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As we progress through Q2 of 2021, the 6 month countdown for firms to have completed their LIBOR transition programmes in accordance with timetable set out by the Working Group on Sterling Risk Free Reference Rates has commenced. As part of that, some firms are still grappling with many of the technical aspects of the transition to Risk Free Rates (RFRs) with, for instance, clarity still awaited on how the FCA will exercise its powers under the Financial Services Bill. That uncertainty may also have led some to delay the implementation of their communications strategy with their customers.
Customer communications are an important element of how firms can mitigate the conduct risks they face as a result of the Libor transition process and is a key focus of the FCAs expectations for firms. In this article we look at the guidance available from regulators, along with available market consensus and best practice. We also provide some top tips for reducing firms’ conduct risk in this complex area.
The FCA has included some useful, if fairly brief, guidance on customer communications in its “Questions and answers for firms about conduct risk during LIBOR transition” that was published in November 2019 with an update in November 2020. Further guidance is contained in the recently joint Dear CEO letter published jointly by the FCA and PRA on 26 March 2021.
The FCA has made it clear that it expects firms to communicate information to customers in a way that is clear, fair and not misleading on the impact of LIBOR cessation. That information should be presented in good time to allow customers to make informed decisions about the relevant products and the risks they may be exposed to. This applies to existing and new financial products and services.
Ideally firms should already have started to communicate with customers to raise awareness and educate them on the general implications and timing of the transition. Further more focused engagement should then be rolled out to discuss new products or solutions that meet the customers’ needs as they take out new facilities, or re-finance or re-paper existing facilities.
How can firms ensure communications are clear, fair and not misleading?
Firms risk being challenged on whether they are treating their customers fairly where:
The complexity of the Libor transition landscape and the necessity to tailor communications to individual customers’ sophistication and knowledge base means that firms’ engagement strategy needs to be multifaceted and include segmenting customers by product type, customer sophistication, and risk segment (or other appropriate segment depending on the make-up of the portfolio). Customers in financial distress should also be identified and streamed appropriately to ensure their situation is appropriately managed through the transition.
Customer communications are a significant piece in the complex conduct risk puzzle surrounding the Libor transition project. Whilst the issues are far from simple and market consensus on some aspects of industry practice is still emerging, firms can and should still be rolling out their customer communications strategies. Indeed regulators expect that communication strategies are being executed, with regular reviews to ensure the plans remain appropriate as we progress through 2021 and closer to the cessation date.
A considered customer communication programme well in advance of the transition date is not only essential from a conduct risk perspective, but should also help to reduce the risk of ensuing litigation by customers following the transition; for example around the identification of genuinely ‘tough legacy’ contracts, in respect of which use of synthetic LIBOR may be permitted, and in the continued absence of clarity on whether a ‘safe harbour’, similar to that proposed in the US, will be introduced (and if so, how broad it will be).
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.
10 May 2021