By Peter Carney, partner at UK law firm TLT
Over the last two years, UK regulators have been steadily increasing the volume and urgency with firms on the need to get prepared for the end of LIBOR, which will cease to be published on 31 December 2021. With parallels to Brexit, it is virtually impossible to be in the financial services industry in the UK and ignore the regular updates and messaging coming from the Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA), the Bank of England, the working group on risk free rates and the ever gathering snowball of articles and materials from the professionals in the market.
Ignorance is bliss?
Most if not all firms either headquartered or operating in the UK have an awareness of the implications of LIBOR’s imminent demise, ranging from reasonably aware and taking some initial steps to in-depth knowledge and well advanced in transition planning. However, there are many international banks (some of which will have branch offices in the UK) who have not yet appreciated the challenges which the end of LIBOR poses, or started thinking about the steps required in advance of 31 December 2021. In some cases, the branch offices in the UK and elsewhere can see the risks ahead but head office may not have given it the attention it deserves.
For any banks adopting this kind of “head in the sand” approach, the message has to be: get up to speed quickly and understand how the end of LIBOR will impact on the business as a whole.
Is a wait and see approach defensible?
Perhaps the lack of engagement in some quarters is not attributable to a lack of awareness, but instead to an expectation that the market, regulators, government or a combination of all of these will step in and produce a workaround, which will avoid the need to tackle the issue when there are no doubt more pressing matters higher up the agenda. Of course, the UK regulators have been at pains to warn all firms that LIBOR will cease and that gambling on external forces solving the problem is not the right move.
Despite this and with the end of LIBOR still 2 years away, depending on the scale of the organisation, a “wait and see” strategy appears an understandable one to adopt; but it is not without risk.
The fact is that international banks have commonly used English law documents including LIBOR provisions (usually based on LMA or APLMA standards) for loans all over the world, even where there is no substantive connection with the UK. The effect of the end of LIBOR on those documents will be a matter of English law and it is vital that international banks understand the implications so that they can at the very least understand the risks associated with a “wait and see” policy. Head offices of international banks may not face the direct level of scrutiny of the UK/EU or US regulators that their branch offices face, but they cannot escape the need to understand and engage with the underlying challenges.
What are the challenges?
The implications of the end of a rate which underpins so many loans, as well as other financial products and contracts, is multi–faceted and listing them all would be a major undertaking. In terms of loans though, it is worth highlighting a select few:
- Any LMA based loans maturing after 31 December 2021 will need to be amended to transition to the appropriate chosen alternative rate (whether a risk free rate (RFR), fixed rate or base rate). Whether these legacy loans adopt the latest LMA wording or not, this will usually require the agreement of the borrower (and potentially other lenders and counterparties depending on the structure of the loan). The re-papering exercise in itself could amount to a significant project, particularly when the amendments required switch from a forward looking rate to a backwards one are not insignificant: this is not a case of swapping a LIBOR definition for a SOFR one.
- The scale of the challenge will depend on the size of the legacy loan book and the likelihood of borrowers cooperating. There are reasons why they might not – particularly if they see that the margin is increased to take account of any price adjustment between LIBOR and RFRs/base rates. In terms of cost, lenders should not assume that the costs of amendment can be passed on to the borrower – this may well not be covered under the indemnities in the loan agreement.
- The risks of a do-nothing approach are potentially high – existing fall-back language in the LMA documents is intended for a short term outage of the LIBOR screen rate – it is not appropriate for permanent discontinuance. Lenders who do nothing may be subject to claims from borrowers that, for instance, the end of LIBOR amounts to a frustration of the loan contract bringing it to an end, or litigation over the calculation of interest based on the lender’s calculation of cost of funds.
- Switching from a forward-looking rate to base rate or to an RFR will entail significant adjustment in terms of the back office functions and processes required. This could take time and require training and testing in advance.
- Any hedging will need to be taken into account in switching to an RFR or base rate.
There are many more challenges ahead. The dire warnings from regulators and commentators alike are undoubtedly well founded. The end of LIBOR presents a massive challenge to lenders and the market as a whole.
