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LIBOR: Are the FCA’s proposed new powers the answer to the problem?

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management
  • Financial institutions

14-07-2020

The UK Chancellor of the Exchequer published a statement on 23 June 2020, outlining the government’s response to the cessation of the London inter-bank offered rate (“LIBOR”) and the problem of tough legacy contracts. The FCA also published a supporting statement together with Q&As on its proposed new powers. We address what this means for the market below.

Will there be a legislative fix?

Rather than directly seek to impose legal changes on LIBOR-referencing contracts governed by UK law, the Government intends to legislate to amend and strengthen the FCA’s existing regulatory powers to address the issue.

What will the enhanced powers allow the FCA to do?

The proposed powers will allow the FCA to:

  • prohibit the use of LIBOR at the point it determines that LIBOR is not representative of the market it seeks to measure and representativeness will not be restored; and
  • direct the administrator of LIBOR to change the methodology used to calculate LIBOR if that change would protect consumers and/or ensure market integrity. This would allow the FCA to stabilise certain LIBOR rates for a wind-down period so that the stabilised LIBOR would be available for tough legacy contracts. The emphasis on ‘certain’ is because LIBOR is available for multiple currencies and this change in methodology may not be possible for all LIBOR currencies. The new methodology would require suitable robust inputs to support the change in calculation.

What does this mean for the market?

Both the Chancellor’s and FCA’s statements are clear that those who can amend their contracts so that they move away from LIBOR, should do so.

Whilst the FCA’s proposed powers offer hope for tough legacy contracts, it remains unclear:

  • whether only tough legacy contracts that will be caught by the legislation
  • if so, what the definition of tough legacy contracts will be
  • what the new methodology for calculating a temporary LIBOR might be
  • how long any wind down period may last; and
  • which currencies of LIBOR will be available in a wind-down period.

For those regulated by the FCA, the regulator’s expectation is that they should continue to prepare for LIBOR cessation. Those who fail to do so remain at risk of regulatory action and litigation risk as outlined here. 

What will happen next?

The Government’s proposals are to be introduced in the forthcoming Financial Services Bill and the FCA will also publish statements of policy on its potential use of these powers following further engagement with stakeholders in the UK and internationally.

How can Eversheds Sutherland assist?

Eversheds Sutherland (International) LLP has the experience and a range of tools which can help quickly identify and then manage these risks. We welcome the opportunity to discuss with you the challenges that this transition away from LIBOR presents to your business.