"A plague on all your houses": Coping with COVID-19 for regulated financial services businesses
Coronavirus COVID-19 is first and foremost, a human tragedy involving suffering and death for large numbers of people. However, it is also having a huge effect on business. Financial services businesses are affected as much as many others, but will need to deal with the effects of the virus in the full glare of regulatory scrutiny.
The FCA has been quick to reiterate (in its statement published on 4 March 2020) its expectation for firms to have contingency plans in place and to take all reasonable steps to meet their regulatory obligations, but at the time of writing so far have not given much practical advice of what firms should be doing.
This article fills some of those gaps in relation both to the primary effects of the virus on staff and in closing buildings and the secondary effects relating to the financial effects on markets and businesses.
https://www.fieldfisher.com/en/services/privacy-security-and-information/privacy-security-and-information-law-blog/coronavirus-and-the-gdpr
Firms should review their HR policies as regards absence and consider whether these to revise them in the light of the emergency, particularly given the government announcements about changes in the availability of sick pay, and more support for SME employers in this regard.
The primary concern for many staff is will they be paid if they must self-isolate and/or get ill? Employers are taking different approaches to this issue. Employers' legal obligations will depend on various factors including whether the individual is an employee or a contractor; the terms of the individual's engagement; the individual is self-isolating on the employer's instructions or based on public health guidance; and it is the individual or his/her family member that is ill. Employers should take legal advice if the position is unclear. Of course, many employers may want to be more generous than the legal position.
The problem is worse if the staff in question are senior managers or certification staff. It may be difficult to replace them with other staff with the requisite skills. To prepare for this, firms should identify where the organisation has particular reliance on the skills or regulatory status of individuals a
nd should consider who could provide backup for these roles. It may be necessary to parcel out the functions and responsibilities of an individual amongst a number of others to involve one person becoming being overburdened.
A good starting place for this would be to review the statements of responsibility of senior managers, the management responsibilities map, if one has been prepared and the handover materials that each senior manager should maintain in relation to his or her role. Senior managers should be encouraged to ensure that this last document is thoroughly up to date to allow an orderly handover at short notice.
Of course, staff must have the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated. The identified backup individual may have little opportunity for further training, but consider whether it might be beneficial for there to be a short period of work shadowing or other interaction with the relevant staff member whose role they might need to fulfil.
Temporary stepping up to a senior management role for a period of less than 12 weeks - total in a 12-month period - will usually be exempted from the requirement for the FCA to pre-approve the appointment. However, as soon as it becomes apparent that a person will be performing an FCA controlled function for more than 12 weeks in that period, the firm should apply for approval.
Generally speaking, and in theory at least, firms will be better prepared for this than they might be in relation to staff shortages, as the unavailability of a building or facility is usually the prime focus of the disaster recovery arrangements that each firm is obliged to have in place to comply with the FCA .
However, each firm should be reviewing these plans as a matter of urgency. These plans will generally involve the switch to the use of another standby facility or home working or a combination of the two.
Each of these solutions may present problems in the light of the current extraordinary circumstances.
Often the same standby facilities are promised to a number of providers. Overbooking is common as this keeps the costs down and it is unlikely that several firms would be out of commission at the same time.
Unfortunately, this is precisely the situation firms may soon find themselves in. Firms should be checking with the providers of their disaster recovery facilities what their position is and checking the small print.
Firms may have business interruption insurance and should check if this will cover them for any necessary premises closure.
Home working now is a very realistic option for many firms and for many roles, but it poses various challenges.
Firms relying on remote solutions such as Citrix should check that they have enough licences in place for a mass-rollout. Firms relying on any remote solution such as Citrix or VPN should also ensure that their servers could cope with a vast increase in traffic coming in this way. Firms might want to redeploy IT staff from development to providing support for users.
Home working at scale, and perhaps for an extended period, brings a number of logistical problems. The way firms deal with system security, confidentiality of data, recording of telephone calls may all need to change if a large proportion of staff are working remotely.
