COVID-19: response from the Bank of England and Prudential Regulation Authority

The Bank of England (BoE) and the Prudential Regulation Authority (PRA) have announced a series of supervisory and policy measures designed to help UK businesses and households "bridge across the economic disruption that is likely to be associated with COVID-19". The regulatory actions are designed to maintain financial stability, ensure the safety and soundness of firms and make sure policyholders are protected.

The BoE and the PRA are working closely with the Financial Conduct Authority (FCA), HM Treasury and regulated firms to coordinate their response in the most effective way. We have summarised the key measures and announcements made to date that firms should be aware of. Please see our separate webpages on COVID-19: the impact on the UK's payments industry, how the Financial Conduct Authority has responded and the measures taken by the European financial regulators in response to COVID-19.

• Treating customers fairly - at the press conference announcing the first set of special measures, on 11 March 2020, Andrew Bailey, Governor of the BoE, stressed that banks must treat their customers fairly: "[o]ne of the FCA's core principles is treating customers fairly. The system is now in a much more resilient state, we expect them to treat customers fairly, that is what must happen. They know that, they are in a position to do that, there should be no excuses. But we at the FCA and Bank of England will be watching this very carefully."
• Financial system resilience – The BoE's financial policy summary record (FPSR) of the March 2020 FPC meetings was published on 24 March 2020. The focus, as expected, was on the financial stability risks facing the market as a result of the economic disruption caused by COVID-19. The FPSR highlighted the measures taken and noted that major UK banks are well placed to "withstand severe market and economic disruption". The BoE, FCA and HM Treasury sent a joint letter to UK banks expressing their appreciation of the action already taken and highlighting the importance of implementing the various measures. In addition, the BoE and major UK banks released a joint statement assuring the public that they are in a strong position to provide support and highlighting the range of measures for household and business, which give enormous scope to the financial system during these extraordinary times. In a speech published on 9 June 2020, Sir Jon Cunliffe, Deputy Governor for Financial Stability, discussed the financial systems resilience. He noted the banking system has been able to absorb a very sharp financial market shock and considerable resilience remains in the core banking system. In his speech he noted that further COVID-19 developments could cause financial instability to return and a particular focus will be on the usability of the capital and liquidity buffers intended to absorb a tail event shock. On 6 August 2020, the FPSR of the FPC meetings on 29 July and 3 August 2020 was published. The FPC discussed the performance of the UK financial system during the coronavirus pandemic, noting the resilience that has been built up since the 2008 global financial crisis alongside the policy responses from the government and the BoE. The FPC reviewed the outlook for financial stability as the COVID-19 shock evolves, by considering the impact on banks, markets and equity finance for companies.
  
  On 17 November 2020, Andrew Bailey delivered a speech on the long-term effects of COVID-19 and the investment required to support the recovery. The encouraging news regarding the vaccine will play a major role in lowering the level of uncertainty in planning for any necessary structural changes. Mr Bailey discussed three components of the changes: (i) what we buy has changed and the way we buy it; (i) how the way we work has changed; and (iii) what we make may need to change.  Mr Bailey concluded the speech by stating that the BoE will be emphasising work on the supply of finance for productive investment, which is important for long-term growth and for financial stability.
  
  On 11 December 2020, the BoE published the Financial Stability Report for December 2020 and the FPSR of the meeting of its FPC on 8 December 2020. The documents set out the FPC's view on the outlook for UK financial stability, including its assessment of the resilience of the UK financial system and the main risks to UK financial stability, and the action it is taking to remove or reduce the risks in light of the COVID-19 pandemic. The report states that banks have high levels of capital, allowing them to absorb very big losses while continuing to lend. The FPC lowered the UK countercyclical capital buffer rate to 0% in March 2020, meaning that banks have more capacity to lend. The FPC confirmed that it expects to keep the rate at 0% for at least another year to help ensure that banks plan for the future and support the economy.
  
  On 7 January 2021, the BoE published a speech by Andrew Hauser, the Executive Director of Markets at the BoE. The speech was titled "From Lender of Last Resort to Market Maker of Last Resort via the dash for cash: why central banks need new tools for dealing with market dysfunction". Mr Hauser said that if financial markets are to support the increasing reliance placed on them safely, more must be done to reduce the scale of inherent vulnerabilities beforehand and build better-targeted tools for dealing with financial instability caused by market dysfunction after it has happened. The speech focussed on the role that central bank balance sheets should play in dealing with market dysfunction. Among others, Mr Hauser stated that central banks are likely to face increasing calls to provide public liquidity insurance for instances of severe financial market dysfunction in the years ahead. He also stated that central banks will need to reflect on whether the use of their balance sheets to address market dysfunction should remain discretionary, or whether at least aspects of that role should be formalised into standing facilities, the terms of which are known in advance.
  
