Covid-19: the role of the regulator

Economic health is not usually the remit of the regulators. The primary function of regulation is to protect market participants and the end consumer. But Covid-19 has created a unique economic environment and across the world governments and regulators have taken differing approaches. In particular the actions of the US contrast with some of the measures taken by regulators in UK, Hong Kong and Singapore.

Here, we compare the responses of different regulators, based on the experience of our teams on the ground.

UK – pragmatic approach to protect consumers and businesses

Over a million applications have been made to the UK Government’s various loan schemes setting up to deal with business interruption under the pandemic. 

Although the FCA is not responsible for regulating government loans, a Dear CEO letter in April reminded banks that if their lending to SMEs was unsatisfactory, the individuals responsible according to SMCR would face scrutiny and possible punishment.

In addition, the FCA has postponed deadlines for consultation papers and implementation of various rules, helping firms to focus on business and customers.

In our view, the UK regulators have struck the right balance, relaxing rules where appropriate but reminding firms of the importance of maintaining conduct standards. This pragmatism has protected consumers and businesses. It is difficult to see how regulators could have done more to help firms without putting consumer protection at risk.

Hong Kong focus on liquidity signals willingness to help

The HKMA has focused its efforts to support the economy on working with banks to relieve cashflow pressures and increase liquidity for businesses. It has released HK$1 trillion of lending capacity by deferring Basel III capital requirements, lowering the Countercyclical Capital Buffer (CCyB) by 1.5% and halving regulatory reserves. SMEs have been supported through the Banking Sector SME Lending Coordination Mechanism. 

By early June, 30,000 applications for payment holidays and other relief measures worth HK$380bn had been granted to businesses. Total loans by banks in Hong Kong increased by HK$440bn from September 2019 to April 2020, and overall lending to SMEs had grown by HK$13bn in the previous three quarters. The HKMA has also supported measures to aid sectors significantly impacted by the pandemic, including an extended repayment period for the transportation sector and accounts receivable loans to the retail sector.

Hong Kong has been keen to protect its status as a global hub of trade and safeguard financial services expatriates. Trade financing lines have been converted into temporary overdraft facilities, and the SFC has made temporary arrangements for licensed individuals working overseas to take account of travel bans. 

This help has been crucial to businesses, especially SMEs and companies in sectors such as transport that have been particularly badly affected by Covid-19. 

We believe the Hong Kong regulators have signalled that they understand the difficulties that businesses are facing and are keen to help.

Singapore – subsidies, loans and a focus on fintech

The Singapore government has instigated significant salary subsidies for all citizens, plus loans and measures to relieve cashflow for businesses. The MAS has supported these measures by lowering interest rates on loans and introducing deferral of principal repayments. 

The SME Working Capital Loan scheme enables borrowing of up to S$1m, with a maximum repayment period of five years. The Singapore government shares 90% of the risk on these loans, and SMEs may apply for up to one year’s deferral of the principal repayment. MAS has supported the government’s loan schemes for SMEs by providing lower-cost funding to financial institutions that lend at a lower interest rate. 

Other regulatory relief in Singapore has focused on FinTech companies and on promoting innovation in the financial services sector. MAS has introduced a S$125m support package that includes a training allowance grant, course fee subsidies and salary support to hire graduates. It has also instated a Digital Acceleration Grant for initiatives such as the adoption of digital tools and upgrading of systems.

MAS’s emphasis on innovation not only addresses the immediate problem but aims to foster longer term improvements. Overall, MAS and the wider Singapore government have worked hard to put in place effective measures to aid the economy during the pandemic, across four special budget announcements over the last few months. 

In our view the actions taken so far have demonstrated a realistic appreciation of businesses’ predicament and needs from the Singapore regulator and there may be more to follow.

US – regulators stick to core focus in complex environment 

The United States’ federal, state and local governments have created economic relief programs, and small business loan funds at both state and local levels. The federal Paycheck Protection Program initially rolled out $349bn in low-interest loans for small businesses, but this sum was very quickly depleted, and, controversially, a number of large corporations were granted relief through the programme.

Most regulators in the US see their remit as ensuring fair and efficient markets rather than supporting the economy. Perhaps that is why US regulators have not introduced a ban on short selling of the kind seen in many countries in Asia and Europe (though not the UK). However, given the more complex and specialist nature of regulators in the US compared with those in the UK, Hong Kong and Singapore, it is in any case impossible to impose the sort of blanket ruling across the financial sector seen in those jurisdictions.

Any special measures regulators did take during Covid-19 were designed primarily to aid their registrants and members. For example, the SEC extended filing deadlines and deferred fees to support the functioning of the firms it regulates. It’s interesting to note, however, that when the filing deadline relief was announced many firms were already close to finishing their reporting and so relatively few took advantage of the relief. Its effectiveness was, in our view, mainly limited to giving asset managers some peace of mind.

Conclusion – one size doesn’t fit all

It’s not surprising that authorities and regulators have focused their support on different areas of the economy and have taken a greater or lesser hand in the fate of businesses. But the approaches in UK and Asia have common ground in their focus on the support and enforcement of financial relief for SMEs. 

As with many adaptations to this pandemic, a lot of these policies are new and untested, and only time will tell which were the most prudent; but it seems that around the world, the sudden and wide-ranging impacts of the pandemic have at least temporarily created greater collaboration between authorities, regulators and businesses.

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