In our recent article, entitled ‘Relief and Rescue During the Covid-19 Pandemic: Financial Regulatory Suspensions in the UK’ (Stanford International Policy Review) and its shorter version, entitled ‘Relief and Rescue: Suspensions and Elasticity in Financial Regulation, and Lessons from the UK’s Management of the COVID-19 Pandemic Crisis’ (Washington University Journal of Law & Policy), we examine how financial regulators in the UK provided ‘relief’ and supported ‘rescue’ policies to meet the financial needs of households and corporations in the UK during the Covid-19 pandemic since March 2020. ‘Relief’ refers to the policy goal of giving corporations and households temporary release from the pressures of debt which would be exacerbated in the weak economic conditions during the pandemic. ‘Rescue’ refers to facilitating the access of corporations to finance to keep them afloat in relation to expenses, losses and shoring up for the future. In the UK, the policy goals of ‘relief and rescue’ were carried out by the enactment of emergency legislation (Corporate Insolvency and Governance Act 2020) as well as by regulatory actions under the leadership of financial regulators, ie the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA). These policies provided temporary debt relief to households and corporations and have allowed businesses to access privately underwritten debt finance with government support.
The PRA and FCA suspended the application of certain regulatory laws and private contractual laws applicable to their regulated entities. Regulatory suspensions may, at first blush, be regarded as temporary. However, we argue that more permanent institutional change may occur, based on the theoretical positioning of regulatory suspensions within the legal theory of finance (Pistor 2013). Regulatory suspension can be seen as one of the ways the ‘elasticity’ of law is realised in order to cater for wider political, social and economic needs. Legal elasticity has been theorised in Pistor’s legal theory of finance, showing when suspensions of laws and regulations may occur under extraordinary circumstances such as financial crises. In Pistor’s legal theory of finance, law is central for constructing finance, hence, legal elasticity is resorted to when existing law is no longer able to meet overarching policy goals such as financial stability. We situate the regulatory suspensions introduced by UK financial regulators during the Covid-19 crisis within the theorisation of legal elasticity. This theorisation, drawn largely from observations during the global financial crisis of 2007-09, depicts law in an instrumental sense and bound up with power structures that influence legal change, but also treats law in a structural sense. Hence, legal elasticity may not avoid structural effects, such as institutional dissonance and change. In this manner, regulatory suspensions in the UK should be perceived as going beyond merely being temporary and instrumental.
We argue that a particular longer-term consequence of ‘relief’ and ‘rescue’ policies facilitated by UK financial regulators is the increased indebtedness of households and corporations, particularly small and medium-sized businesses. This phenomenon has implications for lenders’ prudential compliance going forward, as it remains uncertain if suspended prudential requirements such as capital buffers will resume and by when. The challenge for lenders to remain prudent in terms of expected credit loss provisioning and to appropriately recognise the financial hardships of their constituents is not only a matter for lenders to internalise. We urge the financial regulators to work together to provide a clearer agenda in terms of balancing prudential regulatory and consumer-oriented regulatory goals.
In our article ‘Debt Expansion as ‘Relief and Rescue’ at the Time of the Covid-19 Pandemic: Insights from the Legal Theory of Finance’ (forthcoming in the Indiana Journal of Global Legal Studies), we have also critically interrogated the policy choice for increased indebtedness as a means to manage the financial needs of households and corporations during the pandemic. The financialised context in developed jurisdictions in the West and the inextricable reliance on credit as provision are well-supported in legal framing. We critically question whether such ‘legal framing’ can continue in the post-pandemic environment, and whether the theoretical lens of legal elasticity may provide some grounding for lawyers and academics to consider more radical reforms to address post-pandemic consequences. Although we do not provide a definite answer in terms of whether a ‘bad bank’ for Covid-19 debt should be introduced or whether legal reforms for debt forgiveness are appropriate, we offer an overview of policy thinking options which show ultimately the inevitable and continuing role for policymakers and financial regulators in highly dynamic circumstances.
Iris H-Y Chiu is Professor of Company Law and Financial Regulation at the UCL Faculty of Laws.
Andreas Kokkinis is Senior Lecturer at the University of Birmingham, School of Law.
Andrea Miglionico is Lecturer at the University of Reading, School of Law.