The regulatory response to COVID-19: In conversation with the FCA

Rowena Morris (RM): Welcome to the latest episode of our COVID-19 Business in Focus podcast, where we explore the business impacts of coronavirus. I’m Rowena Morris, a director at PwC, and I help clients prepare and respond to crisis situations, and I’m your host for this series.

The Financial Conduct Authority – the FCA – and other regulators have been very active in their response to COVID-19. This has included postponing some pieces of work to allow the industry to focus on addressing the associated challenges, and publishing a wide range of guidance on their expectations of firms.

In this episode we'll discuss how the FCA has supported the industry's response to the global pandemic. We’ll take a look at some of the key components of the FCA's business plan for this year, and discuss the impact this might have on the sector. We'll also be sharing some practical advice for firms as they navigate the impacts of COVID-19 whilst continuing to respond to regulatory requirements.

I'm delighted to be joined today by PwC's financial services leader Andrew Kail, and Katie Fisher, director of strategy at the FCA. Welcome to our virtual studio, Andrew and Katie.

Andrew Kail (AK): Hi Rowena.

Katie Fisher (KF): Hi Rowena, hi Andrew.

RM: Thanks for joining us both. So to kick off, financial services firms have done a huge amount of work in response to COVID-19, with an initial focus on maintaining critical operations and protecting customers as the priority. So Andrew, now that we're a few months on from that initial response, can you tell us a little bit about what firms are focused on now?

AK: Sure. I think we're in a really interesting point in this particular crisis. I think we were talking when this all started about three phases and that was the mobilise, stabilise and then strategise, and actually I think where we are now, we're clearly right in that stabilise moment, and companies are dealing with the here and now, but also looking forward.

So what are they doing right now? Well, I think first and foremost they're trying to stabilise their business around business flow and that's focusing on customers, it's focused on generating revenues and getting back to some form of normality. They're clearly focused on their operations – I know we'll talk about that in more detail on this call, but there's a whole focus on stabilising the business around making sure that technology and the like is operating as it should, and they're really focusing on their supply chain and their network: these are large, complex organisations that are working in a in a vast ecosystem, which means it's not just about their operations, it's about the operations of a wider group of companies.

They're clearly focused on risk and regulation right now: they have to risk accept a number of procedures to mobilise enough for the heat of the crisis, and therefore stabilising that now around the risks of the organisation but ensuring they’re complying with all relevant regulations is clearly a huge focus.

The next area that they’re very focused on is around capital and cash flow, making sure again, not just from a regular perspective but an economic perspective that the organisation is robust, and of course, they're focusing on their people, and making sure that the health and safety and the wellbeing of people is top of mind.

So that's all very much on the stabilise gender, but then they're now very much starting to look forward on the strategy side, thinking about business planning, the transformation of the business in what will be the new world post-COVID, and really starting to take account of that in an environment where they need to think through both macroeconomic and political considerations, of course considering as well what their competitors are doing.

So actually a huge amount is going on in firms right now right across the industry as they look to both stabilise but then think forward in terms of strategy.

RM: And the FCA, Katie, of course has a wide-ranging agenda beyond the immediate response to COVID-19, which it set out in its business plan in April, and obviously the business plan was a bit different this year, and took a longer term view, so can you tell us why the FCA took a slightly different approach and how COVID-19 influenced the priorities set out to that plan?

KF: Yep, very happy to talk about that, and it was strange timing as you say: we were about to push our business plan out and planning for April, and everything got really significantly changed in March, so obviously one of the first things we articulated in that plan was our immediate response to COVID then and try to set out there the fact that, because the scale of that impact would be significant, some of our plans would necessarily be a little bit more tentative, and we would need to make sure we stay engaged with stakeholders to keep them up to date as things may change as a result of dealing with COVID and the medium-term consequences of that.

But as you said, we had already decided that really what as an organisation we wanted to try and do with our plan this year, and as we prepared our planning process, during the course of the months leading up to the publication, was really trying to articulate more clearly for everyone to understand the outcomes that we were seeking to achieve, and as you say, trying to articulate that over a longer-term time horizon, rather than articulating all the different pieces of activity that we might be undertaking, trying to make sure everybody understands well, this is what we're aiming for, this is what we seek to achieve in the interest of our objective over the coming period, and we thought that having a shorter document that articulated that was the right way to go, and that's what we've sought to do.

