Contents

• COVID-19: PRA Dear CEO letter on IFRS 9, capital requirements and loan covenants
• Treatment of borrowers who breach covenants due to COVID-19
• Occasional consultation paper: PRA CP3/20
• FSCS management expenses levy limit: PRA PS8/20
• COVID-19: FCA and PSR approach to competition law enforcement
• COVID-19: FCA outlines financial resilience expectations for FCA solo-regulated firms
• COVID-19: FCA requests delay to publication of preliminary financial statements
• COVID-19: Joint statement by FRC, FCA and PRA on corporate reporting
• COVID-19: FCA and PRA guidance on identifying key workers in financial services
• COVID-19: FCA delays directory for certified and assessed persons
• COVID-19: FCA statement on impact on firms LIBOR transition plans
• FCA Handbook Notice 75
• LC&F bondholders seek judicial review of FSCS decision to reject majority of claims
• IOSCO report on global stablecoin initiatives
• COVID-19: FSB coordinates financial sector work to maintain financial stability
• End of Brexit transition period and COVID-19: FPC records and checklist
• Financial services after Brexit: House of Lords EU Financial Affairs Committee recommendations
• Brexit: HM Treasury statement on regulators' temporary transitional powers
• Hogan Lovells EBA Outsourcing Solution

COVID-19: PRA Dear CEO letter on IFRS 9, capital requirements and loan covenants

On 26 March 2020, the Prudential Regulation Authority (PRA) published a Dear CEO letter giving guidance on consistent and robust International Financial Reporting Standard 9 (IFRS 9) accounting and the regulatory definition of default, the treatment of borrowers who breach covenants due to COVID-19 and the regulatory capital treatment of IFRS 9.

The PRA expects firms to give the letter their urgent attention. In particular, the messages on accounting will be relevant to firms finalising March/April year-end annual financial statements and Q1 quarterly reports based on IFRS, as directors will need to take decisions about forward-looking expected credit loss (ECL) estimates in the coming days and weeks.

The guidance is split into the following sections:

Consistent and robust IFRS 9 accounting and the regulatory definition of default

The PRA considers it critical that firms:

• make well-balanced and consistent decisions on ECL that consider the potential impact of the virus, but also the unprecedented level of support provided by governments and central banks domestically and internationally to protect the economy. The need for well-balanced decisions also means that due weight should be given to established long-term economic trends, given the challenges of preparing detailed forecasts far into the future; and
• consider the actions that will be, and have already been, taken to support borrowers, including the offer of payment holidays. The PRA does not expect the extension of payment holidays to automatically result in loans being moved into Stage 2 or Stage 3 for the purposes of calculating ECL or trigger a default under the EU Capital Requirements Regulation (CRR). This expectation extends to similar schemes to respond to the adverse economic impact of the virus.

While it is for each firm to form its own view on the appropriate level of provisions in order to comply with IFRS 9, the PRA sets out guidance in the annex of the letter to assist firms in making well-balanced and more consistent ECL estimates and in determining how to treat payment holidays and similar schemes for accounting and regulatory purposes. The PRA believes its guidance is consistent with IFRS 9. The guidance will be reviewed in light of future developments.

Treatment of borrowers who breach covenants due to COVID-19

As explained in a joint statement issued by the Financial Reporting Council (FRC), the Financial Conduct Authority (FCA) and the PRA on 26 March 2020, lenders and other users of financial statements are urged to consider carefully their responses to potential breaches of covenants arising directly from COVID-19. Where those uncertainties are of a general nature or are firm-specific but unrelated to the solvency or liquidity of the borrower, the PRA expects lenders to consider the need to treat them differently compared to uncertainties that arise because of borrower-specific issues, and in doing so consider waiving the resultant covenant breach. The PRA also expects firms to do so in good faith and not to impose new charges or restrictions on customers following a covenant breach that are unrelated to the facts and circumstances that led to that breach.

The PRA expects that a covenant breach or waiver of a covenant relating to a modification of the audit report attached to audited financial statements because of COVID-19 (and other covenant breaches and waivers directly linked to COVID-19) should not automatically trigger a default under the CRR and the loans being moved into Stage 2 or 3 for the purposes of calculating the ECL. The PRA recognises the important role loan covenants play in lenders' credit risk management. However, it is important that firms' assessment of covenant breaches should take account of differences between normal covenant breaches and some of the breaches that might occur because of COVID-19.

