On 23 June 2020, a written statement by the Chancellor of the Exchequer, Rishi Sunak, on financial services regulation explaining that the Government intends to legislate to amend and strengthen its existing regulatory framework for critical benchmarks such as LIBOR rather than directly imposing legal changes on LIBOR referencing contracts that are governed by UK law.
The legislation will ensure that, by end-2021, the FCA has the appropriate regulatory powers to manage and direct any wind-down period prior to eventual LIBOR cessation in a way that protects consumers and/or ensures market integrity.
The Government therefore intends to:
- Amend the UK’s existing regulatory framework for benchmarks to ensure it can be used to manage different scenarios prior to a critical benchmark’s eventual cessation. In particular, the Government will introduce amendments to the EU Benchmarks Regulation 2016/1011 as amended by the Benchmarks (Amendment) (EU Exit) Regulations 2018 (the ‘UK BMR’), to ensure that FCA powers are sufficient to manage an orderly transition from LIBOR.
- Extend the circumstances in which the FCA may require an administrator to change the methodology of a critical benchmark and clarify the purpose for which the FCA may exercise this power. New regulatory powers would enable the FCA to direct a methodology change for a critical benchmark, in circumstances where the regulator has found that the benchmark’s representativeness will not be restored and where action is necessary to protect consumers and/or to ensure market integrity.
- Strengthen existing law to prohibit use of an individual critical benchmark where its representativeness will not be restored, whilst giving the regulator the ability to specify limited continued use in legacy contracts.
- Refine ancillary areas of the UK’s regulatory framework for benchmarks to ensure its effectiveness in managing the orderly wind down of a critical benchmark, including that administrators have adequate plans in place for such situations.
The Government intends to take these measures forward in the forthcoming Financial Services Bill. Following engagement with industry and global counterparts, the FCA will, where appropriate, issue a number of statements of policy relating to its approach to a range of new powers provided by the legislation before it exercises those new powers. The FCA may consider, among other factors, international impacts before exercising its new powers, given LIBOR’s global usage.
The FCA has issued a statement welcoming the Government announcement. In particular, the regulator states that these measures could help manage and direct an orderly wind-down of critical benchmarks such as LIBOR, and, in particular, help deal with the problem identified by the Sterling Risk Free Rate Working Group of ‘tough legacy’ contracts that cannot transition from LIBOR.