In our latest interview, Gowling WLG head of UK Financial Services Regulatory team Ian Mason talks to The Lawyer about the conduct risks emerging from COVID-19 and the difficulties facing Senior Managers, while giving us an insight into the major challenges for the financial services sector in 2021.
Regulators have relaxed the rules to a certain extent amid the pandemic, to allow banks to operate remotely. Are there any conduct issues or challenges arising from this?
Although the regulators have recognised that the pandemic will cause some practical and operational difficulties for banks and other financial firms, there has not been a significant relaxation or amnesty from the rules. The FCA, Bank of England and HM Treasury have all made clear their expectations for financial services firms to have effective contingency plans in place to enable them to continue operating effectively while meeting their regulatory obligations.
COVID 19 has created a number of conduct risks. It could impact on the health of senior management teams and at board level. Firms should therefore ensure that they have a robust crisis management policy in place and identify all personnel who carry out key governance functions to ensure continuity of day to day decision making. They should also consider the possibility of Senior Managers being unable to carry out their roles due to illness and temporary arrangements which may be required.
With most office-based people working from home, the normal controls around the protection of inside information will also be weaker. There is a higher risk that confidential documents are left lying around the home, or are not disposed of securely. Some financial institutions prohibit the printing of work-related documents at home. Recording of calls may also be more difficult. In addition, the current volatility of financial markets makes suspicious patterns of trading or transactions harder to spot. It’s not clear what is “normal” in the current markets. Firms will need to consider what the “new normal” is in relation to parameters previously set for price changes or profits generated.
Cyber-resilience is also another key consideration. Firms should ensure that depleted staff numbers caused by furloughing or redundancy do not impact on their cyber-resilience and ability to withstand malicious attacks. The FCA has warned that criminals have been taking advantage of the pandemic to carry out fraud and exploitation scams through a variety of methods, including cyber-enabled fraud. Those seeking to launder criminal proceeds or finance terrorism are likely to also exploit any weaknesses in firms’ systems. Firms should ensure they are taking all reasonable steps to protect their customers and their staff from these threats.
How can Senior Managers best protect themselves from regulatory liability, when normal day-to-day operations have been heavily disrupted by the pandemic?
COVID 19 has and will continue to present a major challenge for Senior Managers. The FCA has made clear that it expects at least one Senior Manager at each firm to take responsibility for deciding which employees must still be based in the office, having regard to travel restrictions, and generally ensure business continuity.
Day to day supervision is more difficult outside the office. This makes it more important for managers to ensure that they have an effective reporting framework in place, so that they can monitor progress, and identify and follow up on any “red flags”. However documentation and written reporting is not enough. The FCA has emphasised the importance of monitoring the mental well-being of employees: almost everyone has experienced some difficult times during lockdown, and although Zoom calls or similar media are not as good as a face to face chat, they are more effective and will provide more colour than just an exchange of emails. So it is important to have bilateral calls with staff, as well as formal and informal calls in larger groups.
Under the FCA’s Senior Manager and Certification regime (SMCR), each Senior Manager will have their prescribed responsibilities and their statement of responsibilities. The FCA will hold Senior Managers personally accountable for these, and Senior Managers should constantly ask themselves the question “How could I prove if challenged that I am effectively carrying out my responsibilities?” There may be a need to work more collaboratively or a higher risk of blurring of lines during the pandemic, so it is important that management lines and accountability remains clear, and in accordance with the documentation.
What will be the major challenges for the financial services sector in 2021?
It won’t be the same post COVID 19. There will be a mixture of old and new issues to deal with. These include:
- Brexit – this one won’t go away. By 2021 we should know (unless there has been an extension to the transitional period, which currently looks unlikely) what the UK-EU regulatory arrangements will be, in fact they will in operation. Firms will have contingency plans in place for a number of scenarios, it is a case of which plan they need to trigger and implement.
- Consolidation and mergers – there will be winners and losers from COVID 19, some firms will have been better placed than others to capitalise on the opportunities, and this may lead to mergers and consolidation. Some fund management and broking firms have been under pressure. Some banks which already had poor loan portfolios and unviable business models pre COVID 19 will have deteriorated during the crisis.
- Post COVID 19 review – firms’ systems and controls will inevitably have been stretched during the crisis. Some things may not have gone quite as well as they should have done, albeit unintentionally. Where firms have noted increased risks to their business over the COVID 19 period, there should be a clear audit trail of how they mitigated those risks. For example in Market Watch 19, the FCA highlighted personal account dealing by employees at firms as a risk area, since working from home can lead to weaker controls and create fertile conditions for market abuse and conflicts of interest. The FCA will no doubt be reviewing and picking up on any thematic weaknesses which occurred over the period.
- Climate change – The financial sector needs to adapt to manage the physical and transition risks that climate change poses. Climate change has moved high up the agenda of regulators, and therefore it needs to be high on firms’ agendas as well.
Personal: How did you keep yourself motivated in the current climate?
Variety is the spice of life. There is a danger of Zoom fatigue during the lockdown, so I always try to take a walk each day to change my environment and freshen my mind.
I am a keen film fan, so although I have not been able to go to the cinema, I have been making the most of film streaming services, and discovering some new ones. As a fan of crime fiction and “Scandi-Noir”, I have also recently completed an online Scandinavian Film Studies course, as well as one on Star Trek and its impact on culture!
I am a keen chess player, but again have had to make do with online and correspondence games rather than facing live opponents.
Shortly before the lockdown, two kittens came to live with us. We have watched them growing up, and they are as cute as they are naughty. They are a welcome diversion from the current situation.
Ian Mason is one of the 30+ speakers making up this year’s speaker line-up at The Lawyer’s In-house Financial Services virtual event. For more information on the conference, a copy of the agenda, or to register for any of the 10+ sessions available, please visit the event website.