Challenges and opportunities posed by remote working, navigating the EU (and global) regulatory considerations for financial services firms

Executive summary

COVID-19 has had a transformative impact on traditional office workspace arrangements. Despite some initial (very welcome) improvements to the COVID-19 outlook in Europe, future variants and mutations of this present virus or indeed new (prolonged) pandemics could mean a more frequent return to increased restrictions on working from offices or even a return to recurrent and rolling lockdowns.

As has become evident during the pandemic, a number of these restrictions have differing arrangements, including within the same jurisdiction and often segmented vaccination status and/or job role notably for those categorised as "key workers". In large parts of the EU, these restrictions coupled with a prolonged shift to remote working across sectors, notably in financial services, are reshaping the role of the office as well as, in some part, working behaviours. Over the longer-term, financial services firms, market participants and indeed regulatory and supervisory policymakers may need to consider how to adapt regulatory principles and supervisory expectations originally designed for an office-centric environment to meet what might be a longer-term need or even a preference for what is fast becoming a new working dynamic.

The emergence of the Delta and the Omicron variants of COVID-19 are already a proof in point that remote "working from home" (WFH) as well as more longer-term "location independent working arrangements" (LIWAs) whether in the form of short(er)-term "workcations" or on-going "Digital Nomad" (DN) arrangements may be here to stay and for longer than originally expected. For the most part, such arrangements have largely worked well both in terms of business continuity and performance of financial services firms and the counterparties, clients and communities they serve. The same can also largely be said for financial services policymakers and supervisors equally adapting to this new working dynamic. For employees, such new working arrangements have also been welcome, even if, for some households, new challenges have emerged. Yet this new working dynamic may also carry (new) risks including those that are specific to such arrangements.

For financial services firms, getting the balance of WFH, LIWA and DN is more than adopting a defensive strategy. Accordingly, if more agile, digitally empowered location-independent working is here to stay, then successfully attracting, retaining and managing staff (and doing so regardless of borders and bricks and mortar locations) will be key to any talent strategy as well as for growth opportunities.

This Background Briefing assesses the lessons learned from 2019 through to 2021 and considers the outlook for financial services for the remainder of 2022 and further ahead. This Background Briefing should be read in context with other Client Alerts and coverage from PwC Legal's EU Regulatory Compliance Operations, Risk and Engagement (EU RegCORE) centre.

Background and lessons learned

For the most part of modern financial history, firms and their staff conducting financial services activity have largely done so in an office-centric and certainly location-bound working environment. Financial services and markets activity have however become infinitely more electronified and digitised and not just through email as well as handheld devices allowing for more business to be done away from an office and on the go, including outside "traditional" working hours.

While technology has steadily advanced, and become a staple tool that empowers how business is transacted, the laws and regulations (beyond just financial services) that apply to a person's work are generally based on the jurisdiction where that work is performed. This is the case even if the employer is located elsewhere. Furthermore, financial regulatory compliance obligations along with regulators' supervisory expectations apply both to the firm as well as the persons carrying out regulated activities on behalf of the firm (regardless of the working relationship i.e., employee v. contractor v. leased employee).

mportantly, in the EU-27 and in most G-20 jurisdictions, financial services regulation and supervisory expectations have largely been conceived with a focus that regulated activity is conducted in an office-centric work environment as opposed to on WFH basis and certainly not for a prolonged period nor on a LIWA or DN basis. This also applies to employment and tax laws as well as for the scope of insurance coverage for financial services firms and employees. The move to a new remote working environment has demonstrated that a lot of the office-centric rules and regulations might be in need of a more permanent rethink.

Such a change may need to build upon the lessons learned from quick fixes and adaptions that legislative and regulatory policymakers as well as employers have implemented during the COVID-19 pandemic and prolonged lockdowns.

