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Libor – the countdown continues

  • United Kingdom
  • Financial services and markets regulation - Briefings and articles
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As the countdown to the end of LIBOR continues, regulators are increasing the pressure on the market to prepare and proactively engage with their clients to ensure a smooth transition to a new risk-free rate. Failure to do so will expose firms to the risk of regulatory enforcement and customer/counterparty claims.

Heightened regulatory interest

During the announcement of the two new initiatives aimed at supporting a risk-free rate transition on 26 February 2020,[1]  Andrew Hauser (Executive Director, Markets, Bank of England) stated that “there remains an urgent need to expand understanding of the substance and timetable for LIBOR transition to a much wider range of end-users of LIBOR across the UK economy. Central responsibility for this lies with lenders communicating effectively with their clients”.

On 27 February 2020, UK regulated asset managers became the latest in the industry to receive a “Dear CEO” letter from the FCA, setting out its expectations of those firms as they prepare for the cessation of LIBOR on 31 December 2021. The letter notes that firms should “carefully consider whether [their] products and services will meet the needs of clients and perform in the manner expected after 2021”.

The time to act is now

Although regulators have been talking about the end of LIBOR since 2017, the Bank of England and the FCA are clear that, “the time to act is now”.[2]

The FCA has emphasised that financial institutions should be proactively engaging with their clients to prepare for the discontinuation of LIBOR. Failure to do so will leave them open to the risk of regulatory enforcement and claims from customers and counterparties. Many contracts may have no fall-back provision for the discontinuance of LIBOR. Others may have alternative rates which are higher than LIBOR. The FCA expects [3]  firms to demonstrate that they have identified and sought to manage the risks of LIBOR discontinuance. The FCA also expects firms to exercise skill, care and diligence, manage conflicts of interest appropriately, ensure clients are not misled and are treated fairly and are able to show that they have acted in the best interests of the clients. Some of the risks posed by the discontinuance of LIBOR are considered in our article dated 18 July 2019.

The FCA will be monitoring for conduct risk during the transition period. The FCA has advised that firms should have robust governance arrangements for managing risk in their business. Firms should therefore consider any action they intend to make and ensure it is properly planned and comprehensive. They should also consider the impact of any substitute rate on customers and what steps they should be taking to engage with them. Firms should focus specifically on the FCA’s expectations, which are that: (1) firms have a strategy in place and take necessary action during LIBOR transition; and (2) customers are treated fairly by following the FCA’s rules and guidance.

The types of conduct risk that the FCA are most likely to be concerned about are:

  • lacking appropriate care in the way the transition is handled, for instance misleading customers (inadvertently or otherwise)
  • failing to give sufficient information about, or warning of, changes and how they may affect customers
  • failing to be adequately prepared for foreseeable and potentially avoidable issues with the post-change regime (such as prolonged systems down-time affecting customer services)
  • scrutiny of the way a firm responds to enquiries and complaints relating to the changes made

Furthermore, the FCA has advised that firms that are affected by the LIBOR transition and subject to the Senior Managers Certification regime should: (1) identify the Senior Manager responsible for overseeing the transition away from LIBOR; and (2) detail those responsibilities in the relevant Senior Manager’s Statements of Responsibilities.[4]


The task should not be underestimated. Alongside identifying all of the contracts that reference LIBOR, firms need to determine trigger events and appropriate substitute reference rates which may require further negotiation with counterparties and ensure any non-negotiated change is fair to customers. The impact on accounting, IT and tax will also need to be considered.

What next?

Firms should expect to see more regulatory scrutiny as the 31 December 2021 deadline draws closer. Although the work has started, the increased pressure from regulators shows that they believe that there is still a long way to go and that 2020 is the year to make progress.

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

[1]    Turbo-charging sterling LIBOR transition: why 2020 is the year for action – and what the Bank of England is doing to help, Andrew Hauser (Executive Director for Markets, Bank of England), 26 February 2020

[2]    Next steps for LIBOR transition in 2020: the time to act is now, Bank of England, 16 January 2020

[3]    Conduct risk during LIBOR transition, FCA, 19 November 2019

[4]    Conduct risk during LIBOR transition, FCA, 19 November 2019