  The governor of the Bank of England, Andrew Bailey, has given a speech to the Resolution Foundation which was published by the bank on 8 March 2021.   Mr Bailey took the opportunity to emphasise that "strong growth in potential supply [sic] supported by stronger investment and productivity growth will make the COVID recovery easier", reinforcing the message that the Bank's actions on quantitative easing and maintaining low interest rates will aid the recovery.  His message was founded on four points, which were:
  
  • The COVID-19 pandemic has been a shock to both supply and demand within the UK economy, in that both producers and consumers have been separately impacted.
  • Regarding structural changes to the economy as a result of the pandemic, Mr Bailey assesses that some of the home working and online shopping "habits" will remain but may rebalance over time.
  • Capital redeployment and job reallocation in many industries has improved over time, and Mr Bailey expects the economic shock of COVID to be lower as a whole than in previous economic shocks.
  • It is foreseeable that without any other input, the UK economy would see reduced levels of investment, which is why the monetary policy has been focused on promoting investment through quantitative easing and low interest rates.
   
• Insurance industry - on 22 September 2020, Anna Sweeney, an Executive Director at the BoE, delivered a speech on the role of the insurance industry in supporting the recovery of the wider economy. Her speech highlights that the insurers can support the economy by providing protection for significant financial losses, channelling investment into a wide range of assets, and providing security of retirement income in the form of savings and annuities, thus facilitating stable demand for goods and services. On 13 November 2020, the PRA published a letter to chief risk officers of general insurance firms, which sets out insights from recent PRA supervision review work on reserving and exposure management. The PRA noted that the COVID-19 pandemic has given rise to additional complexity in estimating ultimate losses and highlighted issues concerning four key areas that firms should consider as part of their year-end reserving exercise. The key areas are (i) data; (ii) discontinuities in historical trends; (iii) appropriateness of common reserving methodologies; and (iv) reinsurance adequacy. On 3 December 2020, the PRA published a speech by Charlotte Gerken, the Executive Director of Insurance Supervision at the PRA. Ms Gerken outlined the tactical steps that the PRA has taken in relation to the macro-economic impact of COVID-19 on insurers. These include increasing the emphasis placed on cyber resilience as a result of changes in work patterns and increased reliance on technology.
• Economic trends - in a speech delivered 30 September 2020, Andy Haldane, the Chief Economist at the BoE, stated that the economy has seen greater robustness and resilience than anyone expected. He also stressed that avoiding economic anxiety is crucial to support the on-going recovery as this has important implications on how businesses and policymakers act and communicate.
  
  On 25 November 2020, Bank Overground, the BoE Blog, published an article on how has COVID-19 affected household savings. The article concludes that although household savings have risen substantially since the start of the COVID-19 pandemic, only a small fraction of households intends to spend these savings.
  
  On 17 December 2020, the BoE published a survey on the impact of COVID-19 on UK businesses. The survey concluded that businesses continue to expect COVID-19 to have a large impact on their sales, employment, hours worked, investment and costs over the next year. Investment was expected to recover more slowly and by less than sales. On 21 December 2020, the BoE published the Staff Working Paper No. 900 which focuses on the impact of COVID-19 on productivity. Firms anticipate a large reduction in within-firm productivity, primarily because measures to contain COVID-19 are expected to increase intermediate costs.  In the longer run, productivity growth is likely to be reduced by diminished research and development expenditure and diverted CEOs’ time spent on dealing with the pandemic.
  
  On 12 January 2021, Ben Broadbent, the Deputy Governor of Monetary Policy at the BoE, delivered a speech that looks at how COVID-19 has changed the spending habits of households and what the change may mean for costs and inflation. He said that in 2020 the gross domestic product (GDP) growth may have been the weakest on record but retail spending growth is almost the strongest. However, the rapid dynamics of the virus, combined with the vast scale of the furlough schemes, make it difficult to infer what short-term gyrations in GDP mean for inflationary pressure further ahead. Nonetheless, the MPC will continue to set policy in order to achieve the 2% inflation target (see "Statements on monetary policy" below).
  
  On 7 April 2021, the BoE published a statistical assessment on its Bank Overground series which identified that firms' unit costs have risen by around 5% over 2020, as although sales fell by around 6% over the year, the fall in firms' input costs was around 20% of this, leading to the unit costs rise of 5%.  

• Co-operation between regulators - on 9 February 2021, the BoE published an update on the BoE's and the FCA's memoranda of understanding on the supervision of market infrastructure and payment systems (MoU). The BoE and the FCA held a consultation with financial market infrastructures, seeking feedback on how the BoE, the FCA and the Payment Systems Regulator had co-operated during the COVID-19 market events.  They concluded that the MoU’s arrangements for co-operation remain effective. 
  