Individuals may find that their home set-ups (perhaps a single laptop accessed on a sofa) do not allow the same level of productivity as they can achieve at the office. There are many ways to improve productivity at home and implemented if home working is likely for an extended period.
A start might be to set up a proper desk and maybe to add a second screen to the laptop - screens designed as portable second screens for laptops are now widely produced (although increased demand may make these more difficult to source). Voice recognition software or digital dictation software and wireless printing may also be useful. If staff are dealing with papers that include sensitive information or personal data it might be necessary to ensure they have a lockable safe to keep these secure.
A key issue for regulated firms is the adequate supervision of staff if everybody is working from home.
Solutions may involve dial-in meetings or video-conferencing, WhatsApp groups to share concerns and information and perhaps new reporting arrangements to ensure that deadlines are not missed for the numerous statutory and regulatory reporting requirements. One obvious first step is to ensure that managers, and perhaps other staff, have mobile and home numbers for everyone working at home. However, there is a need to consider in each case the extent to which this is legitimate and does not lead to breach of data protection concerns.
Many institutions, particularly banks and insurers, are now subject to stringent prudential requirements such as those as to the amount of highly loss-absorbent capital be held and others as to liquidity. Banks will benefit from the decision of the Financial Policy Committee to reduce the UK countercyclical buffer rate to 0% for bank exposures to UK obligors, which will have a very significant impact in freeing up lending capacity. The Bank of England has also announced the Term Funding Scheme for Small and Medium-sized Enterprises, to which firms in the Sterling Monetary Framework will have access.
Firms should also be alert to the impact of the crisis on their customers and any resultant impact on the firm's risk-based capital requirements (if applicable).
Given the turmoil and uncertainty at present regulated firms need to consider whether any planned payment of bonuses, dividends or other distributions (e.g., buybacks), or planned capital expenditure that will reduce liquidity are appropriate in this environment.
Firms that have in place financing arrangements should review their existing credit facilities to ensure that they will be able to comply with any financial covenants in the short to medium term. Often facilities will include financial covenants that if breached give the funder contractual rights to call in the facility or impose other terms.
One usual solution to covenant breaches is to raise further equity. However, this may not be realistic in the current markets except for firms that have a deep-pocket owner.
If a firm does not think they will be able to comply with the financial covenants during this period of uncertainty, they should seek to negotiate amendments or waivers to these covenants with the bank for the short to medium term, ideally before the breach occurs. Bank funders are being encouraged by Government to be sympathetic to problems caused by the virus and recent measures have improved bank's liquidity to allow for further lending.
If during this period, firms taking on new credit arrangements should review the financial covenants carefully and consider negotiating these for the short to medium term to ensure compliance.
Note that where a firm concludes that it does need to talk to its funders, this is likely to be something that it should report to its regulators under FCA Principle 11.
The scale of market falls has meant that investment firms are finding that their regulatory obligations to tell clients about falls of more than 10% have already been triggered and they may need triggering again. Where this involves an unanticipated mass-mailing this may pose logistical difficulties and firms should plan for this.
Inevitably, the crisis provoked by the virus is likely to cause some firms to breach their obligations under contracts. The legal consequences of this may not be as straightforward as for breaches for other reasons. In particular:
In the spirit of all working together, it is easy for firms to agree to things that are later determined to amount to a waiver of a contractual right or an amendment to the contract. Even if the contract contains a clause preventing oral variations or restricting the effect of waivers, these cannot always be relied upon.
Firm's should consider carefully whether they are seeking to give or receive a waiver and the extent of it and ensure that anything that they do want to agree is in writing and is unambiguous as to its scope.
Firms should be aware however that the FCA's Handbook does include some recognition that emergencies may make it more difficult for firms to comply with particular Handbook rules. This is set out in the Handbook at GEN 1.3.2 R, which provides relief from the consequences of contravention of such a rule in those circumstances. This relief applies in the limited circumstances where an emergency arises which:
(a) makes it impracticable for a person to comply with a particular rule in the Handbook;
(b) could not have been avoided by the person taking all reasonable steps; and
(c) is outside the control of the person, its associates and agents (and of its and their employees).
