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COVID-19: financial regulators are watching – and waiting

Everyone unilaterally agrees that COVID-19 represents an unprecedented period in history. Never before has every country been simultaneously and fully disabled. Governments and other regulatory authorities have been caught equally off-guard as the constituents and institutions that they support and empower.

The response from regulators has been quite muted: the output has primarily been warnings and loose suggestions with formal guidelines and policies lacking. For example, financial institutions have been warned to watch for the potential threat of insider trading and other forms of market abuse. The likelihood of bad actors taking advantage of a poor situation has greatly risen given the displacement of brokers from secure in-office infrastructures to residential work-from-home environments. Many institutes were exposed for lacking business continuity policies and enabled technologies that could ensure regulatory compliance and prerequisite monitoring of transactions and communications, particularly eComms.

Firms are utilizing their “spare time”

Most firms have been scrambling over the past two months to establish working guidelines. Some are putting that “spare time” to good use. Now that people are no longer commuting to work, many employers have asked their staff to use the additional time to test outdated policies, revamp them and create new ones better suited to meet the contemporary needs of remote work.

Institutions and companies across many industries, including financial services, have been slow to get online and return to operational performance and level of productivity that approaches anything witnessed pre-pandemic. The panic state observed across financial institutions in the first few days of March as the global pandemic began emerging as a credible threat has been replaced with a “new normal” steady state, partly enabled by relaxed government regulations and timelines. Optically, the response of regulators can be described as “understanding, considerate and passive.” But make no mistake – regulators are watching – and waiting to flex their regulatory muscles on non-compliance once things begin to return to normal.

Regulatory response to COVID-19

Given how woefully ill-prepared the world was for the onslaught of COVID-19, it would be unfair to critique how regulators needed time to issue their relaxed policies, timelines and operational guidelines.

The Monetary Authority of Singapore was among the first regulators to issue flexible policies anchored in “best effort adjustments” versus stringent and enforceable regulations. The US Financial Industry Regulatory Authority (FINRA), the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) followed suit and relaxed requirements pertaining to business continuity plans for remote work, deliberately leaving much of the suggested “best effort” guidelines subject to interpretation to give organizations time to catch up to the repercussions of the pandemic. “Reasonable due diligence” definitions from regulatory authorities around the globe like the Financial Conduct Authority (FCA) are consistent in two aspects: they are all vague and put the onus of responsibility on the corporate officers.

egulatory gaps currently open, will be closed once normalcy begins to reenter the economy
regulatory gaps currently open will be closed once normalcy begins to reenter the economy

By all accounts, the response by the Securities Exchange Commission (SEC) in early March was swift. The response included offering a reprieve: financial institutions could apply for an extension on document filing deadlines. Per the SEC, publicly traded companies were also temporarily no longer required to alert shareholders regarding financial health or material changes that might negatively impact stock price. However, both the Financial Action Task Force (FATF) and SEC did warn against a heightened risk for insider trading and urged corporate offers to remain alert and be diligent regarding protecting confidential information. The SEC highlighted how this risk was heightened with the following statement “…in these dynamic circumstances, corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances.”

The added pressure of an economic collapse

If the threat of a global pandemic and the reality of a contagion infecting millions of people and killing hundreds of thousands wasn’t great enough, key economies around the globe have collapsed. Governments are infusing cash into the economy to prevent depression. The US has infused more than $2 Trillion yet that may be insufficient to stimulate recovery if the stay-home orders persist much longer. Record levels of unemployment filings (in excess of 7 million in one week alone in the US) are key indicators of a now bear-market threatened with a recession, or even worse – depression.

Regulators like the FCA have urged lenders to show compassion and latitude to clients with a history of credit card and other forms of persistent, unsecured debt. Across the EU, ATM withdrawal limits were increased to provide customers with access to the cash needed now. In contrast, small banks, as well as Bank of America, have limited how much cash was available to its clients in an effort to remain solvent.

Regulatory gaps currently open, both deliberately and as an unexpected byproduct of a global workforce shifting to remote work in tandem, will be closed once normalcy begins to reenter the economy. Some firms have strategically used this unprecedented period of relaxed regulation to update their monitoring systems. “Preparedness is the best defense” is a mindset that many have employed in anticipation of federal requirements under review now. There is no certainty around if or how regulatory requirements will change from one major market to the next, however, there is the potential that they could become even more demanding than they were previously given the perils observed around remote work during this era of COVID-19.

Bad actors were bound to be discovered

Questionable behavior by some US Senators and public health officials has been repeatedly cited as an example of this increased access to material information and the proportionally increased risk for market abuse. Fingers quickly pointed to US Senator Richard Burr who reportedly sold millions in stocks following a confidential briefing on the looming threat of a pandemic that he and only a few others were privy to. Based on the Stop Trading on Congressional Knowledge Act of 2012, regulatory authorities have not yet made any formal charges but Senator Burr along with others who have access to private briefings regarding the pandemic are now under investigation.

Once the wait is over

Governments have relaxed their standards in just about every aspect of regulation and deadlines from drug development to financial obligations in the wake of the coronavirus as a response to it. The general understanding is that institutions were ill-prepared for a global pandemic: to date, no organization has publicly stated that they had the business continuity plans needed to enable the transition from a secure in-office environment to a residential work-from-home situation for all their personnel. As such, regulatory bodies recognize that the optics of imposing fines or pressing charges now, during an ongoing global crisis, would be perceived poorly.

However, that doesn’t mean that these regulatory organizations aren’t watching – it’s probable that they’re just waiting to impose sanctions if institutions remain out of compliance for too long. Rest assured that it will only be a matter of time before all regulatory requirements return to strict adherence standards. Once that happens, the earnest pursuit of all those individuals and institutions not meeting the legal standard for market abuse monitoring will quickly ensue


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