Tuesday 23 June 2020 2:14 pm

Financial regulator to get greater powers to phase out Libor

Britain’s financial watchdog is to be given greater powers by the government to ensure that Libor is scrapped by 2021, after efforts to retire the scandal-hit interest rate benchmark faltered due to the coronavirus crisis.

The Financial Conduct Authority (FCA) will be allowed to compel changes to benchmarks such as the London Interbank Offered Rate (Libor) to protect consumers and market integrity, chancellor Rishi Sunak said in Parliament today. 

Read more: Bank of England and City watchdog urge firms to accelerate Libor transition

Regulators will also be able to prohibit the use of specific “critical benchmarks,” he continued.

Libor, which is set daily by banks, is used to price contracts worth around £355 trillion globally. The rate was widely discredited after banks were fined billions of dollars for trying to rig it, and the FCA has set an end of 2021 date for ending its use.

Sunak’s statement quashes any speculation that Britain could delay the final deadline for scrapping Libor — a move that could have slowed transitions away from the benchmark in the US and other countries. 

“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,” Sunak told Parliament today.

In March, the FCA warned that the coronavirus pandemic would make it harder for some firms to meet the milestones for transitioning away from Libor, but said that firms should stick to the target of phasing out the rate by the end of 2021.

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The Bank of England in May delayed plans to encourage lenders to abandon the benchmark. Later that month, US policymakers used Libor as the benchmark for their $600bn Main Street lending program, which will buy debt from potentially hundreds of companies hit by the pandemic. 

Industry body UK Finance welcomed Sunak’s announcement. “The government’s intention to legislate for the transition of ‘tough legacy’ Libor contracts provides welcome clarity,” said Stephen Pegge, managing director of commercial finance. 

Pegge said the government’s move would remove uncertainty “for both customers and lenders” and play “a key role in ensuring fair and consistent customer outcomes”.

Read more: FCA tells asset managers to gear up for the end of Libor

“It has been pretty inevitable for some time that the Treasury was going to step in to help ensure an orderly, timely transition away from Libor,” said Claude Brown, partner at Reed Smith. 

“After all, not only are there a significant number of contracts with Libor baked in, but the regulator has been sending out mixed messages for a while,” Brown said.