In these circumstances the person will not be in contravention of that rule to the extent that, in consequence of the emergency, compliance with that rule is impracticable.
However this relief applies only for so long as the consequences of the emergency continue and the person can demonstrate that it is taking all practicable steps to deal with those consequences, to comply with the rule, and to mitigate losses and potential losses to its clients (if any). It is notable that the condition here is for the firm to take "all practicable steps" rather than "all reasonable steps" so this may be regarded as a high threshold.
The person must notify the FCA as soon as practicable of the emergency and of the steps it is taking and proposes to take to deal with the consequences of the emergency.
Some of the ideas in this article may be helpful to assist firms in demonstrating to the FCA that they are taking all practicable steps in coping with this undoubted emergency.
Fieldfisher has been assisting its clients with introducing bespoke coronavirus policies, setting out guidance for dealing with the issues arising from the outbreak.
The FCA has been quick to reiterate (in its statement published on 4 March 2020) its expectation for firms to have contingency plans in place and to take all reasonable steps to meet their regulatory obligations, but at the time of writing so far have not given much practical advice of what firms should be doing.
This article fills some of those gaps in relation both to the primary effects of the virus on staff and in closing buildings and the secondary effects relating to the financial effects on markets and businesses.
Primary effects of the virus: Staff
Are your HR policies fit for a pandemic?
The most obvious primary effect of the virus is its potential effect on the availability of staff, who may become too ill to work, because they need to follow advice to self-quarantine or because they need to take a leave of absence to care for sick relatives or for children if schools are closed. Firms of course have a duty to keep staff safe. In particular, there is a requirement under the Health and Safety at Work etc. Act 1974 for companies to take reasonable steps to look after the health, safety and welfare of staff. This implies taking the measures necessary not to expose staff to the virus. However, in meeting this duty firms need also to be mindful of their obligations under the obligations under the General Data Protection Regulation (GPDR) since information about health is a special category of personal data, which attracts a high degree of protection. For more information about the GDPR in the context of the coronavirus and see our separate blog at:https://www.fieldfisher.com/en/services/privacy-security-and-information/privacy-security-and-information-law-blog/coronavirus-and-the-gdpr
Firms should review their HR policies as regards absence and consider whether these to revise them in the light of the emergency, particularly given the government announcements about changes in the availability of sick pay, and more support for SME employers in this regard.
The primary concern for many staff is will they be paid if they must self-isolate and/or get ill? Employers are taking different approaches to this issue. Employers' legal obligations will depend on various factors including whether the individual is an employee or a contractor; the terms of the individual's engagement; the individual is self-isolating on the employer's instructions or based on public health guidance; and it is the individual or his/her family member that is ill. Employers should take legal advice if the position is unclear. Of course, many employers may want to be more generous than the legal position.
Are any staff irreplaceable?
The problem is worse if the staff in question are senior managers or certification staff. It may be difficult to replace them with other staff with the requisite skills. To prepare for this, firms should identify where the organisation has particular reliance on the skills or regulatory status of individuals and should consider who could provide backup for these roles. It may be necessary to parcel out the functions and responsibilities of an individual amongst a number of others to involve one person becoming being overburdened.
A good starting place for this would be to review the statements of responsibility of senior managers, the management responsibilities map, if one has been prepared and the handover materials that each senior manager should maintain in relation to his or her role. Senior managers should be encouraged to ensure that this last document is thoroughly up to date to allow an orderly handover at short notice.
Of course, staff must have the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated. The identified backup individual may have little opportunity for further training, but consider whether it might be beneficial for there to be a short period of work shadowing or other interaction with the relevant staff member whose role they might need to fulfil.
