Stricter social distancing measures were implemented in Gibraltar in mid-March as a result of the COVID-19 pandemic, and ever since, the Gibraltar Financial Services Commission (GFSC) has issued several statements and information to support firms and consumers in these challenging times.
The GFSC continues to monitor developments and to publish and update guidance in line with advice from the HM Government of Gibraltar, UK regulatory authorities, European Supervisory Authorities, and international standard-setting bodies.
GFSC’s general advice to all financial services firms
Among other advice provided to firms, the GFSC has recommended that appropriate contingency plans are in place, ready to be executed if necessary. Firms wishing to discuss their contingency plans and their efficacy have been encouraged to contact the GFSC to work through these together. Stakeholders have also been encouraged to update the GFSC regarding any operational issues they face, including a reduction in staff numbers, and to maintain close communication with theirGFSC supervisor and industry lead. The expectation is that firms take all necessary measures to meet their regulatory obligations and to support their customers.
The GFSC drew attention to the Bank of England’s interest rate cut from 0.75%-0.25%, given that it could impact some Gibraltar-based firms.
Handling customer expectations & information to consumers
The GFSC has stated that all firms must endeavour to continue to service their customers uninterruptedly during this period, highlighting the pressure and difficulty customers may face. The GFSC asked firms to show understanding and demonstrate flexibility during this time, and to continue to treat customers fairly. Firms are expected to consider their customers’s needs and to provide them with clear and timely information about their contingency plans, how they will continue to service their customers, and any additional measures they have implemented to withstand this disruption.
To support consumers, the GFSC has provided information and guidance, including ways to contact firms, pointing to regulated entities’s contact information, and encouraging consumers facing difficulties to discuss their options with their service providers.
Regarding insurance cover, consumers are reminded that this might vary between policies and the GFSC recommend contacting insurance companies directly to request information on any individual policy exclusions.
Finally, the GFSC has provided useful information on scams and urged consumers to remain alert and apply caution to avoid falling victim to scammers taking advantage of the circumstances.
Financial statements submission requirements and update to auditors
Given the significant impact the COVID-19 pandemic is having on auditors and firms, the GFSC has granted some extensions in respect of submission requirements for financial statements, including;
- A four-week moratorium until 26 April 2020 for the signing-off of Gibraltar statutory audits. The GFSC will keep this period of moratorium under review.
- A two-month extension until 30 June 2020 for December year-end audited financial statements due to be submitted within four months of the year-end.
Auditors have been requested to note the following:
- In case the audit included a risk and materiality assessment, this should be revisited and revised.
- Sufficient and appropriate evidence should be obtained before auditors issue their opinion. For group audits, group and component auditors should update their approach given the circumstances. If, as a result of time constraints, the auditor is unable to obtain the necessary audit evidence, the audit report must be updated to demonstrate this.
- Evaluations of the firm’s assessment of its ability to continue as a going concern in the audit report and in communications to senior management should be based on the current economic environment, which continues to change.
- Auditors must assess the impact of COVID-19 on the firm after its year-end. The GFSC requested that this is disclosed as a subsequent event, covering the firm’s activities, its financial situation, and future economic performance. An emphasis of matter may be required as well as amending the audit report to reflect any change in circumstance.
- Information provided in the financial statements about the firm’s financial position, the principal risks it faces, and its future development must be consistent with the audit evidence obtained. Auditors must inform senior management of the impact of COVID-19 on their audit work and, depending on the type of firm; the auditor may need to report to the GFSC and other regulatory authorities and bodies certain matters arising from the pandemic.
Dear CEO Letter – Credit institutions
In addition to the above, on 7 April 2020, the GFSC issued ‘Dear CEO’ letters further setting out its expectations and regulatory measures. Below is a summary of the Dear CEO letter for credit institutions.
First and foremost, firms are required to continue to support and service customers and to manage financial resiliency and liquidity. If firms believe they will enter any financial difficulty, they must report this to the GFSC immediately.
Dividend distribution and remuneration
Prominently, to maintain robust capitalisation, all banks are urged to refrain from dividend distributions during 2020, including any remaining dividend distributions from 2019.
Remuneration policies and practices should be reviewed and set at a conservative level. Larger payments should be deferred until risks arising from the pandemic have been fully considered.
To ensure the correct identification of credit-impaired assets on their balance sheets, banks are required to;
1. classify loans in default;
2. identify forborne exposures, and;
3. apply the appropriate accounting treatment.