We’ve just really tried to keep the key themes running through that, around reducing and preventing harm to consumers, and those priorities that we really want to expend and put our focus on are around ensuring that consumer investment decisions are made effectively, because we see some significant risk of harm in those markets, partly driven by the additional responsibilities that consumers have, making complex investment decisions with initiatives such as the shift from defined contribution insurance and some of the government's pension freedom, and we really want to make sure that that the whole value chain and everything works well there for consumers.

We really want to ensure that consumer credit markets work well, and again, I think the objectives around that are really heightened by some of the challenges that people are experiencing as a result of COVID-19, because although we know that credit markets work well for a lot of borrowers, there’s a sizeable group that it doesn't work well for, who have problems and really struggle, and we need to make sure that that works more effectively.

The whole payments market and ensuring that payments are safe and accessible is another area where we're putting considerable focus, to make sure that consumers can rely on payment services effectively and that that they are properly safeguarded as they undertake that, and the final area and we identified is around delivering fair value in a digital age, which is about ensuring that as the use of consumer data and behaviour through digital channels increases, that we are managing the risks and around that, as well as obviously the benefits, and that consumers are treated fairly and in pricing and the other terms that they're offered.

As I mentioned we also have a fifth priority that we articulated in that plan, which is about focusing on ourselves and transforming our operations to make sure that we really look at how we operate as an organisation, thinking about the data we collect and how use that, how we share intelligence and how we h focus our energies, and we're looking to make sure we learn lessons as an organisation of what we've done well in the past and not so well, and again, like most organisations at the moment, we're also seeking to really make sure we learn the lessons of you know this really extraordinary period, and think about how we learn the lessons about making decisions quickly and effectively in these kind of periods, and what you can learn about different ways of working as an organisation.

RM: That’s a really helpful summary of those five areas, and I think something that comes to really strongly is that point around the fair treatment of vulnerable customers really stands out as a key theme. So I'm thinking in particular about the FCA’s priority areas of consumer credit, and the need for firms to deliver fair value in a digital age: Katie, can you tell us the key things the regulator wants to see from firms in these areas and how that might be impacted by COVID-19?

KF: Yeah, so ingrained in our principles is the requirement to treat customers fairly, and we really expect firms to be thinking about this and taking particular care where consumers have characteristics of vulnerability, whether that's about health, financial resilience, capability, or when there's life events that affect their financial wellbeing, and that's really because it's important to recognise the different needs that vulnerable consumers have, and how that may affect their ability to engage with financial services and make the decisions that really affect their own interests.

So we really want firms to be thinking about, and understand, what the drivers of vulnerability are, and what are likely to be present in their target market or consumer base. So where firms are selling high-cost credit, it is likely that there's a lack of financial resilience that is quite often a feature of some of the customer base, and so we want to make sure that firms are thinking about that, and we've been doing quite a lot of exploration and research in this area, and there are a lot of people out there who do display one or more characteristics of vulnerability, and of course, as you alluded to at the start, this is something that's changing and increasing at this at this time, as a period of significant economic and financial uncertainty.

So we really want to make sure firms are putting additional effort into thinking about vulnerable consumers, and we're doing work ourselves to really explore what the additional financial effects of COVID-19 are on consumers, and think about the additional analysis we need to understand about what more needs to be done, and many listeners may be aware that in 2019, we issued some draft guidance on the treatment of vulnerable consumers where we set out our expectations around understanding the needs of vulnerable consumers, ensuring that staff have the right skills and capabilities to deal with those consumers, and that there’s practical action around product design and customer service that we expected firms to be thinking about. So we haven't finalised that guidance, but we do think that that is a useful guide for firms to be thinking about in the current time, and we know that a lot of firms do already use that as they think about their businesses as a guiding light in terms of how their culture is developing.

Again, as we move through the phases of the crisis, we are now thinking about taking the next stage forward in that piece of work, and then as you as you rightly highlight, questions around fair value for consumers are also issues which have been important to us for a long time, but maybe be heightened during the current situation, but we really think that fair value is extremely important and key for healthy competition, and that's the kind of thing that really will underpin consumer trust in financial services, and we do think that there's some markets such as general insurance and mortgages and cash savings where the value is not being delivered to all consumers, so we want to explore what we can do there, and as I alluded to earlier, just taking account of the impact of that greater digitisation across markets so that really, consumers can benefit from innovation and competition, whilst managing the risk that again may have on vulnerable people.

