05 Jun Covid-19 and the regulatory impact on financial markets
Covid-19 and the regulatory impact on financial markets
The impact of Covid-19 on the global financial market has been huge – some stock exchanges saw their fastest drop in history and analysts say banks’ performance in equity and debt markets is already on a par with the financial crash of 2008.
Against this backdrop, regulators have recognised the need for guidance and temporary changes to some aspects of regulation and legislation. Key concerns for National Competent Authorities (NCAs) are maintaining the frameworks that combat financial crime, quelling the increased potential for market abuse and protecting consumers.
Anti-money laundering regulations
AML is one of the most crucial aspects of compliance for financial organisations and most have established an intricate system to satisfy the regulatory requirements on anti-money laundering in their particular jurisdictions, which has come under threat because of staff illness, furloughing and home working.
In the UK, the Financial Conduct Authority (FCA) has issued regular statements, explaining that firms should not change their risk appetite but acknowledging that some regulatory activities may be delayed.
Some of the key takeaways from the FCA’s advice are that it is relaxing Regulation 31 of Money Laundering Regulations, so that accounts should not be immediately closed if customer verification cannot be obtained, but firms should make reasonable efforts to authenticate customers and consider if there are alternative methods of being satisfied with a client’s identity. It has also stressed the importance of filing regular Suspicious Activity Reports, and, while it accepts there may be delays in reporting while staff are working remotely or furloughed, firms should still maintain accurate records that can be filed when normal service resumes.
The UK regulator was also very clear that a firm’s designated Money Laundering Reporting Officer (MLRO) should only be furloughed as a last resort, although it has left the allocation of other key workers to individual CEOs.
The European Banking Authority (EBA) was also clear that firms should continue to maintain strong ‘Anti-Money Laundering’ and ‘Know Your Customer’ measures and controls throughout the current pandemic and it called on Member States’ authorities to raise awareness about specific emerging threats due to Covid-19 and to remind organisations of the importance of reporting suspicious activity. Similarly, at the other side of the Atlantic, the Financial Crimes Enforcement Network (FinCEN) has asked institutions to contact them as soon as possible if they think the pandemic may delay filings related to counter terrorism or the Bank Secrecy Act.
Regulatory reporting, whether that is statutory disclosures, half yearly reports or depreciation notifications for retail investment clients are all potentially affected by Covid-19, which regulators have acknowledged. All regulators have made some shifts in expectations -for example the FCA extended some disclosures under the Senior Managers & Certification Regime, including changing the length of time someone may cover for a ‘senior manager’ from 12 to 36 weeks and relaxing some of the restrictions on Statements of Responsibilities.
ESMA has also made allowances for reporting delays by deprioritising some of its supervisory actions, including best execution deadlines under MiFID II – where firms were previously expected to publish reports until the end of April, they now have until the end of June instead.
Regulators have introduced a range of measures to enhance consumer protection including the FCA’s guidance to offer payment holidays to mortgage customers, which has just been extended until October. The European Central Bank also implemented a range of emergency funding packages, including targeted longer term financing options and specific pandemic emergency financing, and the Bank of England has taken steps which include slashing interest rates and offering funding so that banks can increase their lending to offer Government backed business loans such as the bounce back loans for SMEs and the Covid-19 corporate financing facility.
Restrictions on dividend payments and share buybacks
The EBA asked banks to consider avoiding dividend payments to investors in order to maintain robust capitalisation. The Prudential Regulation Authority also urged UK banks to suspend dividend payments and halt buybacks on ordinary shares until the end of the year to preserve capital, meaning the UK’s seven major banks have frozen £15bn worth of payments to investors.
As lockdown eases across the majority of jurisdictions some measures that were introduced have been eased, for example France, Italy, Spain, Germany, Austria and Belgium all implemented bans on the short selling of shares, which were lifted on the 18th May.
There is no doubt though that Covid-19 has changed the regulatory landscape across the global financial markets, and regulators will still be maintaining a close watch to ensure that anti-money laundering regulations, operational resilience and cybersecurity standards are maintained even as the global pandemic starts to ease.