Definitive guidance for banks on SME lending
On 15th April the FCA sent a ‘Dear CEO’ letter to banks, outlining its expectations on lending to small and medium-sized enterprises (SMEs) during the Covid-19 outbreak. Its latest guidance refers specifically to how banks are meeting their SMCR obligations in this area.
Accordingly, the FCA:
- expects for each bank that lends to SMEs there is a senior manager, or senior managers, with clear responsibility for that activity
- will consider the Lending Standards Board’s (LSB) Standards of Lending Practice for Business Customers when considering how senior managers’ duties are discharged;
- expects a bank’s CEO and its Board to take reasonable steps to ensure that the senior manager(s) with responsibility for SME lending are discharging their responsibilities effectively; and
- expects the Board to collect information on the bank’s treatment of SMEs and where appropriate, challenge the relevant senior managers.
The FCA also confirms that, when carrying out its supervisory work, it will take account of the fact that banks may be making different judgements and adopting a different risk tolerance than they would have done prior to Covid-19. The FCA has also established a new small business unit to coordinate the activities of the FCA across small business issues.
FCA clarifies its position on BI claims
In a recent ‘Dear CEO’ letter, the FCA focused in on the provision of business interruption (BI) insurance for SME’s during the Covid-19 outbreak. In particular:
- Interim payments in cases where there are reasonable grounds to pay part of a claim, but insufficient grounds to pay the claim in full. Insurers which disagree with this approach should contact the FCA and explain how this represents a fair outcome for customers.
- In the case of disputes over payment of policies, where a policyholder is a SME, the FCA reminds insurers that such cases are likely to fall under the jurisdiction of the Financial Ombudsman Service (FOS), which can offer faster decisions and award firms more timely payments than via a court process.
FCA releases further guidance for funds
The FCA updated its webpage on its expectation for funds during the COVID-19 outbreak to include the following new information:
- Referring to its 31 March 2020 ‘Dear CEO’ letter to firms providing services to retail clients, the FCA confirms that the flexibility around the 10% drop notification also applies to non-retail client business performed by MiFID investment firms and collective portfolio management investment firms.
- If repo transactions are entered into for the sole purpose of liquidity management, then the FCA will consider it unlikely that they will meet the requirements under applicable rules, given the requirement in the Collective Investment Scheme sourcebook (COLL) that transactions should only be used for efficient portfolio management.
- Authorised fund managers (AFMs) may allow unit holders or potential investors to deal in units in an authorised fund by post, fax or other physical means, and that if dealing by one or all of those physical means ceases to be possible due to COVID-19, AFMs should consider whether they can provide alternative means for unit holders to deal in units in the fund.
Speech: the lasting economic impact of Covid-19
Silvana Tenreyro, a member of the Monetary Policy Committee (MPC), delivered a speech on what the BoE is doing to keep inflation stable. In her virtual speech she admitted the MPC is in unprecedented territory with the current crisis.
In her speech, she discussed three topics:
- The likely effects of Covid-19 on the global and the UK economy
- The policy response of the MPC
Tenreyro cautioned the UK recovery is likely to be “less V-shaped than one would like”, suggesting the bounce-back may not be as immediate as previously hoped. She said it’s important to understand what was going on before the crisis hit because the trends that were happening then may be accelerating now. But she also stressed monetary policy cannot meet the challenge alone and warned that even together with the Government’s emergency support, there will still be rising unemployment and shrinking output.
It’s full steam ahead for plans on cross-border payments regulation
The FCA has said that the 19th April implementation date for the Cross-border Payments Regulation (CBPR) currency conversion transparency requirements still stands. Where firms can’t meet this deadline, they’ll be required implement the obligations as soon as possible. The FCA will take a reasonable approach towards enforcement in the light of the need to preserve the stability and continuity of online payment services.
FSI sets standards for operational resilience
The Financial Stability Institute (FSI) published a briefing paper on Covid-19 and operational resilience, concluding that operational resilience standards should take into consideration the following elements:
- the need to identify both critical functions and employees which are needed to support important business services, and to take measures which ensure employees’ safety;
- that IT infrastructure should be able to support a sharp increase in usage over an extended period and that information security must be maintained;
- the role that third-party service providers will play; and
- the importance of ensuring cyber resilience.
Steps to ensure the financial resilience of solo-regulated firms
The FCA has previously laid out its expectations for the financial resilience of solo-regulated firms during the Covid-19 crisis, but this week it updated its advice. Solo-regulated firms are advised that:
- Where they are planning to draw down capital and liquidity buffers, they should contact the FCA
- Wind-down plans should be kept up-to-date
- Any proposed discretionary distribution of capital (for example, to fund a share buy-back, a dividend, upstream cash or meet a variable remuneration decision) should be demonstrably prudent given current market circumstances, and firms should not distribute capital that could credibly be required to absorb losses over the coming period
- For non-bank lenders subject to IFRS9, forward-looking information used in expected credit loss estimates should be reasonable and supportable.
More support for motor finance and high cost credit customers
Motor finance and high cost credit customers are to be given more support during the Covid-19 crisis, the FCA has announced. The regulator has published a consultation on temporary measures, proposing that,
- firms offering motor finance agreements and rent-to-own (RTO), buy-now pay-later (BNPL, or pawnbroking agreements will provide a three month payment freeze
- firms offering high-cost short-term credit (HCSTC) will provide a one month interest-free payment freeze.
The FCA expects to finalise proposals by 24 April 2020, with the new rules coming into force shortly afterwards.