• Securities lending markets - In the minutes of the Securities Lending Committee meeting published on 11 November 2020,  the Committee noted that securities lending markets had coped well with the disruption caused by COVID-19. Margin calls and credit risk concerns were much lower compared to the 2008 financial crisis. 
• Climate change - on 24 September 2020, the House of Commons Environmental Audit Committee presented oral evidence which stressed that, given the short window of opportunity remaining to keep global temperature rises to a manageable level, it would be critical to align the post-crisis recovery stimulus with the UK’s goals on climate change, biodiversity and sustainable development. On 9 November 2020, Bank Underground, the BoE Blog, published an article on COVID-19 and green recovery. The article states that there is a growing consensus among central banks that they should factor in climate-related financial risks in their operations. Nevertheless, central banks’ responses to COVID-19 crisis attracted renewed calls that their policies should also be calibrated to help support climate goals. However, most central banks do not have a mandate to engineer a low-carbon transition, and thus the tools at their disposal may not be best suited for a green recovery.
  
• Operational resilience - on 06 October 2020, Nick Strange, a director at the BoE, gave a speech on operational resilience. Firms shall remain prepared for threats that are fast, short-lived and asymmetric, such as cyber threats and key third-party failures. On 3 December 2020, the BoE published a statement stating that banks have made progress in enhancing operational resilience in recent years including through their response to the challenges posed by COVID-19. However, more work remains to be done to ensure banks are resilient to potential operational disruptions from all hazards, including severe but plausible cybersecurity incidents. 
• Financial Services Compensation Scheme (FSCS) – on 4 August 2020, the PRA published a policy statement setting out the decision to extend coverage under the FSCS for Temporary High Balances (THB) from six months to twelve months from the date of deposit, or the first date the THB becomes legally transferable to the depositor. The extension would be for a limited period and coverage would revert back to six months from Monday 1 February 2021.
• Reduction in Bank Rate and new Term Funding Scheme (TFSME) – at a special meeting on 19 March 2020, The MPC voted to reduce the Bank Rate from 0.25% to 0.1% (a record low) and extended the newly introduced TFSME (which provided additional incentives for SMEs) by increasing the Initial Borrowing Allowance from 5% to 10%. The MPC also voted unanimously to increase the BoE's holdings of UK government bonds and sterling non-financial investment-grade corporate bonds by £200 billion. The various measures, backed by the issuance of central bank reserves, are intended to support consumer confidence, increase liquidity in the market and incentivise banks and building societies to support SMEs that typically bear the brunt of market contractions. Further, on 2 May 2020, the BoE stated that TFSME participants will in future be able to extend the term of some of the funding accessed via the TFSME to align with the 6-year term of loans made through the BBLS.
• Statements on monetary policy – On 28 August 2020, in a speech and an associated paper, Andrew Bailey considered the lessons from using the central bank’s balance sheet as a policy tool in responding to the disruption caused by COVID-19.  Mr Bailey made observations regarding the efficiency of the policy responses, in particular, the quantitative easing (purchases of long-term government bonds) by the BoE's MPC. He commented that for both financial stability and monetary policy purposes, the BoE's balance sheet should move in a countercyclical manner. 
  On 4 September 2020, Michael Saunders, an external member of the MPC, examined the data for GDP, jobs and money in the economy in light of the impact of COVID-19. Mr Saunders suggested that further monetary loosening may be needed in order to support the economy and to prevent a persistent undershoot of the 2% inflation target. On 17 September 2020, the BoE published an open letter from Andrew Bailey to the Rt Hon Rishi Sunak, Chancellor of the Exchequer, to explain why inflation has moved away from target and what action the BoE is taking to bring inflation back to target. The letter states that the COVID-19 shock has had varied impacts on demand and supply in different sectors of the economy, but overall the effects appear to have reinforced the drag on the Consumer Prices Index inflation from lower oil prices. The Monetary Policy Committee will continue to monitor the situation closely and stands ready to adjust monetary policy accordingly to meet its remit.
  
  At the MPC's meeting ending on 4 November 2020, in light of the impacts of the COVID-19 pandemic, the MPC voted unanimously to maintain the bank rate at 0.1%. The MPC also voted unanimously for the BoE to (i) maintain the stock of sterling non-financial investment-grade corporate bond purchases; (ii) continue with the existing programme of £100 billion of UK government bond purchases; and (iii) increase the target stock of purchased UK government bonds by an additional £150 billion. Following the meeting, on 4 November 2020, the BoE wrote a letter to the Rt Hon Rishi Sunak, Chancellor of the Exchequer. The letter explains that the MPC judged that a further easing of monetary policy is warranted and subsequently requests that the Asset Purchase Facility (APF) is authorised to purchase up to a further £150 billion of UK government bonds. Consistent with this, the letter also requests an authorisation to increase the total size of the APF from £745 billion to £895 billion. In a letter dated 5 November 2020, the Rt Hon Rishi Sunak stated that he recognised the extreme disruption COVID-19 is causing and authorised the increase. In the market notice published on 4 February 2021, the BoE set out details on the planned APF gilt purchases taking place between 8 February 2021 and 17 March 2021. On 6 May 2021, the MPC voted in favour of continuing the APF gilt purchases using central bank reserves, maintaining a target stock of £875 billion.
  