RM: It sounds like there's lots of tools available on our website as you say for firms to be going and looking at that draft guidance and help that’s available. So Andrew, for some of the challenges that we've touched on, can you just talk us through a little bit more some of the challenges of firms in meeting those FCA expectations in these areas?

AK: Sure. I mean, I first thing to say on business by the way, I think it's really helpful, clear and sensible the approach that Katie and her colleagues are taking. I thought it was a really well-framed analysis. I would say I thought the plan would have been well-famed well-framed even outside of COVID-19, but the additional COVID-19 overlay is clearly relevant at the current time, but I start there because I think there would have been challenges in the industry delivering on that plan, even if we'd not had to deal with COVID, and so COVID provides additional challenge, I think, in a number of areas, and maybe just to pick on probably three areas that I think will challenge firms even more as a result of COVID.

I think the first one is around the economic environment. We are almost certainly, probably certainly, going into an economic recession. And of course the consequence of going into an economic recession is the population of vulnerable or potential vulnerable customers just increases very significantly: higher levels of consumer debt, unemployment stress and mental health issues all proliferate in a time of recession, and so do issues of fraud, and therefore the environment in which the financial firms are operating and therefore the need for them to be even more focused on issues that we've been talking about today are catalysed in that regard, so I think just firms really operating in that recessionary environment, and all that means for them and their customers, is key.

The second area is really around the digitisation agenda and its impact on customers. We've seen in the last few months how financial services has moved even more digitally into serving customers because they've not had the face-to-face opportunity to spend time with customers. That is only going to accelerate: I'm sure we'll see that with the way the call centres operate, contact centres operate, bank branches operate, investment sales individuals operate, so I think the consumers are going to be faced with a greater level of digitisation in the way that they purchase and use financial services, and that creates issues potentially for usage.

I think the entire population of the country, in fact, the world's probably had a lesson in upskilling in digitisation in recent months, but we shouldn't take for granted, for some individuals operating in a more digital environment is still challenging, financial products by their nature are complex, they're hard to understand, and the levels of financial education across broader society is not as high as it needs to be, and therefore operating in a digital world and remote world brings issues of knowledge, of content, of familiarity around purchasing those products.

And then the third area that I think will be challenging for firms in working with the FCA's business plan is, firms are looking to very significantly change their operating models as a result of COVID-19. I would make the case that they were going to do that anyway. They needed to: their cost base is too high they've already being transforming themselves in a way that's been going on for a number of years, the need to operate commercially and successfully in a post-COVID world, which has a recession, which has lower revenues as a consequence of a recession, and which needs this greater push on digitisation, means that the way companies are facing off to their customers is going to change: potentially their products change, potentially their distribution model changes, and potentially the way that they deal with their customers across the range of products will change, and therefore I think everything that the FCA is talking about here will need to iterate itself as regards, what does that mean for companies’ operating models going forward, particularly in the way that they deal with customers. So I think those will be the three categories of challenges that I would see.

RM: And that's set to theme I think and pulls out what I'd like to really focus on a little bit next, which is around the operational resilience side. I know that's a topic that's been a long-standing priority for the FCA and is obviously central to the COVID-19 response. In many ways the pandemics provide a life scenario test, I think, for firms’ operational resilience plans, so Katie, what can we learn from the current situation and how might it inform the regulator’s approach to operational resilience going forward?

KF: Yeah, I mean, I think you're absolutely right. We as the regulator and firms themselves have had to adapt quickly to the many challenges that come dealing with COVID-19, and the altered threat landscape that financial services firms are facing with increasing numbers of employees working from home, the importance of stable online systems is extremely critical, and we certainly need to be mindful of cyber criminals exploiting the situation, and whilst there the alternative ways of working might be needed to enable business continuity, we do really expect firms to be prioritising information security and ensuring they've got adequate controls in place to manage those kind of cyber threats and respond to major incidents.