Regarding prudential identification of default, current economic measures and debt moratoria must be considered to assess the mitigating factors provided for in legislation. For past-due criteria, defaults take place 90-days past-due on material credit obligations; this should give sufficient time to restructure loans where necessary.
The GFSC has required the following to be considered:
- Any exposure where loans can be renegotiated without impacting the lender’s financial position, should not be classified as defaulted. This would mean that obligations under the renegotiated contract are likely to be met. Renegotiating contacts is considered to be a suitable measure to provide relief to borrowers unable to serve loan obligations in light of the disruptions.
- Payment moratoria that allow the suspension or delay of payments will impact the 90-day past-due criteria. If the institution assesses that there are no concerns with the lender’s ability to continue making future payments, the exposure should remain in performing status.
In respect of forborne exposures, it should be noted that the proposed measures by governments and banks to mitigate the adverse economic impact does not automatically result in the reclassification of exposures under the definition of forbearance.
Similar to the requirements under the prudential identification of default, when applying the IFRS9 standard, firms must apply judgement to differentiate borrowers. This judgement should focus on the long-term impact on customer creditworthiness.
In cases where payment holidays are offered to support customers, these should not be reclassified to default, forborne or necessarily affecting the IFRS9 status. Importantly, credit default risk assessments must continue to be carried out based on the customer’s history and present situation.
The measures set out above should be granted in compliance with existing legislation, including the Financial Services (Mortgage Credit) Regulations 2020, and the Financial Services (Consumer Credit) Act 2011 (Amendment) Regulations 2013, particularly regarding full information disclosure of potential charges and costs.
The GFSC is granting an extension until 12 June 2020 for deadlines falling on or before 31 May 2020 for the following reports (the original deadline for the majority of these was 12 May 2020):
- COREP Solvency
- Liquidity – Stable Funding
- Large exposures and concentration risk
- Leverage ratio
- Asset encumbrance
- Quarterly GFSC Supervisory Return
Information on liquidity cover ratio and additional liquidity monitoring metrics reports must still be submitted on day 15 of every month.
The deadline for publication of financial statements has been extended by up to two months, and since the Capital Requirements Regulation Pillar 3 disclosures should be published concurrently, the deadline for these is extended by the same period.
Reporting submissions with post 31 May deadlines will be considered in due course.
Additional reporting may be requested on a case by case basis; however, the GFSC has assured that it will keep this to a minimum.
Flexibility over 10% depreciation notifications
Article 62 of the Commission Delegated Regulation (EU) 2017/565 requires firms providing portfolio management services to inform clients where the overall value of the portfolio falls by ≥10% from the last periodic statement and for subsequent 10% decreases in value.
Similarly, firms with client accounts, including positions in leveraged financial instruments or contingent liability transactions must inform clients whenever the initial value of any instrument depreciates by ≥10% and any subsequent 10% fall in value.
In light of current market volatility, the GFSC has assured that it will not take enforcement action from April to October 2020 where a firm has taken any of the following steps:
1. Notified retail clients of the ≥10% fall in value of their portfolio/instrument within the current reporting period, and;
2. Further to notifying clients, the firm provides general updates through its website or other public channels. These updates should inform clients about market conditions, provide instructions on how to check their portfolios, and invite them to get in touch if they require further information, or;
3. Ceases to provide 10% depreciation reports to any professional clients.
Flexibility on best execution obligations
The GFSC has reminded firms of their obligation to achieve best execution for clients, ensuring fair order handling and allocations. Firms are expected to consider the importance of venues or brokers relied upon to achieve best execution and to manage risks through the use of different types of orders during times of high market volatility.
In respect of firms’ requirements under the Commission Delegated Regulation (CDR) 2017/576 (RTS 28) and CDR 2017/565 (Article 65(6)), for the 2019 reporting period, the GFSC has granted a two-month extension to 30 June 2020. This information provides details to evaluate the quality of execution practices based on the method and place client orders are executed.
The GFSC has assured stakeholders that to ensure its ability to react quickly and flexibly to any recommended regulatory forbearance; it continues to monitor statements and announcements issued by European supervisory authorities and international standard-setting bodies. Updates to any changes to supervisory and regulatory requirements will be published in the GFSC’s website and other public channels, and the GFSC will communicate directly with firms as necessary.
A dedicated webpage has been created to include all communications issued in this respect. Links to the recommendations issued by the European supervisory authorities are also available in this section of the GFSC’s website.