  On 17 November 2020, Dave Ramsden, the Deputy Governor for Markets & Banking at the BoE, delivered a speech on the potential long-term economic effects of COVID-19. The speech concluded that while there is a role for monetary policy in limiting scarring, there are limits to what monetary policy alone can achieve in the face of structural change. Monetary policy can help to smooth the adjustment, but wider policy will have an important part to play. Additionally, Mr Ramsden said that the BoE stands ready to take whatever additional action is necessary to achieve the remit of meeting the 2% inflation target in a way that helps to sustain growth and employment. 
  
  On 4 December 2020, Michael Saunders, an external member of the MPC, delivered an online webinar on monetary policy options. He said that economic activity is likely to pick up as the recent lockdowns end, helped by encouraging news on vaccines. However, unemployment is set to rise further in the next couple of quarters and the economy may be hit by a below-target inflation. He further stated that the MPC will remain focussed on returning inflation to the 2% target in a way that supports output and jobs.
  
  The Monetary Policy Committee confirmed on 18 March 2021 that it has no intention of tightening monetary policy until there is clear evidence that spare capacity is being eliminated at the 2% inflation target can be achieved sustainably.  This means that the 0.1% Bank Rate and the purchase of both UK government bonds and sterling non-financial investment-grade corporate bond purchases (a total target stock of asset purchases at £895 billion) will be maintained until at least 24 June 2021.
  
  On 26 March 2021 Michael Saunders gave a speech to an online webinar on the issues of measuring supply and demand during and after the pandemic.  
  
• Systemic Risk Buffer – on 9 April 2020, the PRA announced its decision to maintain ring-fenced banks Systemic Risk Buffer rate as set in December 2019. The rate will be reassessed in December 2021 to take into account the impact of COVID-19 on firms' balance sheets. 
  
