On Wednesday 19 September 2018 the Prudential Regulation Authority (“PRA”) and Financial Conduct Authority (“FCA”) wrote to the CEOs of major banks and insurance companies regarding the ongoing global benchmark reform effort, specifically the transition from LIBOR to alternative rates.
The Letter gives background to the reforms to LIBOR, and expresses that, due to how embedded LIBOR is in current business practices, insufficient preparation for the transition to alternative rates may be detrimental to both firms and investors. The Letter also states some of the current efforts being taken to address the challenges posed by the transition process.
One key aim of the Letter is to seek assurance that firms’ Senior Managers and Boards understand the risks associated with this transition and are taking appropriate action now so that firms can transition to alternative rates ahead of end 2021. As such, the regulators have asked regulated firms to nominate the Senior Manager within their firm who will take responsibility for undertaking a proportionate, board-approved 'comprehensive risk assessment of the potential prudential and conduct impacts associated with a transition in a range of scenarios, including LIBOR discontinuation' and respond to the letter itself.
The increased regulatory attention on individual accountability in financial services is not new; the Senior Managers and Certification Regime has been in place for banking firms since March 2016 and insurers and other firms will transition to the extension of the Regime over the coming 18 months.
However, this is the first time the regulators have used a ‘Dear CEO’ letter to request that firms identify a Senior Manager to be accountable for a specific issue. This forms part of the continued trend in regulatory supervision and enforcement of focusing more on the actions of individual Senior Managers in addition to the overall actions of a firm.
While there is no ‘right’ answer to who should be the Senior Manager for LIBOR transition we often see the CFO, and sometimes the CRO, taking this role. Firms should also remain cognisant that it might be appropriate for sponsorship to change during the programme life cycle – once the transition plans are set and are ready to implement it may be that accountability could move to the COO.
Firms should also take this opportunity to consider more broadly whether they have allocated responsibility for all activities, business areas and management functions of the firm to a Senior Manager, including allocating individual responsibility for significant projects or issues.
More generally, current Senior Managers as well as those taking on Senior Manager Functions as part of the extension of the SMCR should remain cognisant of the Statutory Duty of Responsibility, and whether their individual actions can be evidenced and are defensible.
Senior Managers are required to take ‘reasonable steps’ to prevent regulatory breaches from occurring or continuing to occur in their area of responsibility. Further, the Senior Manager Conduct Rules require Senior Managers to effectively control their areas of responsibility, to delegate appropriately and to comply with regulatory requirements.
Firms must respond to the letter by 14 December 2018. The regulators say they will review firms’ responses and consider appropriate next steps, and they will also supplement the FPC’s monitoring of the risks associated with LIBOR discontinuation and transition.