What should banks be doing?
The message from the UK regulator couldn’t be clearer: lenders should be taking steps now. In this context, most firms in the UK have been asked to produce details of their respective LIBOR exposure by 31 December 2019. A clear marker has also been put down that new LIBOR issuances should not be made after Q3 2020. Most LIBOR related articles culminate with the now-familiar warnings if immediate steps are not taken.
But how should international banks approach this? There is always the risk that a huge amount of time and costs is expended at a time when so much is unknown.
Lenders do appear to be in a difficult position. On the one hand they are being told that they should not anticipate that LIBOR will continue and that they should take immediate action to transition, but there is currently no “oven ready” infrastructure for RFRs to switch to. Term RFRs do still remain a possibility, but the leaders in the loan markets are a long way off blazing a trail to show how it should be done.
Faced with this, international banks, often with more modest resources, are quite understandably being cautious about expending time and effort now. The dire warnings do not necessarily apply to all lenders in the same way – how a firm reacts will depend on its size, location, the nature of the loans etc. Perhaps it is time therefore to differentiate between firms and how they should respond.
Taking steps does not necessarily mean launching into a massive re-papering exercise straight away. There are steps that can and should be taken sooner rather than later which do not necessarily involve incurring significant costs. Although the approach of each lender will be different, these should include the following:
- Identify the extent of LIBOR exposure – obviously this will cover LIBOR loans but should extend to other contracts and products which are LIBOR based.
- Document extraction – one common issue faced is finding the documents which reference LIBOR to establish what the terms are. While most will have been written on standard templates, there will be variances. Before any analysis can be undertaken, lenders need to identify and get hold of the relevant documents but that document extraction is likely to be challenging and time consuming.
- Project Team – establish a project team including the appropriate parts of the business and with senior leadership to ensure that it is sufficiently empowered to take the steps required.
- Transition Plan – draw up project plans for transition covering all the business areas effected, responsibilities, timings/milestones and steps required.
- Communicate – if there is a lower level of understanding of the implications of LIBOR’s demise in some quarters in the international bank community that is likely to be the case amongst borrowers as well. Lenders should therefore be considering alerting borrowers to the issue now so that, when more proactive steps are required, it should at least be a simpler conversation to have. This will apply to existing borrowers with LIBOR loans but also new borrowers.
- New terms – with new/refinancing borrowers, if new loans are on LIBOR, consider the terms with the borrower’s lawyers: hardwiring fall-backs, including indemnities etc.
- Understand the implications – probably most importantly for the international banks who may be waiting for a cue from the bigger market players, understand their own challenges associated with LIBOR and keep a very close eye on developments.
There are many questions that currently remain unanswered. The FCA will likely continue its engagement with firms as the end of LIBOR draws closer, but it remains unclear to what extent they will provide additional guidance and support. What is clear, is that the FCA expect firms to start making decisions and implementing their LIBOR transition strategies now, in readiness for the significant impact this change is likely to have on the industry.
So far, the financial services industry has been holding its breath waiting for the outcome of Brexit negotiations, regulatory changes and the recent general election in the UK. However, it’s now essential for banks to take proactive steps to ready themselves, identify their LIBOR exposure, and implement smart solutions to minimise business disruption during the impending transition.
U.S. inauguration turns poet Amanda Gorman into best seller
WASHINGTON (Thomson Reuters Foundation) – The president’s poet woke up a superstar on Thursday, after a powerful reading at the U.S. inauguration catapulted 22-year-old Amanda Gorman to the top of Amazon’s best-seller list.
Hours after Gorman’s electric performance at the swearing-in of President Joe Biden and Vice President Kamala Harris, her two books – neither out yet – topped Amazon.com’s sales list.
“I AM ON THE FLOOR MY BOOKS ARE #1 & #2 ON AMAZON AFTER 1 DAY!” Gorman, a Los Angeles resident, wrote on Twitter.