We’re expecting firms to implement enhanced monitoring, to protect entry points and information and firm-critical processes, including network connections and video conferencing software. We've said that there are a few areas of increased risk that we're asking firms to be particularly vigilant around, which is around the potential increased security breaches or cyberattacks that may occur. We need to make sure that governance and oversight arrangements are up to scratch, we need to make sure that firms are reviewing regularly the impact of coronavirus on the information and security systems and sensors and taking action where they need to, and also ensuring that general notification requirements are as followed and significant incidents reported.

I mean, overall, so far what we've seen is that firms have managed the operational impact effectively and have been able to ensure continuity of service for consumers during this period of significant stress. As you'd expect, there are some pinch points for firms, including managing the high volume of calls to call centres, and increased staff absences. Firms are, as you’d expect, responding in different ways and again, we just want to make sure firms are tracking their operational performance and service quality and addressing any issues that come up quickly.

We continue to engage with firms on a regular basis to make sure we understand what’s going on and are able to respond. We've been speaking regularly with the industry throughout this time alongside trade associations and other regulators, to make sure we really understand this, and I think we'll be collectively looking to learn the lessons from this and just making sure that then we respond and engage on issues on an ongoing basis, while looking at what we can learn for the future.

RM: And so, moving to you Andrew, what can firms take from the current situation? How should they be preparing for regulators’ changing approach to operating resilience, which the regulators consulted on back in December?

AK: Yeah, I mean this has been a key topic on firms’ minds for some time. Of course, they were working through the upcoming regulatory requirements before COVID came along, and so it's definitely something that's had a lot of focus. I think we then had COVID, and I think Katie’s already covered it: I think firms generally are feeling they've done well, probably remarkably well, in the way that they have managed to go to remote working really right across the industry, right across all of the functions, in a relatively short space of time, and yes, with some risk accepting of various procedures and not without some challenge, and Katie mentioned the call centre volumes as an example.

So not without challenge, but actually, I would say that the operational resilience of the sector has held up very well in the crisis, but I think turning to what needs to change now, is I think we are, as I mentioned a few minutes ago, we're not going to go back to the same operating model that needs to be resilient that were working on before, and that's for a number of reasons.

That's because of all organisations have learned a lot about themselves through this crisis, which means that their employment footprint, their operational footprint, their technology footprint, their real estate footprint, needn’t stay the same again and organisations are steeling themselves not to drift back to business-as-usual, but learn from the crisis in a way that will benefit them, benefit their customers, but actually change the operating model, so the model they were working on being resilient before is going to evolve into a different model that will be more digital, that will have more remote working, and actually will have potentially a different way of interacting with customers, particularly digitally.

So I think that, for me, is the nub of the challenge: how do they take their aspirations to run their own business in a resilient way, responding full to the requirements of the coming forth from the regulators, but then translate that into an operating environment that needs to be commercially robust, because the organisations need to generate the appropriate returns on capital to be sustainable.

It's dealing with all of their customers across the their product set and the types of customers they work with, but has the nimbleness and the agility to work in what is going to be a different operating model, whereby we're hearing firms won't be bringing back potentially large percentages of their workforce, certainly for a good 12 months and potentially quite a lot longer after that, and already hearing firms talk about how they will look to use real estate differently going forward.

And then one other point that I think is really important when we talk about operational resilience is the relationship with third parties. No financial services firm is really an island; they're all working with a variety of counterparties and suppliers, particularly in key areas like technology, and therefore it's not just the individual firm’s business model that's going to change, it's the business models of those third parties, that also in totality need to be resilient too, so that the Chief Operating Officers, the Chief Information Security Officers, and the Chief Executive I'm talking to now, are all thinking hard about how do they move their organisations into a new operating model that is safe, it's appropriate, but is also commercially robust, and I think bringing all of that together will be the challenge that the firms are facing to make sure that resilience stays absolutely at the top of the agenda, because we've all seen that trust is at the heart of a successful financial services business, and where trust can be eroded very quickly is where one organisation suffers an operational incident that doesn't just impact them, but actually impacts the entire sector, so I think this is a critical part of the agenda for the sector going forward.

RM: So that sets us up nicely, I think, for a third really big bucket that I want to speak about, which is more looking ahead and areas to focus on. So with COVID-19 having clearly shaken up the regulatory agenda, and we know that the FS regulators have postponed a number of pieces of work to allow them and firms to focus on responding to the pandemic, despite that, what are some of the areas where you think it's really important that firms keep up their momentum, and Andrew, if I come to you first if I may.

