The cessation of the London Inter-bank Offered Rate (LIBOR) at the end of 2021 has long been an issue vexing the global financial services industry given the scale and geographic spread of exposures to the affected benchmarks across the currencies and terms in which it is published. As we reach what Andrew Bailey, Governor of the Bank of England, has called the “endgame”, we thought it would be useful to publish an update on the status of this transition. In our LIBOR Transition Status Update – October 2020, we draw together key recent developments in this transition and summarise the current status in the most impacted product markets at this critical juncture. Continue reading
The UK’s Tough Legacy Taskforce (Taskforce) has issued a paper on “tough legacy” issues in the transition from LIBOR. In an important intervention, it has recommended a legislative fix for all asset classes and possibly all LIBOR currencies. The scope of the recommendation from the Taskforce is wider than many will have expected, but will be broadly supported by the market.
The sections on financial services in the UK’s approach document are set out below:
Chapter 16: Financial Services
- The Agreement should promote financial stability, market integrity, and investor and consumer protection for financial services, providing a predictable, transparent, and business-friendly environment for cross-border financial services business.
- The Agreement should include legally binding obligations on market access and fair competition, in line with recent CETA precedent.
- The Agreement should also build on recent precedent, such as the EU-Japan EPA and international best practice, by establishing regulatory cooperation arrangements that maintain trust and understanding between our autonomous systems of regulation as they evolve. This could include appropriate consultation and structured processes for the withdrawal of equivalence findings, to facilitate the enduring confidence which underpins trade in financial services.
Equivalence in Financial Services
- The UK and the EU have committed to carrying out unilateral equivalence assessments for financial services, distinct from the CFTA. The fact that the UK leaves the EU with the same rules provides a strong basis for concluding comprehensive equivalence assessments before the end of June 2020.
Unsurprisingly, these are brief and outcomes-focused in nature, reflecting the Government’s approach more generally and the desire for “autonomous systems of regulation” (as preserved under the EU-Japan Economic Partnership Agreement) rather than close alignment. The comments on equivalence do serve as a reminder to the EU that the UK will nonetheless be starting from a position of close alignment, but as ever, there are no guarantees that this challenging deadline for completing assessments will be achieved.
On the same date, the European Commission has also published a speech delivered by Michel Barnier, the EU’s chief negotiator on its future relationship with the UK, addressing the potential for UK/EU co-operation post-Brexit. The tone of the speech is characteristically challenging of the UK’s perceived desire to preserve sovereignty and regulatory autonomy while maintaining access to EU markets. Mr. Barnier’s discussion of equivalence indicates the lack of appetite from the EU to develop a more extensive and durable form of equivalence for cross-border market access, as explained in the following extract:
[Equivalence in financial services]
“… The EU will have the possibility to grant equivalences. We will do so when it is in the interest of the EU; our financial stability; our investors and our consumers. But these equivalences will never be global nor permanent. Nor will they be subject to joint management with the UK. They are, and will remain, unilateral decisions.
I read in the Financial Times recently that London must retain its primacy as a hub for wholesale financial markets without becoming a rule-taker of European regulation. As a former Commissioner in charge of financial services, allow me to question that. Why should we accept that the profits stay in London while the EU carries the risks?
The UK may not want to be a rule-taker. But we do not want to be the risk-taker. When the next financial crisis strikes, who will foot the bill? I doubt the UK will foot it for the EU. That is why the EU must take the responsibility for its financial regulation, supervision and stability.”
The FCA has today written to the UK’s major retail banks, asking them to provide evidence of how they have arrived at their new overdraft interest rates, which have all been set at around 40%. The FCA also asked the banks to clarify how they will deal with customers who could be worse off following the changes, and expects firms to take “positive steps” to helps these customers – for example, by reducing or waiving interest, or offering a continuation of overdraft borrowing at current rate of interest.
The FCA’s letter comes after it introduced wide-spread reforms to the “dysfunctional” overdraft market to end harmful unarranged overdraft charges. From April this year, firms are required to charge a simple annual interest rate, without additional charges for using an overdraft.
Today’s letter is perhaps an acknowledgement from the FCA that its overdraft changes have not been implemented quite as expected, and a warning to banks that the FCA will be “keeping a close eye on the market” and will take action should it “see continued harm”. The banks have until 10 February to voluntarily respond to the FCA’s letter, following which we should expect more communications and possibly further action from the FCA.
On 4 October 2017, HM Treasury’s Office of Financial Sanctions Implementation (“OFSI”) published a quick guide for UK businesses, with the aim of helping them understand and comply with financial sanctions. The guide is intended to help explain what financial sanctions are, when and how to comply with sanctions, and where to go for further information and guidance.