Consequently, if such WFH, LIWA and DN arrangements are not managed in a balanced manner then this can expose both the employer and the employee to new risks. These include, but are not limited to, extending the firm's exposure to, certainly where an employee works from another jurisdiction to that of their office, to that new jurisdiction's tax, regulatory compliance rules and laws. Such risks also arise where an employer attempts to limit, without justifiable means, jurisdictions from which an employee may not perform their duties. While these considerations have long-existed pre-COVID, say where an employee performs their duties while on holiday or while living in an EU-jurisdiction outside of where their office is located, the impact of the pandemic and for many the appeal to work on a location-independent and agile basis have begun to reshape the discussion and the urgency for more detailed and sustainable certainty from legislators and firms.

Given the above and the discussion on the lessons learned below, financial services firms will want to ensure they have appropriate policies and procedures in place. These should serve to harness and foster opportunities offered by digitally empowered agile working while minimising risks and ultimately to ensure their workforce are not off the grid both literally and figuratively both in a domestic and international concept. Moreover, these policies should also look to reach an agreement between employer and worker as to when staff are required to return to an onsite environment.1

Lockdowns led to widespread remote working as well as location-independent working

Shortly following the onset of the first set of lockdowns, for those that could, working from home (WFH – is also known as "teleworking" or "remote working") arrangements became a sudden and then widespread normality. Firms, their counterparts and clients but equally regulatory policymakers and supervisors swapped the office for their spare rooms, sofas and kitchen tables.

Across many countries, notably in the EU-27 (rolling) lockdowns entered into force, EU financial services firms were quickly put under pressure to meet complex public health and workplace safety restrictions. Often these restrictions differed between jurisdictions (including across the EU-27) but also within regions in individual jurisdictions. Firms were required to track and comply with these requirements as they applied within, but equally across jurisdictions, often having to take a strategic regional and global view against a rapidly changing set of restrictions.

In response, many EU financial services firms rapidly focused on increasing their digitalised working arrangements at an enterprise-wide level. Making meetings via video-conferencing work (and to do so smoothly) became day one priorities. Shortly thereafter, ensuring investments in information and communication technology (ICT), VPN2 and cloud-based computing capacity continued to flow followed suit. So too efforts on improving operational and cyber-resilience resources to meet WFH realities. In many ways the ability for firms and their employees to thrive in this new "new normal" rested largely on making collaboration a success while widespread social distancing was in place.

Those firms that rapidly embedded widespread and longer-term location-independent agile working3 arrangements were able to demonstrate that initial doubts that WFH meant reduced productivity and higher cybersecurity as well as data protection risks were largely and quickly dismissed. In most cases those working remotely were more productive than they may have been in the office as commute times reduced to nil.

Yet WFH also highlighted new risks and operational challenges. Some of these included on how to replicate workplace health and safety arrangements into private homes, especially when households were dealing with practical challenges of often rapidly assembled and cramped workspaces. These operational concerns also led to new legal issues ranging from appropriate desk heights of furniture that was never designed to cater to office work, length of screen versus break time and how to generally deal with "Conf Call Fatigue"4, priorities for managers and human resources teams across financial services firms quickly moved from rolling-out WFH arrangements, which at first were temporary and soon became an established fixture, to also ensuring employees' wellbeing was being maintained in this new unfamiliar setting.

With the roll-out of WFH on a widespread basis and the rise of location-independent working gaining pace, new strategic risks and priorities for Human Resources as well as Compliance teams across financial services firms arose. These ranged from how to adapt three lines of defence (3LoD) and compliance target operating models (TOMs) from an office-centric set-up to a decentralised model and in employees' homes. Equally, considerations and compromises had to be found to ensure how households with employees from competing financial services providers could co-habit, co-work and co-exist with their respective compliance and privacy obligations often in cramped makeshift WFH set-ups.

Other issues arose about how to balance corporate culture and workforce equality during WFH arrangements. This ranged from having to balance how an employer interacts with an employee as to when they can work from where and when they are to be available as well as to how to treat holiday allowances along with how to reduce "quarantine envy".5 Against this backdrop of change more fundamental questions on the future of the traditional office-centric working relationship arose across certain firms. For some firms and indeed their global workforce6 this included discussions within teams or indeed across the organisation whether WFH (fully and/or on a hybrid basis) could introduce a permanent shift in the relationship between workers and employer. Over time this discussion across some firms also expanded to consider whether workers could be based further afield and perhaps on a longer-term basis.

