Investment Firms: Emerging from Lockdown with Better Prudential Governance and Processes

4 June 2020 | Michael Chambers

Firms no doubt welcomed the FCA’s temporary waiver for smaller firms of late filing penalties (“administrative fees”) for certain returns submitted after a deadline falling on or before 30 June 2020, but could there be a sting in the tail? After all, the over-riding message from the regulator has been that it “expects firms to be taking reasonable steps to ensure they are prepared to meet the challenges coronavirus poses”. Furthermore, yesterday the FCA announced they will be asking around 13,000 firms across the financial services industry to respond to a survey on financial resilience, further underlining their focus.

So what will the FCA do with this data, in combination with what they already know about the industry and specific firms? Might they prioritise their interest in firms who filed regulatory returns late? Or indeed, could those firms that experienced capital adequacy or liquidity issues as a direct result of the pandemic be at the top of the regulator’s list?

All these questions remain unclear so far, so how should firms ensure they prepare themselves for the potential increased scrutiny and inevitably higher expectations? We think firms should be reviewing policies, procedures and other governance arrangements, particularly those that are not thoroughly documented, sooner rather than later, to maximise the ability to make enhancements where identified necessary. For those firms looking for a good place to start, for me there are two key areas.

Business continuity plans are highly likely to be subject to increased regulatory scrutiny once firms return to normality, and we expect to see a renewed focus on liquidity and capital adequacy. Firms that may have previously considered severe liquidity or capital stresses as purely hypothetical will have had cause to question that assessment over in recent weeks and months, while at the same time grappling with operational and logistical upheaval where business interruption plans did not address a lengthy lockdown scenario.

For investment firms, the ICAAP Report is the principal location for the documentation of all such matters, and we expect that the FCA will use a combination of Dear CEO letters, thematic reviews and its SREP powers to seek improvements in the quality of ICAAP Reports. Now may be a good time for firms to get ahead of the curve, by reviewing and, where necessary, improving their documentation – particularly where the pandemic has led to a material change to the business, even if only temporary.

Once we return to something approaching normalcy, it seems likely that the FCA will seek to maximise its return on investment of time and effort. Feasibly, the sharper tools in the FCA’s toolkit will be reserved for firms where the FCA has some grounds to consider that business-as-usual compliance (for example, regulatory reporting processes and/or monitoring and forecasting of liquidity and capital) may have suffered in recent times. So it is certainly within the realms of possibility that breach notifications and late filings could be used as proxy measures to identify a pool of firms to be targeted for more intrusive follow up.

In summary, the regulator will expect firms to emerge from lockdown with a better understanding of the operational vulnerabilities their business model faces, and this being fully reflected in their business continuity plans and documented in the ICAAP Report. Now is a great time for firms to reflect and make improvements to such documentation.

Further, firms should ensure regulatory reporting processes and the monitoring and forecasting of liquidity and capital remain appropriately prioritised – to avoid future assessment by the regulator as requiring a heavier ‘touch’ once the crisis has passed.

I offered some tips in another article on how investment firms and fund managers might look to adapt their liquidity and capital adequacy monitoring to keep pace with COVID-19 challenges – perhaps an additional consideration in conjunction with the above musings.

Should any firm captured in the financial resilience survey require assistance completing it accurately, or for advice or assistance with anything else discussed above, our Prudential Advisory team are able to assist; please contact me:

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