A lot happened in 2020, so you would be forgiven if you had missed some of the developments in the financial services sector. In this article, we look back and identify seven key trends which emerged in banking, finance, funds and asset management.
COVID-19 has impacted financial services as it has every other industry. Throughout 2020, the FCA, PRA and Bank of England have taken steps to react to the pandemic. The FCA and PRA’s 2020 Business Plans set out each regulator’s strategy during the pandemic and its aftermath. Both plans set out operational and financial resilience as key priorities during a time of turbulence; the regulator has since worked with firms to review their contingency plans and survey their financial stability.
The FCA has also worked with firms to ensure that regulatory standards continue to be met with a degree of flexibility to deal with the impact of working from home and minimising social contact.
The sector also played an important part in the COVID-19 response package as banks facilitated the government’s Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loans Scheme. Teething problems with the CBILS led to the Treasury’s decision to relax the eligibility criteria and include larger businesses within the scheme.
The end of 2020 also marked the end of the UK’s Brexit transition period. Whilst the EU and UK’s agreement of an eleventh-hour deal avoided the cliff-edge, the terms of the deal did not include passporting rights. As a result, UK financial institutions began 2021 without the right to offer goods and services in the EU, and vice versa.
Understandably, preparation for this eventuality was a recurring theme in 2020. The FCA rolled out several measures, including its temporary permissions regime, which allows EEA-based firms to continue to offer their previously authorised products and services in the UK for a limited period pending new authorisation from the FCA.
HM Treasury launched the Financial Services Future Regulatory Framework Review to discuss how the UK’s regulatory picture needs to change in the future, in particular to reflect the new position outside of the EU. The consultation on Phase II of the framework closes on 19 February 2021.
3. LIBOR transition
The transition away from the LIBOR benchmarking interest rate was a recurring theme as the global push to scrap LIBOR by the end of 2021 continues. In January, the FCA and Bank of England’s joint statement urged firms to switch from LIBOR to SONIA (Sterling Overnight Index Average – the UK’s replacement benchmark rate) for sterling interest rate swaps during Q1 2020. The Bank of England began publishing its SONIA compounded index from August and stated that all banks should offer an alternative to LIBOR by October.
In recognition of the difficulties some firms were facing in transitioning from LIBOR, HM Treasury published a policy paper on amendments to the Benchmarks Regulation. Among the amendments was an extension of the FCA’s powers to manage the transition and require continued publication of critical benchmarks using a new methodology for a limited period to assist with ‘tough legacy’ contracts.
4. Changing leadership
It was all change at the top of the UK’s financial services industry in 2020. Andrew Bailey succeeded Mark Carney as Governor of the Bank of England from March, and Nikhil Rathi replaced Bailey as chief executive of the FCA for a five-year term from autumn 2020.
Insurer Prudential announced in January that former government minister Shriti Vadera would be leaving Santander UK to become its new chair. In February, the aftermath of Credit Suisse’s spying scandal saw the resignation of its CEO, Tidjane Thiam. In July, it was announced that Lloyds CEO Antonio Horta-Osorio would end his decade-long tenure in 2021, following which he would take the helm at Credit Suisse.
5. FCA regulatory reforms
Last year saw the FCA reassess its approach to financial regulation. It embraced a joined-up approach with other regulators. Firstly, it launched the Financial Services Regulatory Initiatives Forum in conjunction with the PRA, Bank of England, Payment Systems Regulator and Competition and Markets Authority (CMA) to help regulators track and manage peaks in demand and keep firms updated on new initiatives. The Forum’s ‘Grid’ published in May set out the regulatory landscape over the next year on a quarterly basis. Secondly, it signed a collaboration agreement with HMRC which will significantly expand its investigatory powers.
A statement from Rishi Sunak, Chancellor of the Exchequer, in June discussed reforms of the UK’s financial services regulatory landscape in the light of Brexit. The reforms are aimed at keeping the UK in step with industry expectations and competitive outside of the EU and will focus updating prudential requirements, maintaining sound capital markets, and managing future risks.
Those sentiments were echoed in a speech from Christopher Woolard (interim CEO) on the FCA’s adoption of a new model of financial regulation. The speech referred to simplifying the FCA’s requirements, embracing the digital age and continuing to work closely with other regulators and agencies.
6. SMCR extension
The FCA announced that it would delay the implementation period for the extension of the Senior Managers and Certification Regime (SMCR) for solo-regulated firms. Following legislation by the Treasury, solo-regulated firms have until 31 March 2021 (rather than 9 December 2020) to complete the first assessment of the fitness and propriety of their Certified Persons.
The move to delay the implementation deadline was made to accommodate the impact of the coronavirus pandemic, and the FCA followed up with a policy statement confirming that the same extended deadline will apply to the deadline for certification in the FCA Handbook, training staff on conduct rules and reporting directory person data.
7. Regulatory focus on culture
Regulators have taken a keen interest in institutional culture in recent years, and 2020 was no different. The FCA in January published a Dear CEO letter to wholesale GI firms setting out its expectations on tackling non-financial misconduct. The letter cites non-financial misconduct as a key source of harm and emphasised the importance of, and key drivers for, creating a healthy culture from the top down. It stated that a lack of diversity and inclusion acts as an obstacle to creating a safe space for employees.
The EBA’s benchmarking report on EU diversity under CRD IV looked at diversity and inclusion in practice. The Capital Requirements Directive (CRD) introduced a requirement for all firms to implement a diversity policy and account for the diversity of management when recruiting, and for ‘significant’ firms to set and pursue gender balance targets. The EBA’s report showed that more work must be done; 41.61% of firms had not implemented a diversity policy and, whilst there was a slight improvement in gender representation, 66.95% of firms have executive directors of only one gender.