  On 7 December 2020, in response to the economic shock caused by the COVID-19 pandemic, the PRA published a statement announcing the decision to maintain firms’ Systemic Risk Buffer rate at the rate set in December 2019 for a further year until December 2022, with no rate changes taking effect until January 2024.
• Prudential Regulation Committee (PRC) Supervisory Guidance - in conjunction with the MPC and FPC measures, the PRC has set out its supervisory expectation that banks should not use the extra liquidity and policy actions to increase dividends or other distributions, such as bonuses. Additionally, and in light of the fall in government bond yields, the PRC has called on insurance companies to use the flexibility in Solvency II regulations to support market functioning.
• Annual stress test – the BoE's annual cyclical scenario has been cancelled to allow the major banks to focus on meeting the needs of UK households and businesses. Together with the measures to reduce the countercyclical capital buffer, the regulators expect all elements of a banks’ capital and liquidity buffers to be drawn down as necessary. In furtherance of this objective, the PRA published a set of questions and answers on 20 April 2020 for banks on the use of liquidity and capital buffers.
• Liquidity biennial exploratory scenario (BES) - On 3 February 2021, the BoE announced that it will not restart the 2019 liquidity biennial exploratory scenario (BES) which was paused in March 2020 in light of the COVID-19 pandemic. Nonetheless, the BoE stated that insights from the liquidity BES have already helped to shape aspects of its response to the impact of COVID-19 and that these insights will continue to help inform several strands of the BoE's work.
• IFRS 9 and COVID-19 – the BoE recognises the importance of a forward-looking measure of losses but asks firms provisioning into the expected credit loss to be both reasonable and supportable. The PRA published a 'Dear CEO' letter on 26 March 2020, discussing the measures taken in light of COVID-19 to safeguard the financial stability of markets and firms. The letter provided guidance on (i) consistent and robust IFRS 9 accounting and the regulatory definition of default; (ii) the treatment of borrowers who breach covenants due to COVID-19; and (iii) the regulatory capital treatment of IFRS 9. Following clarification sought by some insurance firms, the PRA published a follow-up note on 23 April 2020 for PRA-regulated insurers. It clarified that the Dear CEO letter does not address insurers' internal assessments of loan creditworthiness and the treatment of unrated assets, but it can nonetheless be considered of wider application. Firms should 'make well-balanced and consistent decisions' and give weight to the established long-term economic trends. Equally, breaches to loan covenants, as a result of COVID-19, do not indicate long-term credit risk and insurers will need to use their own judgement to determine the associated credit risk. In this regard, the PRA also directs firms to their Supervisory Statement (SS) 3/17 ‘Solvency II: Illiquid, unrated assets'. On 22 May 2020, the PRA issued a statement on guidance on the application of regulatory capital and IFRS 9 requirements to payment holidays granted or extended to address the challenges of COVID-19. As the first payment deferrals are coming to an end, the PRA considers that eligibility for, and use of, COVID-19 related payment deferrals or extensions to those deferrals granted in accordance with the FCA’s proposed guidance would not automatically result in a loan: (a) being regarded as having suffered a significant increase in credit risk (SICR) or being credit-impaired for expected credit loss accounting purposes, or (b) triggering a default under the Capital Requirements Regulation (575/2013) (CRR). The PRA also published a letter on 4 June 2020, from Sam Woods, Deputy Governor and CEO of the PRA, on IFRS 9 and capital requirements with an update to the March guidance to provide further guidance on initial and further payment deferrals. In light of the FCA guidance in relation to mortgage payment deferrals, on 26 August 2020, the PRA published a statement explaining that tailored forbearance arrangements, at the end of the of the COVID-19 specific payment deferrals, are likely to be as good an indicator of SICR, credit impairments or defaults as forbearance was before the pandemic. The PRA further stated that in some cases, where the position is not clear-cut, a judgement will need to be made. The PRA's earlier guidance for making holistic assessments continues to be relevant.
• Open-ended funds – the BoE announced on 20 March 2020 that the planned survey covering c.300 funds has been delayed, with a subsequent impact on the FCA consultation that would have followed.
• Islamic finance – on 2 December 2020, Andrew Hauser, the Executive Director for Markets at the BoE, delivered a speech on Islamic finance. The first part of the speech sets out why Islamic finance has an important role to play in supporting the recovery from COVID-19. Mr Hauser stated that the philosophical focus on equity-like sharing of risk and reward will become increasingly relevant as market participants get to grips with the scale of debt accumulated in response to COVID-19. Risk-sharing contracts, including those promoted by Islamic finance, pose materially lower medium-term risks to stability. The second part of the speech provides details regarding the BoE’s new alternative liquidity facility. The facility will be open for business from the first quarter of 2021. In Mr Hauser's view, the new facility will provide UK Islamic banks and any other UK banks with formal restrictions on engaging in interest-based activity with greater flexibility in meeting High Quality Liquid Assets (HQLA) requirements, enabling them to hold a reserves-like asset in a non-interest based environment. 
• Supervisory engagement with firms and FMIs – non-critical supervisory programmes will be delayed, the PRA's approach to Senior Manager Function applications will be considered to reduce the burden involved, responses to the BoE's and PRA's consultations on operational resilience policy development will be delayed to 1 October 2020 (in line with the FCA, see above), Internal Ratings Based models implementation will be delayed, the first meeting of the Financial Services Regulatory Initiatives Forum will take place as soon as possible in April 2020 to assist co-ordination of the regulatory initiatives, and new legislation will be introduced to enable implementation of Basel 3.1 (which has been delayed, see below). On 4 June 2020, the BoE published a letter to FMIs. When making any distributions to shareholders or decisions on variable remuneration, FMIs must discuss with it with the BoE and pay close attention to the risks and financial and operational demands from COVID-19.
• COVID Corporate Financial Facility (CCFF) – on 18 March 2020, the BoE and HM Treasury announced they will launch a CCFF on 23 March 2020 to provide additional help to firms experiencing a disruption to their cash flows (see our detailed business loan support insight article here and our article on the suitability of the Coronavirus Large Business Interruption Loan Scheme (CLBILS) for your business). On 22 September 2020, the BoE and HM Treasury announced that the CCFF will close for new purchases of commercial paper from eligible issuers with effect from 23 March 2021. This means that the CCFF will make no purchases of commercial paper after 22 March 2021. A further announcement was made on 9 October 2020 on how CCFF issuers’ credit quality will be monitored and reviewed in advance of the closure of the CCFF. From 9 October 2020, the review of the credit quality of eligible issuers in the CCFF will be enhanced. Any eligible issuer wanting to issue new commercial paper into the CCFF will be subject to a review to consider whether that issuance remains in line with the purpose of the facility. On 28 January 2021, the BoE updated its market notice again to to provide clarity on existing policy. 
  
