Since Andrew Bailey’s speech in 2017 banks have had to prepare for the reality that after 2021, the London Interbank Offered Rate (LIBOR) – one of the world’s most important reference rates - might cease to exist.
As part of industry preparation, regulatory authorities have been working with market participants to transition away from the use of LIBOR to risk-free rates; however, this transition also poses significant conduct risk.
The term “conduct risk” can be broadly defined to mean the risk that actions taken by a firm could be detrimental to a client or have an adverse effect on market stability or effective competition.
As a result, AFME and Simmons & Simmons have together highlighted questions which compliance teams should ask themselves concerning their LIBOR transition preparations in order to mitigate conduct risk.
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- Firms should review their structure and governance frameworks as this will define how they approach the transition and manage their relationships with external parties and key decision-makers.
- Given the scale and complexity of the transition, firms should review their record-keeping processes to ensure they remain compliant when large volumes of documents are produced.
- Review whether the organisation is suitably engaging with regulators and working groups so its responses to consultations are as informed as possible.
- Firms should review whether their new risk-free-rate products are compliant under regulatory product governance obligations and access the viability of any new LIBOR-referencing instruments.
- Determine whether communications teams are suitably addressing client needs and their varying levels of understanding of the transition.
- Take steps to ensure outsourced services are compliant with regulation.
- Ensure all business divisions are suitably trained and aware of the firm’s regulatory and legal obligations.
- Review post-transition communications processes to determine if they are prepared for potential questions and complaints from clients regarding new risk-free-rate linked contracts.