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Mar 24, 2020

COVID-19: Bank of England Announces Policy Measures for Financial Market Participants

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COVID-19: BANK OF ENGLAND ANNOUNCES POLICY MEASURES FOR FINANCIAL MARKET PARTICIPANTS

The Bank of England (BOE) has announced a series of policy measures designed to help U.K. financial market participants deal with the effects of the coronavirus (COVID-19) pandemic. The latest measures, announced on 20 March 2020,[1] primarily aim to ease the operational burden posed by key regulatory obligations applicable to firms, freeing them up to deal with the challenges presented to the wider economy by the pandemic. The BOE’s three policy committees, the Financial Policy Committee (FPC), Monetary Policy Committee (MPC) and Prudential Regulation Committee (PRC), also announced a package of measures on 11 March 2020, to alleviate the broader impact of COVID-19 on the U.K. economy.[2]

The BOE’s measures are in addition to a raft of actions announced by the U.K. government to deal with the pandemic. These include the U.K. government’s Coronavirus Job Retention Scheme (which will allow businesses to access support in paying up to 80% of the wages of employees who would otherwise have been laid off) and support for the self-employed (such as a deferral of Income Tax payments due in July 2020 until January 2021, and access to HMRC’s Time to Pay service, allowing businesses and self-employed individuals in financial distress to receive support with their tax affairs).[3]

Regulators around the world are issuing guidance for financial institutions on how they should operate in the wake of the pandemic. Firms that provide services on a cross-border basis may need to consider different responses to jurisdictions’ varying regulatory requirements, or otherwise employ a global policy covering the most stringent obligations.[4] An understanding of what is required by regulators in the evolving regulatory environment is therefore critical.

Counter-Cyclical Buffers and Stress Testing

On 20 March 2020, the BOE cancelled the 2020 annual stress tests of eight major U.K. banks and building societies. The move is designed to enable lenders to focus on providing credit for U.K. households and businesses. The publication of the results of the BOE’s 2019 biennial exploratory scenario has also been postponed until further notice so as to relieve bank treasury staff from the related additional administrative burden. On 12 March 2020, the European Banking Authority (EBA) announced its decision to postpone its EU-wide stress test until 2021.[5] The EBA has also recommended that national regulators consider postponing non-essential supervisory activities and offer leeway in remittance dates for certain aspects of banks’ supervisory reporting obligations.

Counter-cyclical capital buffers have been temporarily scrapped in response to the pandemic. U.K. banks, building societies and investment firms (other than those exempted by the U.K. Financial Conduct Authority (FCA)) are obliged to set aside regulatory capital in good times in order to prepare for the impact of an economic downturn (the so-called “counter-cyclical capital buffer”). The FPC is responsible for setting the buffer rate for the U.K. On 11 March 2020, it announced that the rate would be reduced from 1% to 0% of banks’ exposures to U.K. borrowers with immediate effect. The release of the buffer is expected to facilitate £190 billion of bank lending to businesses, ensuring businesses can continue to access credit while COVID-19 restricts trade. The FPC expects the 0% rate to apply for at least 12 months and any subsequent increase will not take effect until at least March 2022. The Prudential Regulation Authority (PRA) has made clear that the capital made available by the FPC’s measures should be used to support the economy and that neither bank dividends nor bonuses should increase in response to the measures.

Liquidity Policies: Reduction of Bank Rate and New Term Funding Scheme

On 11 March 2020, the MPC announced the following measures to help U.K. businesses and households manage the shock of COVID-19:

  • Bank rate: A reduction of the Bank Rate by 50 basis points to 0.25%, to improve business and household cash flows and access to finance;

  • Term Funding Scheme: The introduction of a Term Funding Scheme for small and medium-sized enterprises (SMEs), which will see the BOE provide funding for a term of four years of at least 5% of market participants’ real economy lending stock at rates equal to, or around, the Bank Rate; an additional incentive has also been introduced for lending to SMEs, which will see the BOE provide £5 of funding for every £1 of positive net-lending to SMEs; and

  • Bond Purchases: Maintenance of the BOE’s stock of sterling non-financial investment-grade corporate bond purchases (valued at £10 billion) and U.K. government bond purchases (valued at £435 billion), each financed by the issuance of central bank reserves.