On the regulatory capital treatment of IFRS 9, the PRA confirms that the PRA's September 2017 position regarding the transitional arrangements for the phase in of the regulatory capital impact of ECL remains unchanged.

The measures outlined in the letter have evolved rapidly and could evolve further. The PRA expects them to remain in place through the period of disruption cause by COVID-19.

The PRA notes that some of the assumptions relating to the application of IFRS 9 no longer hold. It is therefore important that the PRA and firms view things afresh in the content of the current unprecedented situation. The PRA intends to discuss this with firms and auditors, and other steps that could be taken to enhance the robustness of, and bring greater consistency in, the application of IFRS 9.

Occasional consultation paper: PRA CP3/20

The PRA has published an occasional consultation paper, CP3/20, proposing minor amendments to its Rulebook, supervisory statements (SSs), National Specific Templates (NSTs) and associated LOG files, and the market risk sensitivities data item and associated instructions.

The proposals fall under the following headings:

• Liquidity: Minor updates and amendments to instructions for completing PRA110 (chapter 2);
• Non-Solvency II: London interbank offered rate (LIBOR) updates for small insurers (chapter 3);
• Solvency II Reporting: Minor updates, corrections and clarifications (chapter 4);
• Senior Managers Regime: Application form updates (chapter 5);
• Regulatory Reporting: Amendments to the Branch Return (chapter 6);
• Regulatory Reporting: Updates to SS34/15 and minor amendments to PRA101 (chapter 7); and
• Securitisation: Updates to Significant Risk Transfer (chapter 8).

The deadline for responses is 26 June 2020.

FSCS management expenses levy limit: PRA PS8/20

Following its joint consultation with the FCA (CP1/20 / FCA CP20/2), the PRA has published a policy statement, PS8/20, on the 2020/21 management expenses levy limit (MELL) for the Financial Services Compensation Scheme (FSCS). The PRA is proceeding on the basis of the proposals it consulted on.

The final rules are set out in the PRA Rulebook: Non Authorised Persons: FSCS Management Expenses Levy Limit And Base Costs Instrument 2020 (PRA 2020/3). The instrument comes into force on 1 April 2020. The FSCS MELL will apply for the financial year ending 31 March 2021.

The FCA published its response to feedback and final rule in Handbook Notice 75.

COVID-19: FCA and PSR approach to competition law enforcement

On 27 March 2020, the FCA and the Payment Systems Regulation (PSR) issued a joint statement on their approach to competition law enforcement during the COVID-19 outbreak. The FCA and the PSR state that they are both supportive of the Competition and Markets Authority's (CMA's) guidance on its approach to business cooperation under competition law, which was published on 25 March 2020.

The regulators state that it is important that competition law does not impede firms from working together to provide essential services to consumers in the current coronavirus situation. At the same time, neither the FCA nor the PSR will tolerate conduct that seeks to exploit the situation and harms consumers.

COVID-19: FCA outlines financial resilience expectations for FCA solo-regulated firms

On 26 March 2020, the FCA outlined its financial resilience expectations of FCA solo-regulated firms in light of COVID-19.

The FCA expects firms that have been set capital and liquidity buffers to use them to support the continuation of the firm's activities. Firms are also expected to plan ahead and ensure that their financial resources are soundly managed.

If the firm needs to exit the market, planning should consider how this can be done in an orderly way, while taking steps to reduce the harm to consumers and the markets. A firm's plans for how they will meet debts as and when they fall due could include government schemes to help firms through this period.

Firms that will not be able to meet their capital requirements, or their debts as they fall due, should contact their FCA supervisor with their plan for the immediate period ahead.

The FCA explains that firms that are prudentially regulated by the PRA should consider the PRA's requirements and discuss their concerns with the PRA. They should also keep the FCA notified of any significant developments.

COVID19: FCA requests delay to publication of preliminary financial statements

On 21 March 2020, the FCA wrote to companies it is aware are intending imminently to publish preliminary financial statements asking them to delay their planned publications. The FCA strongly requests all listed companies observe a moratorium on the publication of preliminary financial statements for at least two weeks. The FRC fully supports the FCA's request for a moratorium. The FCA also published some related technical Q&A.

