UK Finance provides more support resources for small and medium sized businesses for a smooth transition from LIBOR to alternative and more robust rates
In 2017, the Financial Conduct Authority (FCA) announced that LIBOR (London Interbank Offered Rate), the most common benchmark that lenders use to calculate interest rates for financial products in the UK, was no longer sustainable and the market should move to robust alternative rates by 31 December 2021.
The end of sterling LIBOR in its current form at the end of 2021 represents a significant change for some business borrowers, and a new survey by UK Finance has found that with less than six months to go, a quarter of businesses (25%) may be unsure if they have a loan or contract linked to LIBOR that could be affected.
In the UK, the Bank of England and FCA have set out the need for this transition. The replacement near ‘risk free rate’ is called ‘SONIA’ (Sterling Overnight Index Average), calculated on actual (and not predicted) transactions. Other rates will also be available including fixed rates and the Bank of England policy rate, known as the bank rate or base rate.
As part of this transition process, UK Finance launched an introductory guide in February to help small businesses understand what was happening and what members may need to do if they or their clients would be impacted.
The pace for transition has been set by a Working Group on ‘Sterling Risk-Free Reference Rates’, consisting of lenders, regulators, borrowers and trade associations. Banks and lenders are now increasing communications with all business customers, looking to transition as many contracts as possible before the end of September, in line with the milestone from the Working Group which is supported by the FCA and Bank of England.
UK Finance has now launched a new LIBOR transition SME resource, which signposts businesses to all the key information available and hopefully provides a useful place for any clarity needed on the LIBOR transition.
While the transition doesn’t affect all, or even most, smaller businesses, members should ensure that those who are affected have the right support and can take action well before the deadline.
For example, as a result of Covid-19 disruption, many businesses will have accessed borrowing through UK government lending schemes. The guidance clarifies that borrowing under the Bounce Back Loan Scheme (BBLS) is not impacted by this change. However, borrowing under the Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Larger Business Interruption Loan Scheme (CLBILS) may be linked to LIBOR but is likely to include terms setting out what will happen to loans when LIBOR ceases. If there are any doubts, it would be best to check with the bank or lender.
Over the coming months banks and lenders will be increasing communications with their customers who have products linked to LIBOR to engage with them on the actions required, such as moving contracts onto replacement rates by the end of Q3 2021 where possible. An increasing number of SMEs will want and need information to help them respond.
Therefore, in the coming weeks and months, businesses are likely to need more support in understanding the different rates and the impact of a change in rate to their contracts. For many this support will be from their accountants and advisers, who will be playing a crucial role in guiding clients through this.
An encouraging result from the UK Finance survey showed that, of the businesses which knew they have a LIBOR linked product, 82% feel very or fairly confident they will be ready for the LIBOR transition on 31 December. Knowledge is key to confidence.
The important thing now is for any business which has a financial product that could be affected is to check for LIBOR exposure, review the impact this might have, make a plan, and speak to their bank, lender or adviser if they have any questions. With less than six months to go, the time to act is now.
Additional resources
ACCA's Technical factsheet: LIBOR transition – SME frequently asked questions
The Working Group on Sterling Risk-Free Reference Rates has also produced a swathe of information for businesses.