FCA Answers Questions on Conduct Risk During LIBOR Transition
FCA published answers to questions related to its core expectations from firms during the transition away from London Inter-bank Offered Rate (LIBOR). During FCA's discussions with industry, including the Working Group on Sterling Risk-Free Rate, the firms asked about FCA's core expectations of firms during the transition away from LIBOR. In response, FCA answered key questions on conduct risk arising from LIBOR transition, outlined the expectations that firms have a strategy in place and take necessary action during LIBOR transition and that customers should be treated fairly by following rules and guidance of FCA.
The FCA supervision of firms’ transition away from LIBOR is focused on firms effectively managing the risks arising from transition, including prudential, operational, and conduct risks. The following are the key takeways form the published questions and answers:
- Governance and Accountability. FCA states that, for many firms, LIBOR transition will impact the overall business strategy and front-office client engagement. Therefore, potential impact and risks need to be considered and addressed in an appropriately coordinated way across a firm.
- Replacing LIBOR with alternative rates in existing contracts or products. FCA believes that the most effective way to avoid LIBOR-related exposure is not to write new LIBOR-referencing business and to transition to alternative rates, taking into account the considerations on selecting a fair replacement rate.
- Offering new products with risk-free rates or alternative rates. Firms should aim to provide products that meet customer needs and perform as they are led to expect. The best way to avoid the complications of calculating and explaining fallbacks from LIBOR to replacement rates is to avoid new LIBOR contracts that mature after the end of 2021.
- Communicating with customers about LIBOR and alternative rates or products. FCA says that it is essential for firms that continue to market, distribute, and/or sell LIBOR products that mature beyond the end of 2021 to fully explain what will happen in the event of LIBOR ending and its effects on the customer.
- Firms investing on behalf of customers and LIBOR transition. Asset managers must identify the extent of their and their clients’ exposures to LIBOR as a result of LIBOR-referencing instruments in asset portfolios and they must consider how to manage the impact of this transition ahead of the end of 2021.
These questions and answers apply to firms across various sectors. FCA used sector-specific examples, where relevant, but firms will need to exercise judgment on the impact of LIBOR transition across their business, taking the interests of specific clients and the nature of the firm’s business model into account. LIBOR will end after 2021 and FCA expects firms to take appropriate steps to ensure they can transition to alternative rates ahead of the end of 2021. The firms which can be affected due to this transition includes investment banks, asset and wealth managers, insurers, retail banks, building societies and mortgage lenders, and other intermediaries such as advisers and brokers.
Related Links
Keywords: Europe, UK, Banking, Insurance, Securities, LIBOR, Risk-Free Rates Q&A, Conduct Risk, Interest Rate Benchmarks, FCA
Previous Article
IMF Issues Reports on 2018 Article IV Consultation with IcelandNext Article
IASB Publishes Meeting Updates for October 2019Related Articles
NGFS Updates Address Short-Term Climate Scenarios and Transition Plans
The Network for Greening the Financial System (NGFS) is exploring the development of short-term climate scenarios to complement its existing scenario framework of long-term climate scenarios.
ISSB Updates Address ESG Issues while IASB Consults on Impairments
The International Sustainability Standards Board (ISSB) is seeking feedback, until August 09, 2023, on the exposure draft that sets out the methodology proposed by ISSB to amend the Sustainability Accounting Standards Board (SASB) Standards' metrics
OSFI to Review Liquidity Adequacy Guidelines and Policy Architecture
The Office of the Superintendent of Financial Institutions (OSFI) is consulting, until June 21, 2023, on a review of the liquidity treatment provided in the Liquidity Adequacy Requirements (LAR) Guideline for wholesale funding sources with retail-like characteristics.
ESRB Publishes Report on Cryptos and DeFi; ECB Updates on Digital Euro
The European Systemic Risk Board (ESRB) published a report that outlines the systemic implications of crypto markets and proposes policy options to address the risks stemming from crypto-assets and decentralized finance or DeFi.
EU Agencies Issue Updates on DORA, ESAP, and Crowdfunding Regulation
The European Supervisory Authorities (ESAs) published a discussion paper on their joint advice to the European Commission (EC) on proposals to specify criteria for critical information and communication technology (ICT) third-party service providers
ESAs Propose ESG Disclosure on STS Securitization, Issue Other Updates
The Joint Committee of the three European Supervisory Authorities (ESAs) proposed to amend the Implementing Regulation 2016/1799 on the mapping of External Credit Assessment Institutions' (ECAIs) credit assessments.
UK Authorities Issue Updates, Finalize Policy on Model Risk Management
The Prudential Regulation Authority (PRA) finalized the model risk management principles for banks, the policy statement PS5/23 on risks from contingent leverage, and PS4/23 on moving senior managers regime forms from the PRA Rulebook.
APRA Revises Implementation Timeline for Operational Risk Standard
The Australian Prudential Regulation Authority (APRA) updated the implementation date of the new cross-industry prudential standard CPS 230 on operational risk management
BCBS Consults on Basel FAQs and Amendments, Issues Other Updates
The Basel Committee on Banking Supervision (BCBS) published a report assessing implementation of the global Basel standards on net stable funding ratio (NSFR) and large exposures (LEX) in South Africa
EBA Announces Multiple Regulatory and Reporting Updates in April 2023
The European Banking Authority (EBA) published consultations on the amendments to the guidelines on risk-based anti-money laundering and countering the financing of terrorism (AML/CFT) supervision