  The CCFF will close for new purchases of commercial paper from eligible issuers on 23 March 2021.  The Bank updated the early repayments scheme on 11 March 2021, stipulating that any sell-back of the commercial paper from 22 March 2021 will need to occur on a trading window in the first working day of each week.  The first window will be on 29 March 2021.  The weekly sell-back windows will continue until the stock held by the CCFF returns to zero value.
• Contingent Term Repo Facility (CTRF) – the BoE, on 24 March 2020, activated the CTRF, which allows market participants to borrow from the central bank reserves secured against less liquid assets, to "alleviate frictions observed in money markets". On 24 April 2020, the BoE announced that it will continue to offer 3-month and 1-month term CTRF operations on a weekly basis, with the final operation scheduled on 29 May 2020.
• Regulatory treatment of the CBILS and CLBILS – on 27 April 2020, the PRA published a statement on the regulatory treatment of CBILS and CLBILS. The statement considered whether guarantees provided by the Secretary of State for Business, Energy and Industrial Strategy are eligible for recognition as unfunded credit risk mitigation (CRM) under the CRR. The PRA found that the guarantee does not contain features that would render it ineligible but encouraged firms to review the relevant legislation, rules and guidance and where necessary seek independent advice. Lenders are expected to use their judgement when making credit decisions and use the range of information at their disposal. Further, on 26 June 2020, the PRA published an updated statement on the regulatory treatment of CBILS and CLBILS. The PRA provided clarification for firms under the following three scenarios: firms using the standardised approach for exposures to the obligor, firms using the internal ratings based (IRB) approach for exposures to the obligor and the standardised approach for exposures to the guarantor (under permanent partial use or rollout), and firms using the IRB approach for exposures to the obligor and the IRB approach for exposures to the guarantor.
• Treatment of the BBLS - on 4 May 2020, the PRA published a subsequent statement on the CRM eligibility of loans under the BBLS, in which they reiterated their views above. The PRA also discussed the leverage ratio treatment of loans under the BBLS. It offered a modification by consent for banks subject to the UK Leverage Ratio Part of the PRA Rulebook to exclude loans under this scheme from the leverage ratio total exposure measure, if they choose to do so.
• LIBOR transition - in a statement made on 25 March 2020, the FCA, BoE and Working Group on Sterling Risk-Free Reference Rates (RFRWG) discussed the impact of COVID-19 on the transition from LIBOR to SONIA. The current assumption is that LIBOR will still be phased out by the end of 2021 and in a subsequent joint statement published on 29 April 2020 this was reiterated. To ensure stability in the credit markets during the transition, the RFRWG recommends that by the end of Q3 2020 lenders should be able to offer non-LIBOR products, by the beginning of Q4 2020 any LIBOR-referencing loan products should have clear conversion contractual arrangements and all new LIBOR-referencing products that expire after 2021 should cease. Additionally, the FCA, BoE and RFRWG will continue to assess the impact of COVID-19 and provide further updates in due course. On 10 June 2020, the PRA updated its webpage providing an update on LIBOR transition with regard to the joint letter sent to the RFRWG on 16 January 2020. The PRA noted that a number of the Working Group milestones included in the letter have been revised due to COVID-19.
• Dividends, share buybacks and bonuses – the PRA also released a statement on 31 March 2020, in which it welcomed the decision of the seven largest systemically important UK deposit-takers to suspend dividends and share buybacks until the end of 2020, and to cancel payments of any outstanding 2019 dividends in response to a request from the PRA.The PRA also expects the banks to not pay any cash bonuses to senior staff as a precautionary step in the current economic climate. On the same day, the PRA also wrote to UK insurers reminding them of their responsibility to carefully consider whether any distributions to shareholders or staff bonuses are prudent and consistent with their risk appetite and their importance in supporting the real economy. Correspondingly, on 8 April 2020, the PRA announced that some insurance companies have decided to pause dividends. These measures are in line with the recommendations of the European Systemic Risk Board (ESRB) on the restriction of distributions during COVID-19. On 28 July 2020, the PRA published a statement providing an update on dividend payments and shares buybacks. As the PRA regards distributions as an important and necessary part of the functioning of the banking system, it will undertake its assessment of firms’ distribution plans beyond the end of 2020 in Q4 2020.
• Matching Adjustment – on 7 July 2020, the PRA published a statement to insurers on the application of the matching adjustment (MA) during the COVID-19 pandemic. While the PRA considers that the MA has functioned as intended, to ensure consistency in firms' interpretation of the PRA's policy it has provided some clarifications. The key areas discussed in the statement include: management of the MA portfolio, eligibility, MA calculation and reflection of the MA in solvency capital requirement. On 30 July 2020, the PRA published a consultation on ‘Solvency II: The PRA’s expectations for the work of external auditors on the matching adjustment’. The consultation seeks views on the draft changes to Supervisory Statement (SS) 11/16 ‘Solvency II: External audit of, and responsibilities of the governing body in relation to, the public disclosure requirement’. The consultation closed on 30 October 2020. On 15 December 2020, the PRA announced a delay to the proposed effective date of the draft changes to SS11/16. The PRA confirmed that any finalised approach will therefore not be effective for audits of the Solvency and Financial Condition Reports (SFCRs) with a 31 December 2020 reporting date. The delay takes into account feedback on the consultation, including in relation to the impact of COVID-19.
• Regulatory reporting and disclosure amendments – on 23 March 2020, following on from recommendations by the European Insurance and Occupational Pensions Authority (EIOPA) (see our separate alert here), the PRA released a statement outlining the acceptable delays to regulatory reporting for UK insurers. In the statement, the PRA listed the acceptable delays to aspects of harmonised regulatory reporting and the PRA-owned regulatory reporting for the year-end after 31 December 2019 but before 1 April 2020. Further, on 2 April 2020, the PRA published a statement to outline its approach to regulatory reporting and Pillar 3 disclosures following the European Banking Authority's (EBA) statement on the same. The PRA listed the acceptable delays to CRR and BRRD reporting (which does not include information on liquidity coverage ratio, liquidity monitoring metrics and institutions' liability structure) and to PRA-owned regulatory reporting, where the original remittance deadlines fall on or before 31 May 2020. The PRA also provided guidance on using the old version of the Branch Return Template, funding plans of credit institutions, possible additional ad-hoc reporting on key prudential metrics and their flexibility in the publication timeline of firms' Pillar 3 disclosures. On 7 May 2020, the PRA correspondingly published a statement, consistent with the BoE's approach to stress testing, setting all Pillar 2A requirements as a nominal amount, instead of a percentage of total Risk Weighted Assets to alleviate unwarranted pressure. On 26 June 2020, the PRA published a statement updating their position in relation to regulatory reporting and disclosure amendments. As firms have adjusted to working during COVID-19, the PRA will expect on time submission for future regulatory reporting. The PRA will be flexible in its expectations of firms’ publication timeline for Pillar 3 disclosures that a firm would normally expect to make on or before Sunday 31 May 2020. On 28 July 2020, the PRA published a further statement on EBA Guidelines on reporting and disclosure of exposures subject to measures applied in response to COVID-19. The statement sets out how the EBA disclosure requirements are going to be implemented in the UK and how firms should submit their disclosures. On 27 April 2021, the PRA released direction to firms to continue using the templates released in the July 2020 statement for semi-annual disclosure reference dates, up to and including 31 December 2021.
  