The FCA states that the unprecedented events of the last couple of weeks mean that the basis on which companies are reporting and planning is changing rapidly. It is important that due consideration is given by companies to these events in preparing their disclosures. Observing timetables set before this crisis arose may not give companies the necessary time to do this.

In addition, listed companies and the audit profession are facing unprecedented practical challenges. The FCA believes the practice of issuing preliminary financial statements in advance of the full audited financial statements is adding unnecessarily to the pressure on companies and the audit profession at this moment.

The FCA notes that the practice of issuing preliminary financial statements is common among UK-listed companies but is not required by either the Listing Rules or the Transparency Directive. Rather, the requirement is that companies publish full audited financial statements within four months of the financial year end. The FCA further notes that it is common to publish preliminary financial statements considerably earlier than the four months permitted for the filing of full financial statements.

The FCA reminds companies that the Market Abuse Regulation remains in full force and listed companies are still required to announce inside information to the market as soon as possible unless a valid reason to delay disclosure under the regulation exists.

This statement does not apply to AIM companies.

COVID-19: Joint statement by FRC, FCA and PRA on corporate reporting

On 26 March 2020, the FRC, FCA and PRA published a joint statement announcing a series of actions to ensure information continues to flow to investors and support the continued functioning of the UK’s capital markets against the backdrop of the challenges and economic uncertainty created by COVID-19.

The measures include:

• the FCA allowing listed companies that are subject to Disclosure Transparency Regulation (DTR) 4.1 an extra two months to publish their audited annual financial reports (see the FCA website: Statement of Policy: Delaying annual company accounts during the coronavirus crisis and Q&A);
• the FRC issuing guidance for companies preparing financial statements in the current environment of uncertainty;
• the FRC providing guidance on carrying out audit engagements that are affected by COVID-19;
• utilising the available three-month extension to the date for filing annual accounts with Companies House;
• postponing auditor tenders, even when mandatory rotation is due. The statement notes that the FRC is empowered to extend certain mandates by up to two years in exceptional circumstances;
• postponing audit partner rotation. Where there are good reasons, for example to maintain audit quality in current circumstances, the rotation can be extended to no more than seven years with the agreement of the affected entity's audit committee; and
• reducing FRC demands on companies and audit firms by revising the deadlines for consultations where possible, postponing for at least one month writing to companies following the FRC's review of their annual reports and accounts and pausing for at least one month requests to firms on supervisory initiatives.

The regulators strongly encourage investors, lenders and other users of financial statements to take into account the unique set of circumstances arising from COVID-19 which might cause uncertainty in companies' financial positions, potential delays in providing financial information, the need for auditors to undertake additional work to support their audit opinions and the increased use of modified audit opinions. It also urges lenders to have regard to the circumstances in responding to potential breaches of covenant arising directly from the COVID-19 pandemic.

COVID-19: FCA and PRA guidance on identifying key workers in financial services

On 20 March 2020, the FCA published guidance and the PRA published a statement on the steps firms should take to identify key workers in financial services. The regulators only expect a limited number of people to be identified as key financial workers.

To help firms identify their key financial workers, the regulators ask them to first identify the activities, services or operations that, if interrupted, are likely to lead to the disruption of essential services to the real economy or financial stability. Firms should then identify the individuals who are essential to support those functions as well as any critical outsource partners who are essential to the continued provision of services, even where these are not financial services firms.

The regulators recommend that a firm's SMF1 chief executive officer (CEO) (or equivalent member of the senior management team) should be accountable for ensuring that only roles meeting the definition are designated.

They list the types of roles that may be considered as providing essential services. This includes individuals essential:

• in the firm's overall management, such as individuals captured under the senior managers regime;
• in the running of online services and processing;
• in the running of branches and providing essential customer services;
• to the functioning of payments processing and cash distribution services;
• in facilitating corporate and retail lending;
• in the processing of insurance claims and renewals; and
• in the operation of trading venues and other critical elements of market infrastructure.

