The FCA has published a speech by its Chief Executive, Andrew Bailey, on transitioning from LIBOR to alternative interest rate benchmarks.

Highlights in the speech include:

  • the absence of ways to remedy the current underlying weakness in LIBOR lead to the conclusion that the best option is to actively transition to alternative benchmarks;
  • the most effective way to avoid LIBOR-related risk is not to write LIBOR-referencing business;
  • the work being done by risk-free rates working groups in the UK and in other jurisdictions is important as it seeks to make available conventions and standards that can help ensure that financing and risk management are not interrupted when LIBOR disappears. Authorities will support and facilitate this work but ultimately it is the responsibility of each individual firm to address the risks it faces;
  • firms will need to demonstrate to FCA supervisors and their PRA counterparts that they have plans in place to mitigate the risks, and to reduce dependencies on LIBOR;
  • some firms will also have obligations to disclose and consider risks to investors when they sell LIBOR-related instruments;
  • banks and investment firms also need to consider the design and risks of any new LIBOR-referencing instruments as part of their product governance obligations, considering and describing the impact of LIBOR discontinuation on those instruments. And they will also need to provide all appropriate information to all distributors of those financial instruments;
  • those acting on behalf of investors will need to ensure they have considered and understand what will happen to LIBOR-referencing instruments in the event of LIBOR discontinuation. For example brokers or platforms offering non-advised sales need to disclose to clients in an understandable way information on the key features and risks of financial instruments they make available. For an instrument relying on LIBOR beyond end-2021, the risk of discontinuation will need to be covered; and
  • many firms are already planning for the transition but some are not. The biggest obstacle to a smooth transition is inertia – a hope that LIBOR will continue, or that work on transition can be delayed or ignored. Misplaced confidence is a risk to financial stability as well as to individual firms.