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Does your business have a LIBOR transition plan?

4 March 2020: the Bank of England has pronounced 2020 as the “year for action” in relation to LIBOR transition following slower than hoped for progress in 2019. Don’t delay in acting.

In a speech on 26 February, Andrew Hauser, Executive Director, Markets, at the Bank spoke about the urgent need to raise awareness about LIBOR transition among end users – business and individuals who have financing connected to LIBOR in the form of loans or derivatives.

In quarter three of this year, banks and other financial institutions are expected to stop issuing financial products referencing LIBOR which mature after 2021. This means companies should look at their financing needs for the year and assess when they will be affected by these changes and work with their current providers to understand what this could mean, as interest rates will change.

The GBP replacement rate is SONIA, which is calculated differently to LIBOR, based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions. As it is an overnight rate, there is still work to be done by the Bank of England and others to work out how the rate will be used in contracts of different durations using compounded SONIA. This is expected to become clear following a consultation by the Bank of England which concludes in early April.

Businesses also need to look internally at where they might use LIBOR – for example in intercompany borrowing and transfer pricing arrangements. It could also pop up in unexpected placed, like rental agreements, insurance policies and other contracts. Even straightforward tasks like accessing and taking stock of your various agreements which may reference LIBOR will take time and planning, and companies should not wait to start this work.

It is primarily your banks’ responsibility to communicate these changes and the timetable, but businesses should also prepare on their own terms, should they want to reassess their financing needs and options in light of this change.

ICAEW has a range of resources available on our LIBOR transition hub. The hub will continue to be updated throughout the year.