The MPC’s measures are in addition to the financial support announced by the Chancellor of the Exchequer on 17 March 2020,[6] which includes:

  • Mortgage holidays: Mortgage providers will grant three-month mortgage holidays for those unable to meet mortgage repayments due to COVID-19; the deferred repayments (including any related interest) will be paid by borrowers at a later date, according to a repayment schedule agreed with their provider. Measures have also been announced to prevent private and public landlords from commencing eviction proceedings against tenants, including for non-payment, for three months;[7] the three-month mortgage holiday extends to landlords affected by tenants’ inability to maintain such payments; and

  • SME loans: An extension of the government’s Business Loan Interruption Scheme to provide loans of up to £5 million to SMEs, with no interest due for the first six months.

Expected Credit Loss Under IFRS9

The PRA has reminded firms that forward-looking information used to form the basis of adjustments to expected credit loss estimates for the purposes of COVID-19 should be reasonable and supportable under IFRS9 accounting standards. In particular, the PRA expects firms to bear in mind that, at this stage, reliable information upon which to base such forecasts is limited. Where forecasts are made, firms should take account of the temporary nature of the shock caused by the pandemic and the relief measures being put in place by U.K. authorities. 

Postponement of Supervisory Programs

FCA and PRA supervisory programs which impose obligations upon financial institutions and financial market infrastructures (FMIs) will be suspended or adapted in many cases to enable firms to focus on managing the implications of COVID-19.[8] In particular:

  • Open-ended funds investigation: The BOE/FCA survey of open-ended funds, launched in support of the joint investigation into funds’ liquidity mismatches, will be suspended until further notice;

  • Non-critical obligations: data requests, on site-visits and deadlines for firms and FMIs that are not “critical” will be postponed; and

  • Senior Management Function applications: the processing and review of applications for Senior Management Functions will be reviewed by the PRA to reduce regulatory burdens.

The BOE also intends to suspend the deadline for responses to certain BOE and PRA consultations[9] until 1 October 2020 and to postpone the implementation of the PRA’s proposed changes to internal ratings based models until 1 January 2022. The FCA has also postponed the deadlines for responses to its open consultation papers and Calls for Input until 1 October 2020[10] and the European Securities and Markets Authority (ESMA) has announced that the deadlines for responses to all consultation papers with a closing date on, or after, 16 March 2020 have been extended by four weeks.[11] Details of the revised deadlines for the consultations suspended by the BOE, FCA and ESMA are set out in the Annex to this client note. The U.K. regulators' Financial Services Regulatory Initiatives Forum, designed to help regulators manage the operational demands of regulatory initiatives, will meet as soon as possible in April 2020 with a view to producing a coordinated plan for future regulatory work in light of COVID-19.

Global Outlook

Governments around the world are taking similarly decisive action to deal with the escalating COVID-19 crisis. On 17 March 2020, the U.S. Federal Reserve announced a package of measures to address the sudden strain placed upon financial markets, discussed in our client note, “The Fed Repurposes the Financial Crisis Playbook for Pandemic Response.” On 20 March 2020, six central banks (namely, the Bank of Canada, Bank of England, Bank of Japan, European Central Bank, U.S. Federal Reserve and Swiss National Bank) announced a coordinated plan to enhance the availability of U.S. dollar liquidity swap line arrangements. The swap line arrangements act as standing facilities amongst central banks to provide liquidity during periods of strain in global funding markets. This inter-governmental coordination demonstrates the global response demanded of governments to tackle the pandemic. As the fallout from COVID-19 continues to spread across the globe, governments and regulators around the world will need to respond quickly in developing policy to deal with the challenges the pandemic presents.