AK: Sure. I mean, the first area is actually a little bit of a panacea, or business as usual. The world was a complicated place before the pandemic, and all of the firms were working on a whole variety of initiatives, be those regulatory or commercial, anyway, so the agenda of the firms is full, and that they need to continue doing many of the things they were they were doing before, by way of making sure that the business remains resilient, sustainable, profitable and complying with the needs of its customers and the regulations around those customers. So that’s really important, that the BAU agenda is maintained, but of course we're now operating in a different environment, and I think there are a few things for me that are increasingly important that firms will need to deal with.

The first one is really around where we take some of the impact of the economic impacts, and making sure that sustainability of the business, so you know, we're all familiar of course with ESG, and that's very much been a focus on the environmental impact coming into COVID. I do think that the social impacts of that now, as a result of the pandemic, will be even more pronounced, so I think organisations, both for serving their customers but also increasingly, dealing with the expectations of society, the expectations of regulators, the expectations of government, and we're going to see big government, even bigger government coming through after the crisis, ESG is going to be critical to how an organisation runs itself and presents itself to its stakeholders. I think that's key.

I think then probably a couple of other, more tactical pieces, although they're very significant. The first one I'd highlight firms to is, that Brexit is now an issue that is going to be front of mind as we come up to the end of what was a transitional period, and is still, and clearly we are still in negotiations now that the firms have done in previous months and years a lot of planning around Brexit, but of course we're heading to a situation where that planning may need to be executed in an even harder fashion, so I think that's a second area.

And then the third area I would focus firms to is the response to LIBOR and how that regulatory deadline hasn't changed. That will drive significant impacts, and is being planned for across the sector, but is a really important change for firms that they will need to respond to in good time, so those would be my highlights if you like Rowena.

RM: Brilliant, and Katie, how about you? What would be your highlights of what firms need to keep front of mind?

KF: Really yes, I would say obviously, I would entirely endorse what Andrew said. It may feel a little bit Groundhog Day, but we and the firms do need to be thinking about preparing for the end of the transition period as we leave the EU, but that transition period will bring with it further changes, and we continue to work closely with the Bank and Treasury to plan for what will happen at that point.

There’s obviously a lot still happening around, discussions around equivalence and another things, but we need firms to be keeping preparing for the end of that period and for the different scenarios that we could find ourselves in. We continue to do what we can to make sure that the end of that transition is as smooth as possible, and we will still have recourse to the tools that we have developed in preparation for previous points such as the temporary permissions regime, and the temporary transitional power that we have, which will mean that some of the requirements that would come into force at the end of a transition period are able to be delayed, but we cannot control everything, and the business that UK firms can do in the EU is a matter of local law and regulation, and firms need to be thinking about what will be happening elsewhere, and again, firms will no doubt be aware, but there isn’t a pan-European equivalent to our temporary permissions regime, so it’s really important that firms are understanding what business can continue in different jurisdictions.

Again, as I said, I would reiterate that we remain very committed to the ESG and climate agenda, and as Andrew said, government is active here, and although the COP26 UN Climate Summit, that was due to happen this year, has been postponed, I think that will only result in increased focus on making sure that there’s an ambitious agenda in the run-up to that, and that collectively, everybody is playing their part in supporting that agenda.

We are working very closely with government and other regulators, and we’re also being active internationally. There’s a new task force which we’re involved in, and I think we really want to work with the industry to make sure that we can collectively face the challenges associated with that.

And I would just finally endorse Andrew’s plugs for LIBOR transition and ensuring that firms are preparing for that. We stand ready to help firms with that process and we would encourage them to speak to us where they have issues that are of concern.

RM: Really helpful summary, thanks very much both for sharing those insights and thanks to everyone for listening. If you'd like more practical advice visit our website at pwc.co.uk/covid19. Here you'll find our blog on how to manage financial operations during COVID-19, as well as our Strategy& Where Next series, which is an industry-by-industry look at where we are today, what we're learning, and how to respond to new challenges and opportunities. Thanks everyone, and until next time, please do stay safe and well.

Participants

• Rowena Morris, director, PwC
• Andrew Kail, director, PwC
• Katie Fisher, Director of Strategy at the Financial Conduct Authority