Gorman’s debut poetry collection ‘The Hill We Climb’ won top spot in the online retail giant’s sale charts, closely followed by her upcoming ‘Change Sings: A Children’s Anthem’.
While poetry’s popularity is on the up, it remains a niche market and the overnight adulation clearly caught Gorman short.
“Thank you so much to everyone for supporting me and my words. As Yeats put it: ‘For words alone are certain good: Sing, then’.”
Gorman, the youngest poet in U.S. history to mark the transition of presidential power, offered a hopeful vision for a deeply divided country in Wednesday’s rendition.
“Being American is more than a pride we inherit. It’s the past we step into and how we repair it,” Gorman said on the steps of the U.S. Capitol two weeks after a mob laid siege and following a year of global protests for racial justice.
“We will not march back to what was. We move to what shall be, a country that is bruised, but whole. Benevolent, but bold. Fierce and free.”
The performance stirred instant acclaim, with praise from across the country and political spectrum, from the Republican-backing Lincoln Project to former President Barack Obama.
“Wasn’t @TheAmandaGorman’s poem just stunning? She’s promised to run for president in 2036 and I for one can’t wait,” tweeted former presidential candidate Hillary Clinton.
A graduate of Harvard University, Gorman says she overcame a speech impediment in her youth and became the first U.S. National Youth Poet Laureate in 2017.
She has now joined the ranks of august inaugural poets such as Robert Frost and Maya Angelou.
Her social media reach boomed, with her tens of thousands of followers ballooning into a Twitter fan base of a million-plus.
“I have never been prouder to see another young woman rise! Brava Brava, @TheAmandaGorman! Maya Angelou is cheering—and so am I,” tweeted TV host Oprah Winfrey.
Gorman’s books are both due out in September.
Third on Amazon’s best selling list was another picture book linked to politics and projecting hope: ‘Ambitious Girl’ by Vice-President Kamala Harris’ niece, Meena Harris.
(Reporting by Umberto Bacchi @UmbertoBacchi, Editing by Lyndsay Griffiths. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers the lives of people around the world who struggle to live freely or fairly. Visit http://news.trust.org)
Why brands harnessing the power of digital are winning in this evolving business landscape
By Justin Pike, Founder and Chairman, MYPINPAD
Delivery of intuitive, secure, personalised, and frictionless user experiences has long been table stakes in digital commerce, well before the era of COVID-19. As businesses harness the revolutionary power of digital technologies, they have pursued large-scale change to adapt to evolving consumer preferences (some more successfully than others, but that’s a blog for another day). Digital transformation is a term we hear repeatedly, and it looks different for each organisation, but essentially, it’s about utilising technology and data to digitise, automate, innovate and improve processes and the customer experience across the entire business.
As I said, this was already well underway but then came 2020 and no industry escaped the disruption of the coronavirus outbreak, which has had an indelible impact on businesses performance, operations, and revenue. Regardless of whether the impact of COVID has been very positive or very challenging, it has forced organisations globally to re-evaluate and re-orient strategies to adapt.
As lockdowns and pandemic-related restrictions continue to change daily life, this raises the question of how we can balance a dramatic shift to digital and the benefits it brings, while ensuring business continuity and innovation both during and post-COVID, and protecting everyone against fraud?
Digital is an essential survival tool, and even more so in a COVID world
No one could have predicted the dramatic digital pivot that has taken place over this year. Indeed, within weeks of the COVID outbreak cash usage in the UK dropped by around 50%. Digital solutions including delivery applications, contactless payments, mobile commerce, online and mobile banking have become essential components of a touchless customer experience in the era of social distancing. It’s no longer just about an enhanced and superior customer experience, it’s also about health, safety and survival.
In store, businesses have benefited from contactless payments enabling faster throughput and reduced need for consumers to touch payment terminals (therefore requiring greater cleaning, which degrades the hardware much faster). Mastercard reported a 40% increase in contactless payments – including tap-to-pay and mobile pay – during the first quarter of the year as the global pandemic worsened. Digital has also become an essential sales channel for many B2C brands. Where brick and mortar stores have been required to close, digital commerce enables continuity of customer relationships and revenue. This channel also provides brands with rich customer data, which can be used to enhance and personalise the customer experience and typically results in greater levels of engagement and uplifts in revenue.
