority advising national regulators to deprioritize supervisory actions to enforce the new tick-size regime for systematic internalizers under the Markets in Financial Infrastructure Regulation, which came into force on 26 March 2020.^[11]

Senior Managers

The FCA has confirmed that firms are not expected to appoint a senior manager to take responsibility for COVID-19 and should instead allocate responsibility appropriately among existing Senior Manager Functions. The FCA does, however, advise that individuals appointed to the Chief Executive Officer Senior Management Function (SMF1) should be accountable for determining which employees within their organizations qualify as financial services key workers.

Mortgages

The FCA has issued guidance on how mortgage lenders and administrators and home purchase providers and administrators should operate in the exceptional circumstances surrounding COVID-19. The guidance requires firms to grant three-month “payment holidays” to customers experiencing difficulties in meeting mortgage payments (except where it is reasonable and in the customer’s best interests not to do so), and prohibits repossessions other than in exceptional circumstances. When considering enforcement proceedings against firms operating in breach of the guidance, the FCA will take into account relevant sections of the FCA Handbook on firms’ duties to have regard to the interests of customers and to act honestly, fairly and professionally in customers’ best interests.^[12]

Operational Resilience

FCA-regulated firms are expected to have robust contingency plans to deal with significant global events like the COVID-19 crisis. The FCA and Bank of England are reviewing firms’ contingency plans and expect firms to take all reasonable steps to ensure they continue to comply with their regulatory obligations, notwithstanding any adjustments made to their usual practices in the context of COVID-19. This issue is discussed in further detail in our client note “Planning in a Time of Pandemic: Considerations for Regulated Financial Institutions in the US, EU and UK.”

Urging UK Banks to Continue Lending

On 25 March 2020, HM Treasury, the BOE and the FCA wrote a joint letter to the CEOs of U.K. banks, urging them to maintain, and even extend, their existing lending activity and to “take all action necessary” to ensure that the benefits of government measures to mitigate the effects of COVID-19 flow through to businesses and consumers.^[13]

Insurance

The FCA has announced that it expects insurers to show flexibility to the needs of customers in light of the pandemic, and the ability of customers to make claims should not be impacted by the circumstances. General insurance firms should have plans to deal with the operational challenges of the situation, including having a Senior Manager responsible for business continuity. Plans to deal with staff absences should be put in place and the FCA should be notified of gaps in firms’ strategies that may cause harm to customers. Specific guidance has been given with respect to travel, motor, home and private medical insurance, product suspensions, renewals and mid-term adjustments.^[14] In particular:

• Travel insurers have been asked to clearly communicate any policy exclusions that result from coronavirus to their existing customers.
• Motor and home insurers have been asked not to reject claims because of a consumer’s change in how they use their vehicle or their home address, in response to Government advice and the emerging coronavirus situation.
• For motor insurance, the government’s 6 month moratorium on the annual MOT (vehicle testing requirement) should be taken into account in assessing whether cars are properly licensed.
• The need to treat customers fairly under FCA rules has been highlighted, which may have an impact on insurance product terminations or cessations (e.g. need for sufficient notice, opportunity to change provider), renewals (including pricing and terms of renewed policies) and claims processing.

Consumers

The FCA is taking steps to ensure consumers are protected from the negative implications of COVID-19. Firms, particularly insurers and mortgage providers, have been reminded of their obligation to treat consumers fairly. Firms are also being encouraged to be flexible in pursuing customers for existing unsecured credit card debts and have specifically been asked to give customers until 1 October 2020 to respond to debt-related communications before imposing card suspensions.

Consumers are advised to be particularly alert to COVID-19 related scams which may relate to bogus insurance policies or investment opportunities, including those in crypto-assets. Specific advice on avoiding crypto-asset scams is also available on the FCA website[15] and includes guidance on the tactics to look out for (such as use of stock market uncertainty in advertising materials and “good cause” scams) and ways consumers can protect themselves (including checking crypto-asset providers against the FCA’s Financial Services Register and Warning List and being wary of unknown or unsolicited offers).

The FCA is also working with the BOE and Payment Systems Regulator to ensure consumers continue to have access to cash and to prepare electronic payment providers for changes in transaction numbers.

The FCA has also endorsed the Competition and Markets Authority’s position on business cooperation, published on 25 March 2020, which assured businesses that where coordination occurred in order to address concerns arising from COVID-19 and does not continue for longer, or go further, than necessary, competition-related enforcement action would not be taken.[16] The FCA’s support for this approach within the financial services sector means firms’ efforts to combat the fallout from the global pandemic would not be restricted by competition enforcement, although behavior that is deemed to be exploitative of the situation will not be tolerated.[17]

LIBOR

On 25 March 2020, the FCA confirmed that COVID-19 is not expected to affect LIBOR preparations and the target date for LIBOR cessation of the end of 2021 still stands. The FCA does acknowledge, however, that some interim LIBOR milestones may not be met as a result of the pandemic, and it will continue to monitor the impact on such timelines carefully.^[18]