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Janine Alexander
Partner
Banking Litigation & Dispute Resolution
The UK Government announced on 23 June 2020 that it intends to introduce new legislation to give the UK Financial Conduct Authority (FCA) enhanced powers in circumstances where (i) LIBOR ceases to be representative of the market and (ii) its representativeness cannot and will not be restored. This is intended to solve the problem of “tough legacy” contracts by giving the FCA the power to protect consumers and market integrity in relation to those contracts (which the FCA envisage will be a “narrow band”). “Tough legacy” contracts in the context of LIBOR transition are existing contracts referencing LIBOR which extend beyond 2021 and cannot realistically be renegotiated to use a different benchmark rate or to add new robust fallback provisions. This announcement from the UK Government follows the Paper on the identification of Tough Legacy issues published at the end of May by the Working Group on Sterling Risk-Free Reference Rates (the Consultation Paper) which considered “tough legacy” issues across asset classes in the UK and concluded that there is a case for action to address these exposures.
The proposed legislation would:
The UK Government intends to introduce those proposed new powers in the forthcoming Financial Services Bill.
This progress towards solving the problem of “tough legacy” contracts is welcome. However, of itself this proposed legislation does not remedy the current inherent uncertainty parties face. For example:
The FCA are proposing yet more wide ranging consultations and discussions with market participants to establish how best to alter the LIBOR methodology post-31 December 2021. It will likely be many months before the true picture of what will be available post-2021 becomes clear. This makes it more difficult for parties to consider their options for legacy contracts between now and the end of 2021, although an optimistic view suggests that the “cliff edge” of 31 December 2021 may no longer be so steep if the FCA intends to provide some support on the other side. Unless and until clearer guidance becomes available, it is impossible to tell to what extent these powers will assist parties to resolve disagreements about how to deal with contracts referencing LIBOR extending beyond 2021.
The announcement from the UK Government can be found here: https://www.parliament.uk/business/publications/written-questions-answers-statements/written-statement/Commons/2020-06-23/HCWS307/. In connection with the announcement, the FCA has also issued the following statement: https://www.fca.org.uk/markets/transition-libor/benchmarks-regulation-proposed-new-powers.
2 July 2020
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