In summary, questions to consider in relation to managing the IBOR transition from a corporate governance perspective include: 

• Does the firm have a transition plan which has appropriate milestones, is resourced adequately and is devised holistically across all business functions? Does the transition plan factor in engagement with industry bodies, peers and regulators?
• Does the firm have a clear governance framework to manage the IBOR transition based on the firm’s size, scale and complexity?
• Is the board or governing body have oversight of the transition process? Regulators may ask for copies of board minutes, so board members will need to demonstrate that they have: (a) asked relevant questions, (b) challenged assumptions, and (c) taken the necessary steps to enable the firm to meet the end of 2021 deadline.
• Are senior managers aware of the risks of IBOR transition and clear about who is accountable within the firm for managing each aspect of the transition Statements of responsibilities for senior managers (where applicable) should be updated and include any responsibilities arising from IBOR transition plans. 
• Is management information of a sufficient quality to facilitate informed and timely decisions regarding IBOR transition? Consideration should be given to the frequency of reports up and down the corporate governance chain. 
• Has the firm identified and considered the impact of the cessation of IBOR on products, operational processes, infrastructure, systems and controls, accounting practices, geographical risks and customers?   
• Has the firm implemented internal risk management procedures (including IT measures) to identify and monitor the IBOR transition, together with a fall-back plan?
• Has the firm established an overall strategy for amending old and new contracts, and making changes to services and products? How, when and how often will the firm engage and communicate with customers in this regard? The strategy for communicating with customers should take account of the customers’ level of sophistication and should seek to ensure that customers are able to make informed decisions in a timely manner.
• Is the firm’s base case scenario for the purposes of planning and managing risk modelled on IBOR discontinuation at the end of 2021? 
• Has the firm allocated sufficient resources to manage the IBOR transition? How often should this be reviewed? This may include identifying a ring-fenced, dedicated team of staff with an allocated budget.
• Does the firm’s IBOR transition process ensure that risks are identified and progress captured and escalated to the right level? Information should be updated regularly to support timely decision-making by the relevant committee or senior managers.
• How and when will the firm train and communicate with staff on the IBOR transition? 
• Has the firm considered the impact of the cessation on its other regulatory obligations (e.g., under the European Markets Infrastructure Regulation, Mortgage Contract Directive, Consumer Credit Directive, Securities Financing Transaction Regulation and Markets in Financial Instruments Directive II)? Is the firm tracking statements from regulators to ensure that these are reflected in its transition plan and processes? 
• Does the firm’s IBOR transition process enable it to maintain adequate records and a clear audit trail of decisions regarding the transition away from IBOR? 
• Has the firm adopted a customer communication strategy? 

If the board of the firm decides that no transition plan is required, this decision needs to be reviewed by the board periodically. Equally, if a firm does not believe that they are impacted by IBOR, this needs to be carefully documented, stress-tested and reviewed by the board periodically. 

Treating customers fairly (TCF) 

Regulators will likely scrutinise amendments to customer terms, products and services through a TCF lens. 

Furthermore, certain recent opinions (German case opinion and Spanish case opinion) of the European Court of Justice (ECJ) in relation to amendments to interest rate provisions of contracts and terms underscore the importance of financial institutions embedding the concept of TCF into their IBOR transition plans, and ensuring that they comply with consumer protection legislation when amending agreements or services with customers even if the: (a) amendments relate solely to the interest rate; (b) parties have agreed to the amendments; and (c) new reference rate has been recommended by a competent national authority (e.g., SONIA).  

In summary, questions to consider from a TCF perspective include: 

• Has the firm identified whether any contracts, products or services are subject to consumer protection legislation (e.g., unfair terms legislation or distance-marketing rules)? Equally, has this analysis factored in the manner in which the firm communicates with customers (e.g., remotely rather than face to face)? It is clear from the ECJ opinions that compliance with consumer protection legislation is required even if the customers agree to the new reference rate and even if regulators recommend certain reference rates.
• Can the firm unilaterally amend customer terms or does it have to obtain consent, disclose certain information (e.g., a right to withdraw) or observe a cooling-off period? Have we embedded this into our transition plan and processes? 
• Does the firm’s IBOR transition plan ensure that customers are not unnecessarily exposed to IBOR risk? What factors has the firm taken into consideration when determining the timing of stopping issuing IBOR-limited products? How and when will the firm communicate such decisions to customers? Regulators expect that: 
  
  • Firms clearly identify the contracts impacted by the transition.
  • New products or services that mature after the end of 2021 should be linked to a risk-free reference rate (RFR) or other alternative rates rather than being linked to IBOR. The regulators have explained that this avoids the complication of calculating and explaining any fall-back provisions. 
  • Firms that continue to offer IBOR-linked products or services that mature after the end of 2021 must consider whether these products or services continue to meet the needs of customers. 
  • The implications of fall-back language in customer terms is fully explained. 
  • Communications are fair, clear and not misleading.
  • Communications to customers reflect the customers’ level of sophistication. 
  • Firms manage any transfer of value related to the change of benchmark.
  • Firms communicate their approach and the consequences to customers in a timely manner to ensure that customers are able to make informed decisions. 
• How does the firm ensure that the new replacement reference rate(s) are ‘fair’? Does this take account of industry guidance, customers’ demands and needs and the firm’s internal risk assessment? Adoption of a market or industry solution should assist firms in demonstrating fairness, although solutions may come too late and firms may need to exercise judgement.
• Has the firm clearly explained the key features of the new RFR product, including the costs, benefits and risks? Has the firm represented this to the customer in a fair way, ensuring that it does not disguise, reduce or hide relevant information? 
• Does staff training allow staff to inform customers about new RFRs, products, services or contract terms (including fall-back language)? Does staff training adequately highlight the boundary between providing information and giving investment advice? Does the firm’s staff understand why this distinction is important? Is this adequately embedded in the transition plan? 
• Has the firm retained records of all customer communications? 

Conclusion

Notwithstanding the challenges posed by the COVID-19 pandemic, regulators have confirmed that the deadline for transitioning away from IBOR is the end of 2021. 

Therefore, firms need to ensure that their transition plans are fully developed and that progress is made to meet the deadline.  

Client Alert 2020-273