Other staff in risk management, compliance, audit and other functions who are needed to ensure the firm meets its customers' needs and its regulatory obligations, and individuals providing essential support to the above roles, such as finance and IT staff, are also included.

The regulators ask firms to consider issuing a letter to all individuals they identify as key workers, which can be presented to schools on request. They also suggest some wording for the letter and that it should be signed by someone with appropriate authority.

COVID-19: FCA delays directory for certified and assessed persons

On 25 March 2020, the FCA announced that, due to COVID-19, it has delayed for at least a month the publication of the directory of certified and assessed persons, which was due to be published on the Financial Services Register by the end of March. The timing of the launch is now under review. The FCA will provide further updates on its website.

COVID-19: FCA statement on impact on firms LIBOR transition plans

On 25 March 2020, the FCA published a statement on the impact of COVID-19 on firms' LIBOR transition plans. The FCA states that its main assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed and it should remain the target date for all firms to meet.

The FCA recognises that there has been an impact on the timing of some aspects of the transition programmes of many firms. Alongside other international authorities, the Bank of England (BoE), FCA and the Working Group on Sterling Risk-Free Reference Rates will continue to monitor and assess the impact on transition timelines, and will update the market as soon as possible.

FCA Handbook Notice 75

The FCA has published Handbook Notice 75, which sets out changes to the FCA Handbook made by the FCA board on 26 March 2020 in instruments including the:

• Handbook Administration (No 52) Instrument 2020 (FCA 2020/11);
• Financial Services Compensation Scheme (Management Expenses Levy Limit 2020/2021) Instrument 2020 (FCA 2020/12);
• Listing Rules (Contents of Circulars) (Amendment) Instrument 2020 (FCA 2020/13); and
• Listing Rules (Disclosure of Rights of Securities) Instrument 2020 (FCA 2020/14).

LC&F bondholders seek judicial review of FSCS decision to reject majority of claims

The FSCS has published a press release relating to the application for judicial review, by London Capital & Finance plc (LC&F) bondholders, of how the majority of their claims for FSCS compensation have been rejected.

The claimants allege that the FSCS ruling contained errors in law and fact and is "irrational". The FSCS has stated that it was following the rules. It has also said it could not compensate those who transferred from external cash accounts or came in directly through online advertising or price comparison websites.

Commenting on the application for judicial review, James Darbyshire, FSCS General Counsel, states that the FSCS undertook a thorough and wide-ranging investigation to determine whether LC&F carried out any regulated activities that it might be able to compensate for.

IOSCO report on global stablecoin initiatives

The International Organization of Securities Commissions (IOSCO) has published a report on global stablecoin initiatives. Global stablecoin initiatives are proposals for low-volatility cryptoassets that have potential global reach and adoption. In the report, IOSCO seeks to identify the possible implications that these proposals could have for securities market regulators.

COVID-19: FSB coordinates financial sector work to maintain financial stability

On 20 March 2020, the Financial Stability Board (FSB) announced that it is coordinating to maintain financial stability in response to COVID-19.

The FSB encourages authorities and financial institutions to make use of the flexibility within existing international standards to provide continued access to funding for market participants and for businesses and households facing temporary difficulties from COVID-19, and to ensure that capital and liquidity resources in the financial system are available where they are needed.

End of Brexit transition period and COVID-19: FPC records and checklist

The BoE has published the financial policy summary and record of the meetings of its Financial Policy Committee (FPC) on 9 and 19 March 2020, and the FPC's decisions by written procedure on 23 March 2020.

The main topic discussed by the FPC in the meetings was its actions to respond to the financial stability risks associated with the economic disruption resulting from COVID‑19. The FPC's decisions taken by written procedure focus on Brexit.

Regarding Brexit, the FPC reviewed and approved a checklist of actions (published alongside the record) that would mitigate risks to financial stability that could arise from disruption to households and companies if no further arrangements were put in place for cross-border trade in financial services for the end of the transition period on 31 December 2020.

The FPC is of the opinion that, reflecting extensive preparations by authorities and the private sector, should the transition period end without the UK and EU agreeing specific arrangements for financial services, most risks to UK financial stability that could arise from disruption to cross-border financial services have been mitigated.