Preferences for longer-term hybrid or full WFH arrangements also became apparent during COVID-19 lockdowns in changing real estate markets where demand, in certain markets and financial centers, for more spacious surroundings in suburbs or in the countryside saw increases. Equally, many households also began to debate the issue: If WFH and home schooling was set to go for longer why not take a "workcation" or move to a more permanent "digital nomad" arrangement either domestically or internationally? Location-independent working would allow a break and a change of scenery from domestic surroundings to often sunnier surroundings with less COVID-19 restrictions and often a more efficient cost and/or higher standard of living.7

For some firms, notably those operating in jurisdictions where amendments to employment law meant that these firms would have to enter into amendments to employment contracts to reflect documented WFH arrangements, challenges also arose in defining the place(s) of work. Defining one or more places of work is relevant for those engaging in WFH domestically as well as considering how and whether to do so internationally. This consideration also became relevant relevant for employers and employees and their insurance coverage, in particular for work-related accident and occupational health insurance (both offered by statutory and/or private providers).8 A number of insurance firms have more recently begun to consider and/or launch WFH and even digital nomad tailored insurance products but also occupational health insurance policies.

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1. Such policies also serve to replace any informal arrangements that might be put in place with immediate bosses under informal arrangements and ensure that location-independent working and/or travel are within an employer's knowledge and risk management framework. If travel is conducted without a firm's knowledge, employers may wind up breaking employment laws as well as regulations and laws without any awareness that are they are doing so.

2. Virtual private networks extend a private network (such as an office's) across a public network (such as that in an employee's home) and allows permissioned users to share data as if their devices were connected directly to the private network.

3. Crucially, agile working seeks to treat work as an activity as opposed to a place where people processes, connectivity and technology as well as time and place come together to find the most appropriate and effective way of working to carry out a particular task.

4. Conf call fatigue (see also Quarantine envy below) is an undefined firm that emerged during 2020 as the boom in videoconferencing meant that for many, their working day started earlier and ended later due to a higher frequency of meetings taking place via conference calls than would have been the case in an office-centric environment. Some researchers have attempted to show that excessive amounts of close-up eye contact and the increased cognitive load (i.e., nonverbal communication is more difficult) via video calls can be demanding on workers. This coupled with the increased amount of calls may mean a reduction in usual mobility and an ability to stretch or recharge during breaks.

5. Quarantine envy is an undefined term that however over the course of 2020 began to gain traction to refer to the envy felt amongst co-workers or colleagues at competitors as to who could work from home or further afield versus who could not and what that meant for surroundings i.e., more spacious and affluential WFH based settings versus those that were not fit for prolonged pandemic situations, cramped and uncomfortable when compared to the office. Quarantine envy, if not controlled by firms and promoting equality amongst employees in what may be offered to them (regardless of what they may make of it) can spur discontent and even "Quarantine Schadenfreude" which, generally does not bode well for collegiality and thus collaboration.

6. Notably for those staff working from cramped kitchen or coffee tables or spare rooms.

7. Some EU-27 Member States have also considered Digital Nomad visas as a strategic option given the infringement actions the EU Commission has taken against notably Cyprus and Malta investor citizenship schemes, details of which are available here and here. It should be noted that a Digital Nomad visa/work permit scheme is very different to the investor citizenship schemes. Equally a Digital Nomad visa is also different from an entrepreneur or freelancer visa or work permit such as that offered by say Germany.

8. This itself is in its own right a question that is highly driven by the nature of the existing insurance, the insurance policy and ultimately the provider and their relationship with the employer. As an example, under most EU jurisdictions, statutory accident insurance cover is usually limited to the territory of where that person is employed. If the employment contract sets out that the place of work is Frankfurt (and the employer can direct the employee from other locations – usually limited to Germany) then it may not cover accidents that occur in a WFH basis if the employee is working from their second residence in say Mallorca, Spain.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.