COVID-19 and financial services
COVID-19 raises a range of financial services issues which firms and businesses will be managing through over the next weeks and months.
ICAEW’s coronavirus (COVID-19) hub can be found here. Additional resources will continue to be added, so readers should check back regularly. This article highlights four areas which need to be considered immediately.
Financial reporting & audit
As well as practical questions about how in progress audits and other engagements will be finalised amid practical difficulties around obtaining information and travelling some of the key issues to consider will be the impact of coronavirus and the associated regulatory and government measurement on decisions around:
- Going concern status, including how forecasts are affected.
- Classification of forbearance activities and deferment.
- Whether activities constitute a significant increase in credit risk under IFRS 9 and therefore would lead to a larger number of assets moving to stage 2 provisioning. The German Banking Association for example is expected to lobby the government for an exemption from IFRS 9.
Firms should ensure that their business continuity plans are up to date and that staff are briefed on what to expect. This should include:
- Staff welfare, including mental health impacts, any concentration of employees with young children or other caring responsibilities (should schools close etc.).
- Process resilience and compliance, for example in the event of needing to work remotely, or in partial teams.
- Communication with customers and support mechanisms.
- Supply chains, contracts and impact on outsourced arrangements, with particular regard to cloud providers where supply is concentrated among a small number of firms.
Operational, liquidity, credit, insurance and market risk will all be exacerbated by COVID-19. Institutions need to modify their approaches in terms of:
- Balance sheet and valuations for example the impact of reduced stock market valuation on insurers, reduced assets under management and credit valuations.
- Income and potential liquidity stresses.
- Continuity of records and backups in the event of disrupted suppliers, systems and/or displaced staff.
The Bank of England’s extensive package of measures give banks the capacity to support viable businesses and ensuring that individuals are not adversely affected. The rate cut of 0.5% combined with the SME term funding scheme and reduction of the counter cyclical buffer should in combination give banks the confidence to lend to those who most need it to cope with the COVID-19 induced shock. The challenge will be how to use this capacity quickly and to best effect.
Additional measures announced as part of the budget mean that cash flow constraints will be eased for businesses, particularly the smallest businesses through grants, deferrals of tax payments and refunding of statutory sick pay. The government also announced the coronavirus business interruption loan scheme. Loans to SMEs of up to £1.2m will have up to 80% of losses guaranteed by the government. As with the Bank of England actions, the challenge will be ensuring that these measures reach those who need support in a timely way.
About the author
Director of ICAEW Technical Strategy Group & ICAEW Head of Financial Services
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