  On 5 February 2021, the PRA published a statement, providing further guidance on regulatory reporting for 2021. The PRA stated that it is aware that the COVID-19 pandemic may affect some firms' ability to meet the regulatory reporting deadlines and therefore will accept a delay in the submission by UK banks and designated investment firms of their annual reports and accounts by up to two calendar months, where the remittance deadlines contained in the PRA Rulebook fall on or before 31 July 2021. For building societies, while it is prepared to accept a similar delay, firms considering the extension may need to consider other statutory requirements that apply to them.
• CRR Amending Regulation – on 30 June 2020, the PRA published a statement on the amendments to the CRR applying directly to PRA-regulated firms in response to COVID-19. The statements sets out the PRA's views on the transitional arrangements for capital impact of IFRS 9 Expected Credit Loss accounting, acceleration of certain CRR II measures, and a temporary prudential filter on certain unrealised gains and losses.
• Value at Risk (VAR) back-testing – on 27 August 2020, the PRA published a statement setting out its decision to terminate its temporary approach to VAR back-testing exceptions from Wednesday 30 September 2020. The exceptions, which applied from 30 March 2020, temporarily allowed firms to offset increases due to new exceptions through a commensurate reduction in risks-not-in-VAR (RNIV) capital requirements. In light of the amendments to the CRR, the PRA has decided to terminate its temporary approach from 30 September 2020.
• Fixed rate lending guidelines – in a 'Dear CEO' letter published on 11 August 2020 (dated 31 July 2020), the PRA agreed to suspend the relevant guidance levels on fixed rate lending limits in the Building Societies Sourcebook for an initial period of six months, running from Saturday 1 August 2020 to Sunday 31 January 2021. The PRA's only proviso is to limit any self-administered extension to 10% above the lower of the Sourcebook benchmark or the Building Society’s current limit, and it still expect boards to undertake the appropriate risk assessment.
• Benchmarking – On 9 February 2021, the PRA published its statement on supervisory benchmarking exercise relating to capital internal models, addressing the 2021 supervisory benchmarking exercise for capital internal models. The statement is relevant to credit institutions in scope of the reporting requirements. The PRA encouraged firms to use the draft implementing standards in relation to market risk and credit risk data as set out in the 2021 benchmarking exercise reporting package. 
• Basel 3.1 standards – the PRA released a joint statement with HM Treasury appreciating the decision by the Group of Central Bank Governors to delay the implementation of Basel 3.1 standards by one year, allowing banks to focus on the immediate operational and financial issues caused by COVID-19.
• Electronic signatures – on 2 June 2020, the PRA published a statement confirming that firms may use electronic signatures, as opposed to wet-ink signatures, in relation to the submission of forms and other regulatory documents but only in the absence of any specific legal provisions to the contrary.
• Machine learning (ML) and data science (DS) – The BoE's 2020 Q4 Bulletin published on 18 December 2020 outlines the impact of COVID-19 on ML and DS in UK banking. According to the survey conducted by the BoE, the investment and interest in ML and DS has remained broadly stable, and has actually increased for some banks. This is significant news given the wider market volatility and the economic downturn, which might be expected to constrain budgets for investment in innovation.
• Resolution measures – the PRA published a series of further measures on 7 May 2020 in response to the COVID-19 pandemic. The changes are a part of the PRA's shift in approach as explained in the PRA's statement from 7 May 2020 on reprioritising work in light of the COVID-19 pandemic to alleviate the operational burden on firms. The following areas of the PRA's work have been re-prioritised: climate change risk mitigation, resuming full supervisory engagement on LIBOR from 1 June 2020, including data reporting at the end of Q2, postponing the next Insurance Stress Test to 2022 and not publishing the results of last year's test (IST2019), and that firms are not expected to update their Stressed VAR 12-month period. On 7 May 2020, the PRA published a joint statement with the BoE announcing the following changes to resolution measures. The PRA delayed the first Resolvability Assessment Framework cycle by one year and published a direction for modification by consent that modifies rules in the Resolution Assessment Part of the PRA Rulebook. The PRA webpage sets out the process for firms that choose to take up the modification by consent. They also extended by a year the timings for major UK banks and building societies to submit their first reports on preparations for resolution (until October 2021) and to publicly disclose a summary of the reports (until June 2022). Similarly, the compliance deadline for the BoE's Statement of Policy on valuation capabilities to support resolvability has been extended by three months to 1 April 2021. The BoE has also provided an update for firms on the Minimum Requirement for Own Funds and Eligible Liabilities.
