On 19 November 2019, the FCA published a statement on its website regarding conduct risk during LIBOR transition.
Among other things, the FCA states that even where a firm does not itself provide or distribute products linked to LIBOR, it may have links to LIBOR in its systems, or in its contractual relationships with other firms. Whilst the FCA statement focuses on conduct, firms are reminded that they also need to consider operational, financial resilience and business model risks posed by LIBOR transition.
In the statement firms are reminded as to what governance and accountability oversight they should put in place where they are impacted by LIBOR transition. In particular, they should have robust governance arrangements for managing risk in their business. Where appropriate, where they are subject to the Senior Managers and Certification regime they should both identify the senior manager responsible for overseeing the transition away from LIBOR and detail those responsibilities in the relevant Senior Manager’s Statements of Responsibilities. Firms must also have effective processes and controls to identify, manage, monitor and report risks to their business, including risks associated with critical outsourced functions. Firms have existing obligations to this effect such as SYSC 4.1.3R, SYSC 7.1 and SYSC 8.1. Firms must also identify and prevent or manage conflicts of interest (SYSC 10).
The statement also covers the following topics:
- the replacement of LIBOR with alternative rates in existing contracts and products;
- treating customers fairly when replacing LIBOR;
- offering new products with risk-free rates or alternative rates;
- communicating with customers about the impact of LIBOR cessation and the availability of alternative products; and
- firms investing on customers’ behalf in relation to LIBOR and risk-free rates-linked products.
In terms of treating customers fairly, the FCA states that it will challenge firms where:
- contracts have ‘small print’ resulting in higher costs for the customer (for example by replacing LIBOR with a higher rate);
- conversations with customers affected by LIBOR are delayed to the point the client is left with insufficient time to understand their options and make informed decisions; and
- firms do not present or discuss alternative products due to unfounded fears of straying into a personal recommendation. Firms can provide an objective overview of the benefits, costs and risks of a range of alternatives to a client’s existing LIBOR-linked exposure, without inferring a recommendation.
In the final part of the statement the FCA briefly discusses the steps that asset managers should take. These are that asset managers:
- identify the extent of their and their clients’ exposures to LIBOR as a result of LIBOR-referencing instruments in asset portfolios; and
- consider how to manage the impact of transition ahead of end-2021, including: (i) ensuring they assess and manage risks associated with LIBOR ending, including the impact on contract continuity, expected interest payments, risks of declining liquidity in LIBOR-referencing products; and (ii) engaging with issuers of LIBOR-referencing securities, derivatives and loans counterparties, to convert these instruments and products to alternative reference rates, for example through consent solicitation processes or bond buy-backs, in good time before LIBOR’s likely cessation.