As the UK continues to be gripped by the COVID-19 pandemic and the number of cases – and death toll – rise, it may now appear that what happens to the financial services sector is relatively inconsequential.
The reality though, is that a resilient financial services sector will indeed play a part in recovery in a number of ways, from supporting businesses, re-energizing the currently stagnant property market and encouraging a return to stable investment.
This is a time for the sector to show its strength and banks and other mortgage lenders have been praised for allowing customers to take payment holidays if needed, and so avoid racking up large debts.
The contactless limit has also been raised to £45 – a small measure but one that also reduced the risks in handling cash. But, as yet, we do not know either when the current lockdown will end or what the repercussions will have been on the financial services, although there has been huge damage to markets and it is clear that regulators have been forced to take far more of a backseat role.
One fact is clear – there will be a huge amount of work to catch up on, as the following work has all been put on hold:
- The FCA’s second review into advice suitability has been postponed to allow advisory firms to focus on supporting their clients. The FCA said it would be dealing with ‘more critical’ activity and did not say when the review would be picked up again.
- Reforms to the defined benefit pension transfer market were expected in the first quarter of 2020, as was a ban on contingent charging, meaning that those wanting advice on their options would need to pay upfront. However, new rules surrounding pension transfer advice have been delayed and are now likely to come out by the third quarter of this year.
- The publication of the FCA’s guidance on vulnerable customers has also been put on the back-burner. The regulator said it would also delay calls for input from the market on open finance and accessing and using wholesale data.
- The Prudential Regulatory Authority has said it is postponing ‘non-critical’ work as well as the 2020 stress tests for banks. It added its ‘non-critical data requests, on-site visits and deadlines’ would be cancelled if appropriate.
- Further, deadlines for responding to new rules on IT systems’ resilience will also be extended to 1 October. The Basel III regime of banks’ capital requirements has also been deferred by a year to January 2023.
The FCA does continue to handle customer enquiries via email and social media, but with its staff largely working remotely, it is clear why the work output has needed to be reduced so substantially. It is understood that staff have also been redeployed to manage COVID-19 related fall out issues which could involve firms going out of business and any subsequent harm to customers.
The FCA has stated any regulated business running into difficulties such as becoming insolvent should get in touch ‘immediately’. And although the regulator said its approach to enforcement ‘remains the same’ the actual processes are expected to take longer and whether there will be delays to authorizations and approvals remains to be seen.
So, even if it doesn’t want to admit it, there is almost certainly going to be reduced regulatory firepower. Should there be a major collapse, however, the Financial Services Compensation Scheme has emphasized it is fully operational and continuing to manage existing claims, although it too has many staff working from home.
A changing scene
The full extent of the financial damage resulting from this pandemic cannot be estimated and there is a great deal of uncertainty around how the £350 billion government bailout for businesses and the further vast amount of borrowing currently underway will be repaid.
Financial services firms are all likely to be impacted by the effects of reduced balanced sheets. There could be higher charges passed on to consumers and the government is also likely to clawback money through higher taxes, including on the financial services sector.
There may be changes such as even more bank branches close and more customers become attuned to online banking as well as to save costs. Online payments are also soaring as shoppers seek to avoid physical stores and this too will pose a challenge for providers. Rising fraud is yet another concern.
Banks have a key role in handling the government loans to small businesses, but many more people in the UK could also end up with higher levels of personal debt. This may result in higher demand for borrowing, which should be cheaper as interest rates have been cut. But, the risks may also be viewed as higher – who knows if all the furloughed staff will be able to return to their former roles?
It has been suggested that GDP could shrink by some 35% this quarter and a recent survey from the Confederation of British Industry has said financial services firms believe that within their sector, demand, profitability and employment will all decline sharply.
To say there are difficult times ahead is an understatement – the Chancellor has admitted that there are ‘tough times’ ahead for the UK economy. But, there is undoubtedly a crucial role for financial services and it is to be hoped that when the lockdown ends, it will play a leading role in ensuring that lives can begin to return to normal.