Out-Law News | 21 Nov 2019 | 1:39 pm | 2 min. read
New guidance from the FCA encourages firms to stop issuing new LIBOR cash contracts that mature beyond 2021 by September 2020, as recommended by a Bank of England working group on risk-free reference rates (RFRs). The FCA will be monitoring firms' progress towards this deadline over the course of 2020, according to the guidance.
The guidance, which has been published in Q&A format, sets out what firms should be doing as part of their transition preparations. The FCA expects firms that are subject to the Senior Managers and Certification regime (SMCR) to have identified a senior manager responsible for overseeing the transition, and has warned firms to ensure that customers are treated fairly throughout the process.
The FCA expects firms to be developing and implementing their LIBOR transition strategies now if they haven't already done so.
Financial regulation expert Lauren McCarthy of Pinsent Masons, the law firm behind Out-Law, said that the guidance would be welcomed by firms.
"The FCA's new page points to the significant impact that the LIBOR transition is likely to have on regulated firms," she said.
"The key message from the FCA is that LIBOR transition is as much a governance and compliance issue as it is a legal one. Firms need to be prepared to navigate the transition amongst the backdrop of the FCA's Principles for Business and its rules more broadly."
"This is not a time to sit and wait for further guidance. The FCA expects firms to be developing and implementing their LIBOR transition strategies now if they haven't already done so," she said.
LIBOR is a measure of the average rate at which banks are willing to borrow wholesale, unsecured funds, and is used to price or value a wide range of financial products. The rate has become less reliable as the number of transactions underpinning the rate has fallen, while previous attempts at market manipulation and false reporting have also decreased confidence in the rate.
The panel banks whose submissions inform LIBOR have agreed to support the rate until the end of 2021. Firms are therefore expected to adopt suitable alternatives in this timescale. A Bank of England working group on sterling risk-free reference rates has identified the Sterling Overnight Index Average (SONIA), which is based on an average of over £40 billion worth of transactions each day, as its preferred alternative, but this may not be suitable in every scenario.
Firms must ensure that customers are treated fairly when replacing LIBOR in existing contracts, according to the FCA. They may not move continuing contracts to replacement rates that are expected to be higher than what LIBOR would have been, or introduce other inferior terms. Firms will also need to consider whether any term they may rely on to amend a LIBOR-related product in a consumer contract is fair under the 2015 Consumer Rights Act.
Firms are more likely to be able to demonstrate that they have met the requirements to treat consumers fairly where they adopt a replacement rate that "aligns with the established market consensus, reached through appropriate consultation, and is recognised by relevant national working groups as an appropriate solution", according to the FCA.
Changes should be communicated to customers in a way that is clear, fair and not misleading, giving customers sufficient time to make informed decisions about relevant alternative products and the associated risks. Firms must especially take care in describing the risks associated with LIBOR ending to customers, being aware that they may not fully understand the implications.
Asset managers should be assessing the extent of their and their clients' exposures to LIBOR through the investments that they hold. They will need to convert any securities, derivatives and loans which reference LIBOR to alternative reference rates in good time before the 2021 deadline, for example through consent solicitation processes or bond buy-backs.
Firms must also ensure that they have robust governance arrangements in place for managing the transition risks, including risks associated with critical outsourced functions, the FCA said.
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