The transition away from Libor
On 19 November 2019, the FCA published a Q&A document regarding conduct risk during the transition away from LIBOR. As the FCA notes, the discontinuation of LIBOR will affect many firms, in terms of:
- developing and offering new products linked to risk-free rates;
- assessing and reducing their own and clients’ exposure to legacy LIBOR contracts by amending or replacing existing contracts; and
- avoiding/managing risks relating to LIBOR discontinuation.
The FCA document provides a very helpful starting point of the factors that firms should consider in managing their transition away from LIBOR, such as:
- Finding fair replacement rates for LIBOR-linked products/services;
- Ensuring that customers are treated fairly during the transition period;
- Offering new products (ideally linked to risk-free rates); and
- Communicating with clients (particularly communications by firms which will continue to market, distribute and or sell LIBOR products that mature beyond end-2021).
In particular, firms should expect to be challenged by the FCA as to whether they are treating customers fairly throughout the process. Points to consider include whether:
- contracts have ‘small print’ resulting in higher costs for the customer (for example by replacing LIBOR with a higher rate);
- conversations with clients affected by LIBOR are delayed to the point whereby the client is left with insufficient time to understand their options and make informed decisions; and
- firms present or discuss alternative products with clients.
The impact on the buy-side
The FCA also expects buy-side firms to be preparing for LIBOR transition and to manage the process in a way that protects their customers’ best interests. Specifically, buy-side firms are expected to identify the extent of their and their clients’ exposures to LIBOR; and
- consider how to manage the impact of transition ahead of end-2021, for example, the impact on contract continuity, expected interest payments and risks of declining liquidity in LIBOR-referencing products; and
- engage with issuers of LIBOR-referencing securities, derivatives and loans counterparties, to convert these instruments and products to alternative reference rates.
The SM&CR looms large
Firms which are subject to the Senior Managers and Certification regime (SM&CR) must consider how their obligations under this regulation impact on their efforts to transition away from LIBOR. As a minimum, the FCA expects such firms to:
- identify the Senior Manager responsible for overseeing transition away from LIBOR; and
- detail those responsibilities in the relevant Senior Manager’s Statements of Responsibilities (SoRs).
The FCA specifically refers to the need to keep appropriate records of management meetings or committees that demonstrate that Senior Managers have acted with due skill, care and diligence in their overall approach to LIBOR transition and when making decisions impacting customers.
A taste of the future? Without doubt.
In explicitly linking LIBOR transition to the SM&CR, the FCA is clearly signalling to the market that it needs to take this matter seriously at the highest level within each firm and to action the transition process in good time. One of the firm’s most senior decision makers is going to have to be appointed to take overall responsibility for the matter. That person will be personally liable for ensuring a smooth delivery and will be under a positive obligation to do that which is reasonable to ensure that customer interests are protected.
The SM&CR also implies a significant data capture requirement. Put simply, it won’t be enough just to comply. Given the dual focus of both the FCA as well as clients themselves on the protection of customer interests, it will be necessary to prove compliance. The question is, how do you do that?
We can help
If you have concerns about the discontinuation of LIBOR, the best way to transition to alternative rates and your possible responsibilities, we’d be happy to chat you through the process. If you are a firm which is subject to the SM&CR or the Senior Manager appointed to run a LIBOR transition project and you have concerns about how you can effectively discharge the legal obligations to which you will become subject during the process, ask us about “Corterum”. This is a secure cloud-based software platform designed specifically to help you navigate the requirements of the SM&CR in a cost-effective manner. Whatever you choose to do, take it seriously and don’t leave it too late. Statements of Responsibility mean that there is nowhere to hide. Heads may roll.Contact Us