Temporary stepping up to a senior management role for a period of less than 12 weeks - total in a 12-month period - will usually be exempted from the requirement for the FCA to pre-approve the appointment. However, as soon as it becomes apparent that a person will be performing an FCA controlled function for more than 12 weeks in that period, the firm should apply for approval.
Primary effects of the virus: Closure of premises
Will your disaster recovery policies work?
Another foreseeable effect of the virus may be the need to close down an office or facility where there has been an outbreak or to allow a deep clean. Firms that are reliant on suppliers should also be asking their suppliers how they are coping with these issues, and be prepared to cooperate with them to solve any problems.Generally speaking, and in theory at least, firms will be better prepared for this than they might be in relation to staff shortages, as the unavailability of a building or facility is usually the prime focus of the disaster recovery arrangements that each firm is obliged to have in place to comply with the FCA .
However, each firm should be reviewing these plans as a matter of urgency. These plans will generally involve the switch to the use of another standby facility or home working or a combination of the two.
Each of these solutions may present problems in the light of the current extraordinary circumstances.
Use of standby facilities
Often the same standby facilities are promised to a number of providers. Overbooking is common as this keeps the costs down and it is unlikely that several firms would be out of commission at the same time. Unfortunately, this is precisely the situation firms may soon find themselves in. Firms should be checking with the providers of their disaster recovery facilities what their position is and checking the small print.
Firms may have business interruption insurance and should check if this will cover them for any necessary premises closure.
Making home working work
Home working now is a very realistic option for many firms and for many roles, but it poses various challenges.Firms relying on remote solutions such as Citrix should check that they have enough licences in place for a mass-rollout. Firms relying on any remote solution such as Citrix or VPN should also ensure that their servers could cope with a vast increase in traffic coming in this way. Firms might want to redeploy IT staff from development to providing support for users.
Home working at scale, and perhaps for an extended period, brings a number of logistical problems. The way firms deal with system security, confidentiality of data, recording of telephone calls may all need to change if a large proportion of staff are working remotely.
Individuals may find that their home set-ups (perhaps a single laptop accessed on a sofa) do not allow the same level of productivity as they can achieve at the office. There are many ways to improve productivity at home and implemented if home working is likely for an extended period.
A start might be to set up a proper desk and maybe to add a second screen to the laptop - screens designed as portable second screens for laptops are now widely produced (although increased demand may make these more difficult to source). Voice recognition software or digital dictation software and wireless printing may also be useful. If staff are dealing with papers that include sensitive information or personal data it might be necessary to ensure they have a lockable safe to keep these secure.
A key issue for regulated firms is the adequate supervision of staff if everybody is working from home.
Solutions may involve dial-in meetings or video-conferencing, WhatsApp groups to share concerns and information and perhaps new reporting arrangements to ensure that deadlines are not missed for the numerous statutory and regulatory reporting requirements. One obvious first step is to ensure that managers, and perhaps other staff, have mobile and home numbers for everyone working at home. However, there is a need to consider in each case the extent to which this is legitimate and does not lead to breach of data protection concerns.
Secondary effects of the virus: Market falls and volatility
Capital adequacy and liquidity
Clearly, a sudden fall in asset values can have an effect both on a firm's capital position and on its liquidity. The regulatory capital and liquidity resource requirements applicable to any given firm depend on the type of business of the firm and the permissions it holds.Many institutions, particularly banks and insurers, are now subject to stringent prudential requirements such as those as to the amount of highly loss-absorbent capital be held and others as to liquidity. Banks will benefit from the decision of the Financial Policy Committee to reduce the UK countercyclical buffer rate to 0% for bank exposures to UK obligors, which will have a very significant impact in freeing up lending capacity. The Bank of England has also announced the Term Funding Scheme for Small and Medium-sized Enterprises, to which firms in the Sterling Monetary Framework will have access.
Firms should also be alert to the impact of the crisis on their customers and any resultant impact on the firm's risk-based capital requirements (if applicable).
