UK Financial Services Bill Includes New Powers for FCA to Manage LIBOR Transition

The proposed powers for the Financial Conduct Authority ("FCA") to manage the London Interbank Offered Rate ("LIBOR") transition should address so-called "tough legacy" contracts involving UK participants but could also have broader consequences for other agreements.

On 21 October 2020, the UK Government introduced its proposed Financial Services Bill to Parliament, which includes significant new powers for the FCA to manage an orderly transition away from the LIBOR benchmark. The Bill is part of the UK's legislative response to Brexit and contains a range of measures that will affect firms across the financial sector, as well as those accessing the UK's financial markets after the end of the Brexit transition period on 31 December 2020. 

In this update, we focus on the amendments the Bill will make to the UK's Benchmark Regulation, as announced in June (see "Latest Developments in Dealing With "Tough Legacy" IBOR Transition Contracts"). Firms should note that the extensive scope of the Financial Services Bill is likely to increase legislative scrutiny, which in turn may impact the date when these new powers may come into force. Further, the Bill does not predetermine or fix LIBOR transition outcomes for any contracts.

As drafted, the Bill provides the FCA with additional powers to:

  • designate a critical, unrepresentative benchmark and require the administrator to change that benchmark's methodology, rules or code of conduct. In the case of LIBOR, this could allow a change so that LIBOR is no longer reliant on panel bank submissions;
  • prohibit some or all uses of any designated benchmark by UK regulated firms from a specified date;
  • exempt "legacy use" of any prohibited benchmark by UK regulated firms for a specified period and/or for certain purposes. This is intended to prevent widespread claims of frustration over "tough legacy" contracts which cannot practically transition away from LIBOR;
  • increase the maximum time that the FCA can compel benchmark administrators that it supervises to continue publishing a critical benchmark, from five to 10 years.

The Bill also extends the period during which UK market participants can use "unapproved" third country benchmarks provided by an administrator located outside the United Kingdom to 31 December 2025.

While the drafting of the Bill is clearly intended to assist with LIBOR transition in UK financial markets, the potential continuation of LIBOR after the end of 2021 could impact any overseas contracts which do not transition before any FCA designation takes place, as well as raising the prospect that non-UK regulated firms could continue to use "alternative LIBOR" in new contracts after the end of 2021.

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