The Working Group on Sterling Risk-Free Rates (RFRWG), the Financial Conduct Authority (FCA) and the Bank of England published joint statements on the 25th March and 29th April relating to LIBOR transition. These statements underline the need for firms to continue to migrate away from LIBOR as a reference in their financial contracts and reiterate that firms cannot rely on the benchmark’s continued publication as the current voluntary agreement between the FCA and LIBOR panel banks will expire after end-2021 (as announced in 2017). The Government has followed these and related global regulatory developments closely, including the Tough Legacy Taskforce report published by the RFRWG.
The Government shares both the regulators’ pragmatism in recognising the interim timetable for transition has been slowed by Covid-19 and their urgency that the market must continue actively transitioning away from LIBOR. It is in the interests of financial markets and their customers that the pool of contracts referencing LIBOR is shrunk to an irreducible core ahead of LIBOR’s expected cessation, leaving behind only those contracts that genuinely have no or inappropriate alternatives and no realistic ability to be renegotiated or amended. The Government recognises, however, that legislative steps could help deal with this narrow pool of ‘tough legacy’ contracts that cannot transition from LIBOR.
Unlike many jurisdictions, the UK has an existing regulatory framework for critical benchmarks such as LIBOR. The Government therefore intends to legislate to amend and strengthen that existing regulatory framework, rather than directly to impose 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 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 Government agrees with the RFRWG’s Tough Legacy Taskforce that active transition of legacy contracts remains of key importance and provides the best route to certainty for parties to contracts referencing LIBOR. Parties who rely on regulatory action, enabled by the legislation the Government plans to bring forward, will not have control over the economic terms of that action. Moreover regulatory action may not be able to address all issues or be practicable in all circumstances, for example where a methodology change is not feasible, or would not protect consumers or market integrity. This reinforces the importance of parties who can transition away from LIBOR doing so on terms that they themselves agree with their counterparties. The Government, the FCA and the Bank of England will continue to work closely to encourage market-led transition from LIBOR and to monitor progress.