The checklist assesses risks of disruption to end-users of financial services in the UK and, because the impact could spill back, also to end-users in the EU. Risks of disruption are categorised as low, medium or high. The checklist (in table 1) addresses risks relating to the need to ensure a UK legal and regulatory framework, insurance contracts, asset management, banking services, OTC derivative contracts (cleared and uncleared) and personal data.

A second table sets out risks that could cause some disruption to economic activity if they are not mitigated and there are no further financial services arrangements in place at the end of the transition period. The FPC judges their disruptive effect to be less than that of those issues in its checklist. Table 2 covers access to euro payment systems, ability of EEA firms to trade on UK trading venues, servicing banking and insurance customers, financial market infrastructure, increased prudential requirements and credit rating agencies.

The FPC's next policy meeting will be on 24 June 2020 and the record of that meeting will be published on 2 July 2020.

Financial services after Brexit: House of Lords EU Financial Affairs Committee recommendations

The House of Lords EU Financial Affairs Committee has published a letter sent to Rishi Sunak, Chancellor of the Exchequer, containing recommendations following an inquiry on financial services after Brexit conducted between January and March 2020.

The committee's recommendations include the following:

• in its white paper on financial services, expected in spring 2020, the government should consider the merits of the regulators having a formal secondary competitiveness objective;
• the government may also wish to use the white paper to make proposals for increased delegation of powers to the regulators to give the UK’s regulatory regime greater flexibility. If more powers are delegated to the regulators, this may require changes to the structure of parliamentary committees and their resourcing to ensure effective scrutiny of the regulators, particularly as Parliament will need to fill the scrutiny gap left by the European Parliament;
• the UK may wish to make targeted adjustments to financial services regulation after Brexit to ensure that the regulatory regime is tailored to the UK context. In particular, the government should consider in which specific areas the UK may wish to diverge from the EU in its implementation of the final Basel III standards and of other international standards; and
• the UK must take a leadership role to develop common global standards in areas such as FinTech. It should also develop closer bilateral relations with jurisdictions with which it shares a common approach to promoting cross-border financial services.

The committee also considers the negotiations on the future relationship between the UK and the EU. It calls for a regular and structured regulatory dialogue between the UK and the EU to provide a forum for discussion and resolving possible disagreements. In particular, if an equivalence decision is to be withdrawn, the committee states that there should be a phased approach to withdrawal, with clear timelines and consultation with the industry. The dialogue could have a role in managing divergences in regulation between the UK and the EU.

The committee warns that the UK and the EU should urgently address the risks of disruption to financial services arising from Brexit separately from broader discussions on equivalence and the future UK-EU relationship.

Brexit: HM Treasury statement on regulators' temporary transitional powers

The House of Lords has published written statement made by John Glen, Economic Secretary to the Treasury, on the powers of the regulators to smooth adjustments to the UK regulatory regime for financial services at the end of the Brexit transition period.

Mr. Glen explains that, in preparing to leave the EU, HM Treasury made over 50 "EU Exit" statutory instruments (SIs) under the European Union (Withdrawal) Act 2018 (EUWA) to ensure the UK's financial services regime was ready for all scenarios at exit day. This included introducing a range of temporary permissions and transitional regimes to minimise any disruption to firms and consumers.

As the UK has now left the EU and entered a transition period (which will last until 31 December 2020), the European Union (Withdrawal Agreement) Act 2020 (EUWAA) delayed those parts of the EU Exit SIs that would have come into force immediately before, on, or after exit day. Instead, they come into force at the end of the transition period. As a result of further secondary legislation made under the EUWAA, the temporary permissions and transitional regimes will also now apply at the end of the transition period.

While, generally, the same laws and rules will apply at the end of the transition period, HM Treasury recognises it will be important, irrespective of the agreement that is reached between the EU and UK, for the UK regulators to have flexibility to smooth any adjustments to the UK financial services regulatory regime at the end of the transition period. For this reason, it will retain the regulators' temporary transitional power (TTP), which was introduced by way of the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 (SI 2019/632), and move its application so the TTP is available for use by the regulators for a period of two years from the end of the transition period.

The TTP will allow the BoE, the PRA and the FCA to phase-in changes to UK regulatory requirements so that firms can adjust to the UK's post-transition period regime in an orderly way, in line with the objectives already set by Parliament.

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