Global financial regulators have issued more than $26B in market conduct fines to financially regulated institutions and individuals since 2012 and market abuse fines have accounted for more than 70%.[i] Although financial institutions have learned to navigate uncertainty and manage the complex risks associated with market conditions, the House Financial Services Committee’s Congressional Hearings continue to suggest that firms struggle to address the critical issue of conduct risk. As the world embarks on the monumental shift away from LIBOR, regulators are monitoring how firms manage risk and the transition’s effect on all impacted customers and broader stakeholders more closely than ever.
![Source: Corlytics [i]](https://images.squarespace-cdn.com/content/v1/5121ad1ce4b08a7615935933/1585700617015-5TWYMNBIGRUZR8TTLMC0/LIBOR+Fines.jpg)
Source: Corlytics [i]
LIBOR Transition
Of the most notable market abuse fines, the response to the LIBOR manipulation scandal uncovered in 2012 has arguably had the greatest impact on the financial services industry. This scandal served as one of the catalysts that led the UK Financial Conduct Authority (FCA) to declare that LIBOR publication will not be guaranteed beyond 2021. By now, many of the world’s leading financial institutions have begun preparations for the discontinuation of LIBOR by establishing LIBOR transition offices, assessing the impact to their businesses, and putting plans in place to manage this complex, industry-wide transformation. Despite this, regulators have been vocal about accelerating progress and many questions about how to transition customers remain.
Conduct Risk
Broadly speaking, conduct risk refers to the actions and decisions of the firm that could have an adverse effect on a customer. This risk can arise in many different ways while transitioning from LIBOR to risk-free rates, but a lack of clear communication and an unclear or delayed transition plan could spell disaster for firms. To curtail potential pitfalls and the need for enforcement actions, the FCA recently published “Questions and answers for firms about conduct risk during LIBOR transition” and highlighted several key areas that firms must consider as they move forward with this transition.[ii] Program leaders in all firms must be diligent in monitoring and mitigating risk in their LIBOR transition plan. The underlying concept is simple—firms must take reasonable steps to treat customers fairly—but the potential for missteps remains. Using the FCA’s Q&A, our team created a checklist to help our clients manage conduct risk and avoid regulatory inquiries as to whether customers were treated fairly.
Conduct Risk Management Checklist for LIBOR Transition
While LIBOR transition presents significant challenges, firms that understand the requirements and act appropriately stand to mitigate the risk of fines and litigation and increase market share by attracting new customers. Developing new products and solutions to solve for the new rates is imperative to a successful transition but enabling positive customer experiences has the potential for a much more significant impact.
About Monticello
Monticello consultants have extensive experience in the implementation of large-scale regulatory initiatives. Our firm understands the importance of diligent analysis, program management, and collaboration across teams within major financial institutions and across the industry. Our current work on LIBOR Transition, Uncleared Margin Rules (UMR), Qualified Financial Contract (QFC) Record Keeping and US Stay regulations demonstrates the important regulatory expertise our consultants bring to our clients. Our teams possess deep knowledge of capital markets instruments, legal agreements and operational processes, as well as the related data and information systems impacts that will be in focus for the migration to RFRs. Monticello teams are dynamic, flexible, and highly motivated to assist you in your transition to a post-LIBOR future.
[i] Financial Conduct Authority. “Conduct Risk during LIBOR Transition.” <https://www.fca.org.uk/markets/libor/conduct-risk-during-libor-transition> Accessed Mar 24, 2020.
[ii] Corlytics. “The Corlytics Barometer – The market conduct landscape (2012 – Q3 2017).” <https://www.corlytics.com/wp-content/uploads/2018/06/Corlytics_market_conduct_report_2012-q32017.pdf> Accessed Mar 24, 2020.
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Robert Farnham
Senior Manager