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Next steps in transition from LIBOR

The conduct risk perspective

On 19 November 2019 the FCA published some long awaited guidance (in the form of a Q&A) for firms on managing the conduct risks associated with LIBOR transition. 

In a speech delivered the same week, Edwin Schooling Latter, Director of Markets and Wholesale Policy repeated the FCA's message that the best way to avoid LIBOR-related risks is to move away from LIBOR altogether. 

We explore what this latest guidance means for firms and their LIBOR transition programmes, reflect on some of the questions which remain unanswered and outline how financial services firms can prepare.

What does the latest FCA guidance mean for firms and their LIBOR transition programmes?

In many ways the latest guidance is consistent with all of the FCA's previous messaging on the end of LIBOR.  The guidance has three key messages for financial services firms:

1. avoid entering into any new LIBOR-linked facilities;
2. develop a strategy to support LIBOR transition; and 
3. when developing and executing the LIBOR transition strategy, take reasonable steps to treat customers fairly.

There are a few points in particular that stood out to us from the Q&A: 

  • Governance and accountability: the FCA sets out very clearly that responsibility for LIBOR transition should form part of a firm's SM&CR and conduct risk management framework and that firms should identify the Senior Manager responsible for overseeing the transition. Putting an appropriate governance framework around your LIBOR transition programme is key.  Expect the FCA to be monitoring that responsibility for LIBOR transition has been appropriately allocated and risks reflected in your risk management framework, particularly when you next file SM&CR documentation with the regulator.

  • Legacy contracts and TCF: one of the trickiest issues for firms, particularly in the retail financial services sector, is transitioning customers on legacy LIBOR-linked contracts to an alternative Risk Free Rate and avoiding customer detriment. Although the Q&A emphasises the importance of firms treating customers fairly (and ensuring any unilateral amendments to consumer contracts are fair under the Consumer Rights Act 2015), the FCA leaves a number of questions unanswered, for example its expectations of firms where customers choose not to engage with their transition strategy.

  • Communications strategy: the FCA expects firms to engage with customers both generally on the implications and timing of the LIBOR transition and by planning for and rolling-out a client-specific communication strategy.  The FCA highlights that any LIBOR transition communications should deliver the key messages clearly and be appropriately targeted to the knowledge and experience of the intended audience.  

Your communications strategy should form a core part of your LIBOR transition plans.  It is important that the communication strategy builds in sufficient time for customers to understand their options and make informed decisions.

Are there questions that remain unanswered?

  • Selecting a replacement rate and TCF:  although the FCA highlights the need for market consensus and supports industry initiatives to reach agreement on fair replacement rates, including work done by ISDA and the RFR Working Group, it recognises that these industry initiatives are still underway and market consensus is still developing.   The FCA expects firms to exercise their own judgment on when and how to remove LIBOR dependencies in legacy contracts, against a backdrop of uncertainty about when any industry initiatives may be finalised.
  • Regulatory expectations based on type of product: although the FCA acknowledges that there will be different considerations for firms when developing and executing their LIBOR strategy depending on the types of products involved and the relative financial sophistication of the customer, the Q&A does not address the RFR Working Groups request for specific guidance in this area.
  • What to expect next: although it is likely that the FCA will continue to engage with firms as we approach end-2021, it is unclear the extent of any additional guidance that the FCA will publish or the questions this might address. What is clear is that the FCA does not expect firms to wait for any further guidance, but to be developing and implementing their LIBOR transition strategies now.

How we can help

We understand the significant impact the LIBOR transition is likely to have on regulated firms. In response:

We have brought together experts from across our banking, restructuring, regulatory, employment and disputes practices to form a specialist LIBOR transition group to provide clients with the resources and expertise to support all aspects of the transition away from LIBOR, including in relation to:

  • Identifying LIBOR exposure and developing a LIBOR transition strategy
  • Incorporating LIBOR-transition into your existing risk management framework and managing conduct risk associated with LIBOR transition
  • Amending customer facing documentation and managing the re-papering exercise
  • Developing appropriate customer engagement strategies

We have built smart technology solutions to provide efficient support for larger scale documentation review and re-papering exercises.

Please contact us if you would like to discuss how we can support your LIBOR transition programme.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.

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