Given the turmoil and uncertainty at present regulated firms need to consider whether any planned payment of bonuses, dividends or other distributions (e.g., buybacks), or planned capital expenditure that will reduce liquidity are appropriate in this environment.
Checking your own banking covenants
Firms that have in place financing arrangements should review their existing credit facilities to ensure that they will be able to comply with any financial covenants in the short to medium term. Often facilities will include financial covenants that if breached give the funder contractual rights to call in the facility or impose other terms.One usual solution to covenant breaches is to raise further equity. However, this may not be realistic in the current markets except for firms that have a deep-pocket owner.
If a firm does not think they will be able to comply with the financial covenants during this period of uncertainty, they should seek to negotiate amendments or waivers to these covenants with the bank for the short to medium term, ideally before the breach occurs. Bank funders are being encouraged by Government to be sympathetic to problems caused by the virus and recent measures have improved bank's liquidity to allow for further lending.
If during this period, firms taking on new credit arrangements should review the financial covenants carefully and consider negotiating these for the short to medium term to ensure compliance.
Note that where a firm concludes that it does need to talk to its funders, this is likely to be something that it should report to its regulators under FCA Principle 11.
Reporting falls to clients
The scale of market falls has meant that investment firms are finding that their regulatory obligations to tell clients about falls of more than 10% have already been triggered and they may need triggering again. Where this involves an unanticipated mass-mailing this may pose logistical difficulties and firms should plan for this.
Secondary effects of the virus: Enforceability of contracts
Inevitably, the crisis provoked by the virus is likely to cause some firms to breach their obligations under contracts. The legal consequences of this may not be as straightforward as for breaches for other reasons. In particular:
- the contract may include a "force majeure" clause exempting a party (or all parties) from performance in certain circumstances beyond its control;
- the contract may include a "MAC" clause allowing a party to pull out of an agreement with another party that has suffered from a material adverse change;
- a party may be able to argue that the common law legal principle of frustration applies because the contract has been "frustrated" by external events and that this exempts both parties from the contract or from particular provisions of the contract (such as a requirement to do things within a particular time).
In the spirit of all working together, it is easy for firms to agree to things that are later determined to amount to a waiver of a contractual right or an amendment to the contract. Even if the contract contains a clause preventing oral variations or restricting the effect of waivers, these cannot always be relied upon.
Firm's should consider carefully whether they are seeking to give or receive a waiver and the extent of it and ensure that anything that they do want to agree is in writing and is unambiguous as to its scope.
Conclusion
COVID-19 will pose enormous challenges for us all. Financial services firms have the additional challenge of working in a highly regulated area and under high levels of expectation and scrutiny from the regulators.Firms should be aware however that the FCA's Handbook does include some recognition that emergencies may make it more difficult for firms to comply with particular Handbook rules. This is set out in the Handbook at GEN 1.3.2 R, which provides relief from the consequences of contravention of such a rule in those circumstances. This relief applies in the limited circumstances where an emergency arises which:
(a) makes it impracticable for a person to comply with a particular rule in the Handbook;
(b) could not have been avoided by the person taking all reasonable steps; and
(c) is outside the control of the person, its associates and agents (and of its and their employees).
In these circumstances the person will not be in contravention of that rule to the extent that, in consequence of the emergency, compliance with that rule is impracticable.
However this relief applies only for so long as the consequences of the emergency continue and the person can demonstrate that it is taking all practicable steps to deal with those consequences, to comply with the rule, and to mitigate losses and potential losses to its clients (if any). It is notable that the condition here is for the firm to take "all practicable steps" rather than "all reasonable steps" so this may be regarded as a high threshold.
The person must notify the FCA as soon as practicable of the emergency and of the steps it is taking and proposes to take to deal with the consequences of the emergency.
Some of the ideas in this article may be helpful to assist firms in demonstrating to the FCA that they are taking all practicable steps in coping with this undoubted emergency.
Fieldfisher has been assisting its clients with introducing bespoke coronavirus policies, setting out guidance for dealing with the issues arising from the outbreak.