Annex: Postponed EU/UK Supervisory Programs

SUPERVISORY PROGRAM
ORIGINAL DEADLINE
REVISED DEADLINE
BOE/PRA CONSULTATIONS

Operational Resilience: Impact Tolerances for Important Business Services

3 April 2020

October 1, 2020

Operational Resilience: Central Counterparties

3 April 2020

October 1, 2020

Operational Resilience: Recognised Payment System Operators and Specified Service Providers

3 April 2020

October 1, 2020

Operational Resilience: Central Securities Depositories

3 April 2020

October 1, 2020

Outsourcing and third party risk management

3 April 2020

October 1, 2020

FCA CONSULTATIONS

Building Operational Resiliance: impact tolerances for important business services

3 April 2020

1 October 2020

Quarterly Consultation

3 April 2020

1 October 2020

Introducing a Single Easy Access Rate for cash savings

9 April 2020

1 October 2020

Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations

5 June 2020

1 October 2020

Open-ended Investment Companies—Proposals for a more proportionate Listing regime

9 June 2020

1 October 2020

Call for Input: Open Finance

17 March 2020

1 October 2020

Call for Input: Accessing and using wholesale data—Call for input

1 May 2020

1 October 2020

Timings for rescheduled roundtables will be confirmed later in the year.

ESMA CONSULTATIONS

Guidelines on Internal Controls for CRAs 

16 March 2020

13 April 2020

MiFIR Report on SI

18 March 2020

15 April 2020

Guidelines on Securitisation Repository Data Completeness and Consistency Thresholds

16 March 2020

13 April 2020

MiFID II/MiFIR Review Report on the Transparency Regime for Equity and Equity-Like Instruments, the Double Volume Cap Mechanism and the Trading Obligations for Shares

17 March 2020

14 April 2020

Draft Regulatory Technical Standards Under the Benchmarks Regulation

11 May 2020

8 June 2020

Draft Technical Standards on the Provision of Investment Services and Activities in the Union by Third-Country Firms under MiFID II and MiFIR

31 March 2020

28 April 2020

MiFIR Review Report on Transparency for Non-Equity TOD

19 April 2020

17 May 2020

Footnotes

[1]   BOE’s announcement of policy measures for financial market participants to address COVID-19 was published on 20 March 2020.
[2]  BOE’s annoncement of policy measures to address the economic shock of COVID-19 was published on 11 March 2020.
[3]  See COVID-19: Support for businesses.
[4]  See our client note, “Planning in a Pandemic: Considerations for Regulated Financial Institutions in the US, EU and UK
.
[5]  EBA’s announcement of postponement of EU-wide stress testing was published on 12 March 2020.
[6]  The Chancellor of the Exchequer’s speech on the government’s response to COVID-19 was delivered on 17 March 2020.
[7]  The Government’s announcement of a complete ban on evictions and additional protections for renters was published on the government website on 18 March 2020.
[8]  See Annex for a list of postponed FCA, PRA and ESMA consultations.
[9]  This includes the joint BOE/PRA consultation on “Operational Resilience: Impact tolerances for important business services” (details of which can be found here: https://finreg.shearman.com/UK-Regulators-Launch-Consultation-on-Operational-) and the PRA’s consultation on “Outsourcing and third party risk management” (details of which can be found here: https://finreg.shearman.com/UK-Prudential-Regulator-Consults-on-Outsourcing-and).
[10] See FCA information for firms on Coronavirus (COVID-19) response
[11] See ESMA Extends Consultations Response Date.

Authors and Contributors

Barnabas Reynolds

Partner

Financial Institutions Advisory & Financial Regulatory

+44 20 7655 5528

+44 20 7655 5528

London

Thomas Donegan

Partner

Financial Institutions Advisory & Financial Regulatory

+44 20 7655 5566

+44 20 7655 5566

London

Chloe Barrowman

Professional Support Lawyer

Financial Institutions Advisory & Financial Regulatory

+44 20 7655 5136

+44 20 7655 5136

London