Forbearance is something of a dirty word in UK financial regulation, at least with regulators themselves. It describes a situation where watchdogs voluntarily exercise their discretion not to enforce rules or other requirements on the regulated. And that’s why they don’t like it – no regulator has ever prospered by giving its industry a free pass. Long-term pain for the regulator will outweigh any short-term gain to the industry as a whole.
Even so, you’d be forgiven for thinking the coronavirus crisis presents an ideal breeding ground for regulatory forbearance: a world-wide pandemic with seismic economic effects, stock markets tumbling, staff working remotely, and huge potential consumer detriment lurking around every corner.
So, if now isn’t the time for a little forbearance, when is?
But what’s interesting is how UK regulators are fulfilling their mandates. They’re walking a tightrope between two roles every parent will find familiar: allowing activity and setting expectations. Or, to put it another way, taking positive action to protect the industry and the economy, and ensuring firms meet their responsibilities. In that context, any forbearance is likely to be limited.
On the prudential side, regulators have taken steps aimed at giving firms more freedom to manoeuvre in financially testing times. In March 2020, the Financial Policy Committee (FPC) set the Counter-Cyclical Capital Buffer at 0%, freeing up capital for banks to lend, and the long lead-in period for implementing increases in the buffer mean that banks won’t need to hold capital against it again until March 2022 at the earliest.
And then comes the pro-active parenting, and it’s all about setting boundaries. Shortly after the FPC took its decision, the Prudential Regulation Authority (PRA) made clear that it did not expect banks to use the additional capital freed up to pay dividends. And it noted any proposals to use those funds in bonus pools should be discussed, documented and (if necessary) challenged by boards and remuneration committees. Building on this stance, a joint letter from the Treasury, the Bank of England and the Financial Conduct Authority (FCA) dated 25 March encourages banks to keep lending.
The FCA has adopted a similar approach, making it clear that it is sympathetic to the impact COVID-19 will have on firms. It recognises that new modes of remote working are likely to place significant strain on compliance frameworks, and has asked firms to contact it to discuss matters if they are having difficulties.
But as with the PRA, the FCA’s approach also reinforces its expectations, and – consistent with its role as a conduct regulator – carries more dire warnings. In guidance issued to mortgage lenders, the FCA notes that any consumer who might have difficulty paying their mortgage due to coronavirus should be granted a three-month payment holiday. It goes on to say that lenders will likely breach rules on treating customers fairly if they start or continue possession proceedings, or seek to enforce a previously-obtained possession order against a consumer. Failure to follow the guidance, the FCA notes, may be relevant in an enforcement context.
Insurers are expected to take account of the changed circumstances in the way they write new business, process renewals and deal with claims. So, the FCA notes that in some cases a firm might not treat a customer fairly if it refuses to renew a policy, even if the product is being suspended. Likewise, the FCA does not expect motor and home insurers to reject claims that arise as a result of the new paradigm for home working.
Sitting behind this is the threat of enforcement, particularly at any suggestion of firms taking advantage of the current situation. Given the positive steps the authorities have taken to combat the crisis, the regulators will be on the look-out for poor behaviour that should be punished. If they find widespread misconduct then their approach may well become more directive. Parliament and society will expect no less.
We would all do well to remember that – as any parent will tell you – sympathy rapidly dissipates when confronted with wrong-doing. And in a regulated industry, arguments around forbearance won’t help if you find yourself on the wrong end of an intervention.
Robert Dedman is a partner at King & Spalding and former head of enforcement at the Bank of England/Prudential Regulation Authority
For more legal analysis on the coronavirus crisis, see ‘Guest comment: HSF disputes chief assesses the City litigation market’s Covid-19 response’ and click here for our latest coverage