• Resolution measures (reporting obligation) – The PRA published a consultation paper (CP19/20) on amendments to reporting and disclosure dates for resolution assessments on 28 October 2020. CP19/20 sets out the PRA's proposal to extend, by one year, the dates by which firms are first required to submit a report of their assessment of their resolution preparation, and to first publish a summary of that report under Rule 3.1(1) and Rule 4.1(1) respectively of the resolution assessment part of the PRA Rulebook.
• PRA 2020/21 business plan – the PRA published its 2020/21 business plan on 9 April 2020, which addresses the impact of COVID-19 and the PRA's plans for the coming year. In particular, as a result of COVID-19, the PRA has cancelled the 2020 annual cyclical scenario stress tests, delayed the publication of the 2019 biennial exploratory scenario result, is working with individual firms to postpone less critical elements and extended consultations periods where suitable.
• Money Markets Committee meeting – the BoE published the minutes of the Money Markets Committee meeting held on 2 June 2020. The topics discussed at the committee's meeting include, the current market conditions, operational effectiveness during COVID-19, impacts of COVID-19 on local authority finance and contingency arrangements for amending the RTGS (real-time gross settlement) day.
• Agency Network briefing events – the BoE held an Agency Network briefing event on 20 April 2020, given by Deputy Governor for Monetary Policy, Ben Broadbent, and Chief Economist, Andy Haldane, to provide an update on the actions the BoE has taken to help firms and households. A subsequent briefing event was held on 12 May 2020, given by Mr Broadbent, Mr Haldane and Executive Director for UK Deposit Takers Supervision, Sarah Breeden, to provide an update on the recently published Monetary Policy Report and interim Financial Stability Report (FSR). On 7 August 2020, the BoE held a briefing event in which it discussed the recently published MPR and FSR and its projections of the impact of COVID-19 on the economy.
• Working from home – On 9 November 2020, the PRA published a statement reminding firms to continue following the government guidance relating to COVID-19, including the use of face coverings in close contact services and the implementation of testing regimes. The PRA recommended that the Chief Executive Officer senior management function (SMF1) should be accountable for ensuring an adequate process for following and adhering to government guidance. The minutes of the Securities Lending Committee meeting published on 11 November 2020 highlighted the need to be mindful of diversity and inclusion issues in the current work from home environment and during any future return to office phase. This included shielding considerations, factors which might lead to differentials between the return of men and women to the office (e.g. childcare) and the need to avoid two separate work cultures (office vs. home).
• Cash usage and alternative payment - The BoE's 2020 Q4 quarterly bulletin published on 24 November 2020 explores the impact of the COVID-19 pandemic on cash usage. During the COVID-19 pandemic, the way people use cash has changed, with less being used for transactions but more online shopping and contactless transactions. The barriers to alternative payment adoption may have been permanently broken by COVID-19. The BoE is neutral to the public’s choice of payment method and will continue to support people’s ability to choose how they make their payments.
• Recovery Loan Scheme – On 6 April 2021 the UK Government launched a Recovery Loan Scheme as part of the Covid-19 support plan for UK businesses.  These include a guarantee by the Secretary of State over payments at such aggregate amounts as he sees fit.  The PRA's press release of 6 April 2021 explains that this guarantee may be eligible for unfunded credit risk protection for firms where the Secretary of State has guarantee protection for not less than 100% of the amount of the aggregate loans provided.  However, firms who wish to use the unfunded credit risk protection to alter their capital requirements in line with the regulations need to consider that not all elements of the Recovery Loan Scheme include protection for interest and fees.

Useful Links

Bank of England - Our response to Coronavirus (COVID-19)

Prudential Regulation Authority - Our response to Coronavirus (COVID-19): regulatory measures for PRA firms

Help is at hand

If you would like to discuss any of the points arising out of the regulators' announcements or need assistance with reviewing your contingency plans, please get in touch.