Industry forecasts estimate that worldwide spending on the technologies and services enabling digital transformation will reach GBP 1.8 trillion in 2023 – a clear indication that the process represents a long-term investment and a global commitment to digital-first strategy. The key point here is that digital brings significant benefits, and regardless of COVID, is here to stay.
The challenges that rapid digital transformation brings to businesses
Regardless of whether businesses are operating in developed or less-developed economies, these times of crisis have levelled the playing field in the sense that all businesses are facing similar issues. Access to products and supplies, maintaining customer relationships, accelerating sales for some and declining sales for others, health and hygiene are just a few of the unique challenges brought about by COVID.
Many businesses in physical environments have had to swiftly implement changes to significantly reduce safety risks for staff and customers, such as contactless payments, mobile ordering and delivery options. But with these changes come a host of other benefits of digitisation, such as faster transactions, and reduced human error at the point-of-sale.
The reliance on technology, however, can also expose organisations and consumers to certain vulnerabilities. In particular, the risks of fraud and cybercrime have dramatically increased since the onset of the pandemic as scammers have taken advantage of digital technologies to target both businesses and individuals.
As a McKinsey report illustrates, new levels of sophistication in the activities of fraudsters have placed more pressure on companies that have been previously slow to go digital, bringing “into sharp relief how vulnerable companies really are”, and damaging the financial health of small and large businesses. In fact, the Bottomline 2020 Business Payments Barometer reveals that only one in 10 small businesses across the UK report recovering more than 50% of losses due to fraud.
But take these stats with a grain of salt. While it is important to be aware of the risks and challenges this new business landscape brings, it’s equally as important to have a lens firmly across your own business, industry and audience, and to identify the changes you can make internally to mitigate risk as well as improve your customer experience. Where can you make some quick wins? Do you have the right skillsets internally to achieve what you need to achieve? What technology is out there that will enable your business goals? There are tech companies like MYPINPAD that are making huge strides in software development, which will transform businesses globally.
A digital world post-COVID
Almost a year in, the line between business success and failure remains fragile. However, an ongoing transition towards greater digitisation will be the difference between survival and the alternative.
There is a wide range of initiatives businesses can implement to weather this storm. If we look at the space MYPINPAD operates within, secure digital consumer authentication is crucial to the ongoing success and security of not only financial products but also identification and verification across a range of different industry verticals. Shifting the authentication of consumers securely onto mobile devices enables businesses to completely reshape their customer experiences. By bringing together a more seamless, frictionless customer experience, accessibility, privacy, security and access to consumer data, businesses are able to drive digital transformation across day-to-day activities.
Against this backdrop, software with stronger security standards continue to play an ever more vital role in supporting society, protecting consumers and businesses from the increase in risks that rapid digitisation brings. Already, merchants can deploy PIN on Mobile technology from companies like MYPINPAD, onto their smart devices to speed up the digitisation process many are now tackling.
Essentially, opening up universal payments and authentication methods that feel familiar, for both online and face-to-face transactions, will be key to opening up a world of possibilities when it comes to redefining how businesses engage with consumers.
Brexit responsible for food supply problems in Northern Ireland, Ireland says
LONDON (Reuters) – Food supply problems in Northern Ireland are due to Brexit because there are now a certain amount of checks on goods going between Britain and Northern Ireland, Irish Foreign Minister Simon Coveney said.
British ministers have sought to play down the disruption of Brexit in recent days.
“The supermarket shelves were full before Christmas and there are some issues now in terms of supply chains and so that’s clearly a Brexit issue,” Coveney told ITV.
The Northern Irish protocol means there are “a certain amount of checks on goods coming from GB into Northern Ireland and that involves some disruption,” he said.
(Reporting by Guy Faulconbridge; Editing by Tom Hogue)
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