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.
Keywords: Europe, UK, Banking, Insurance, Securities, LIBOR, Risk-Free Rates Q&A, Conduct Risk, Interest Rate Benchmarks, FCA
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