Regulators around the world have taken a largely supportive approach to COVID-19, albeit with varying approaches. While some are in total lockdown, others are taking a more measured approach – but according to the word on the street, firms have been surprised by the ‘take-no-prisoners’ stance adopted by the UK’s Financial Conduct Authority (FCA).
With the unprecedented lockdown forcing most major banks into business continuity measures (BCM), many institutions have opted to reduce the risk to their employees through actions such as splitting sites, splitting shifts, and – in a large proportion of cases – working from home. But this brings with it its own raft of problems – most notably, and for traders in particular, the issue of regulatory compliance (and regulatory reporting) during the upcoming period of enforced absence.
The FCA last week confirmed that it was working with the Bank of England and the Treasury department to review all firms’ contingency plans – and made its position absolutely clear in terms of stringency. “We expect firms to take all reasonable steps to meet their regulatory obligations. For example, we would expect firms to be able to enter orders and transactions promptly into the relevant systems, use recorded lines when trading and give staff access to the compliance support they need,” it said.
In other words, don’t expect any leniency.
But although the regulator has claimed no objection to staff working from backup sites or from home as long as firms are able to meet these standards and undertake the relevant regulatory activities, realistically it is nigh on impossible to adhere to the same compliance standards in a home environment – making the official position seem, perhaps, somewhat intractable.
The current situation raises all kinds of compliance questions that it seems firms simply have not previously considered in their disaster planning. What can and can’t be done from a corporate laptop compared to a remote desktop? Can Bloomberg terminals be accessed remotely, and how can that activity be monitored? What are people allowed to print at home, and how can that be controlled? How can you enforce the restrictions against trading floor mobile phone usage, when that trading floor is now someone’s kitchen? Do firms’ have the right to record all mobile phone calls during this period, and how? Do they even have the technology in place to do so?
While firms frantically scramble to find answers, the FCA on Tuesday released further details around what would be expected from them during this period – and it didn’t make for reassuring reading.
“As firms are moving to alternative sites and working from home arrangements, they must consider the broader control environment in these new circumstances,” stressed the regulator. It has insisted that firms must continue to record calls, for example – and where this is not possible, must make the FCA aware as soon as possible. “We expect firms to consider what steps they could take to mitigate outstanding risks if they are unable to comply with their obligations to record voice communications. This could include enhanced monitoring, or retrospective review once the situation has been resolved,” said the statement.
If firms experience difficulty in submitting regulatory data, they must maintain appropriate records and submit as soon as possible “with no unnecessary delay,” although what constitutes “necessary” remained unspecified.
The regulator also recommended that firms take all steps to prevent market abuse risks – including enhanced monitoring and/or retrospective reviews, and warned that it would continue to monitor for market abuse and take action if necessary.
“The message we are getting from our team is: don’t show a chink in the armour, don’t show any weakness, don’t ask for anything,” says a compliance specialist at a London-based Tier 1 bank, speaking to RegTech Insight on condition of anonymity. “Standards cannot be slipping at a time like this. We don’t expect any forbearance from the FCA at all. It’s got to be business as usual, and then some.”
Some have suggested, cynically, that this could be a means of sorting out the sheep from the goats. The FCA has long endorsed a move towards automated reporting, and in the current climate it will be very easy to see who has successfully transitioned and who remains stuck in the mire of manual processing. Firms with automated systems will inevitably find the requirements easier to meet, even under current conditions – whereas those that are still doing much of the work manually (of which there are many, especially on the buy-side) are likely to struggle.
“Manual processes, downloading from multiple systems, manipulating spreadsheets – firms that are still doing things this way are going to find it a lot harder,” agrees one asset manager, who asked not to be named. “The current crisis is going to weed out a lot of these kinds of processes going forward. The stronger the automation and centralisation of data architecture in your model, the more resilient you are going to be – and the FCA could use this as an opportunity to identify who is managing to meet requirements, and who is running into difficulties.
“If these conditions go on for much longer, and firms start missing deadlines, that’s an obvious indicator of weakness in their processes.”
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