Exec Matters – March 2021

Business resilience: From CP19/32 to a live catastrophic environment within 2 months!

Have you noticed how regulatory initiatives and the resulting changes can creep up on your firm? For example, one day you’re asking your team to review the impact and commence planning for SM&CR and in the blink of an eye, you’re signing off your certified staff. It all seems to happen so quickly.

So, when the FCA issued CP/32 in December 2019, looking for responses to the joint PRA policy summary on operational resilience, asking for your feedback by April 2020, how many of you thought you had a lot of time to decide if you would respond? Even if you didn’t respond, you may have thought it would be well into 2021 before the need to act on the final rules comes around.

That would have been a fair observation, if not for the seismic impact of Covid-19. The pandemic will undoubtedly move the focus of the FCA from asking ‘what would you do if’, to ‘how did you do when’?

But let us take a sense check. The detailed proposals laid out in CP19/32 are still in draft and, will only codify the steps that should currently support a well-defined business resumption and continuity plan.

So, it’s fair to say, a firm’s resumption and continuity response should be a key item on your risk register, along with the detailed controls and procedures in place and obviously tested regularly. A number of firms will also have detailed scenario planning in place to support the ICAAP process but how many firms planned specifically for what Covid-19 has brought? This is different from a few days’ outage because of a burst water main or gas leak.

There can be little or no doubt every firm in scope of the CP is managing the real risks posed by their own operating model at this time and working diligently to ensure all consumer outcomes are being satisfied. Obviously, the nature of the risks is varied and depend on the type of firm but issues that concern the regulator when we are operating in BAU, such as staff supervision, complaints handling and all treating customer fairly KPI’s are very much going to be of interest to the FCA when or if we get back to normal.

A quick glance at the FCA website pages aimed at consumer support, gives us an insight into the issues that will be a focus of an FCA visit or even an industry wide thematic review, to assess how sectors performed during this period of unprecedented disruption.

Ask yourself this question; if you were an FCA supervisor looking at your portfolio of firms, with the ink still wet on the senior management statement of responsibility (SOR), the hot topic of operational resilience and the potential for consumer detriment during lockdown being a high risk, who would you want to talk to in a firm and what would you want to know?

Senior management need to ensure that not only are appropriate consumer focused actions being taken by their firm but the data being gathered is able to tell a great story around any identified key business service delivery issues and performance e.g. claims management, switching funds, payment holidays, debt guidance, and repossessions, depending on your sector. I could go on with that list but one area that will be common to all firms in all sectors will be complaint handling and resolution.

The drive to secure the P&L of a firm through this turbulent time must be in balance with the service needs of the consumer. Any suggestion that a firm went into survival mode at the expense of its service to its consumers may find regulatory conversations difficult when the performance reviews begin post lockdown and something resembling BAU returns.

Complaints will be, as they always have been, an indicator for regulators of how well or how poorly firms placed their consumer’s interests at the heart of the operation. It would be wise to start now, if not already in train, to take a close look at your complaints management process metrics and take action if you don’t like what you see.

It would be a brave person to begin to predict the new normal for financial services post lockdown. Will this time result in more remote working for staff, will we see a downturn in the office space requirements in the financial centres as a result, will Fin Tech applications see a boost in demand as customers have had to change their habits when it comes to interacting with service providers?

There will be many more questions to pose for the financial services industry going forward but one thing that will not change is the regulators drive to ensure the protection of consumers. Armed with their powers to investigate personal accountability of senior managers through the SM&CR regime, firms need to be diligent around the documentation of responsibility, especially where the manager responsible has changed because of the pandemic.

The FCA has issued a statement saying that the need to formally amend and notify them when an SOR changes or responsibilities reallocated can be relaxed under certain circumstance. This is to avoid additional administrative burden but at the same time they have stated the need for firms to make an internal record of any change in accountability of a senior manager.

So, a “heads up” for senior management. The FCA will be aware of who was responsible for key consumer outcomes and will be interested in how the firm and the management responded to the business demands because of the lockdown. The question you need to pose as a board, is how well prepared will you be to answer the questions they will ask?

It is true to say that Covid-19 is a genuine “Black Swan” event and as such, it is highly doubtful any scenario planning will have scoped out the requirements to deal with what we are experiencing. However, this fact will not be mitigation if consumer issues arise due to a systemic failure in the firm that could have been avoided. The response by firms to the risks created by the Covid-19 impact has been the greatest test of operational resilience imaginable.

How firms coped and the status of consumer outcomes will be reviewed and scrutinised carefully by all stakeholders. What the financial services industry and the regulator can learn from this time will steer and define the outcome of the current consultation and the way ahead.

In the meantime, senior managers need to be mindful of their responsibility in the regulatory regime and be able to account for the actions and the rationale for those actions, demonstrating an acceptable level of consumer satisfaction.

The good news is, if the industry can demonstrate it can cope with this crisis with minimal impact to consumers and the reputation of firms and the wider perception of the financial system remaining strong in the minds of the public, it can survive almost anything.