Senior managers to have bonuses linked to success of LIBOR transition

On 26 March 2021, the FCA and the PRA published the latest in the growing list of “Dear CEO” letters.  This letter addresses the “Transition from LIBOR to Risk Free Rates”.

Firms are reminded of the fact of LIBOR cessation and the various deadlines that exist.  The letter sets out a number of priority areas where the PRA/FCA considers that further action by firms is necessary in order to prepare for LIBOR cessation.  These include:

  1. Cessation of new sterling LIBOR business milestones,
  2. Systems readiness for LIBOR cessation,
  3. Active transition of legacy LIBOR exposures,
  4. Conduct risk mitigation,
  5. Development of RFR markets,
  6. Model changes, and
  7. Selection of appropriate alternatives to LIBOR.

However, firms are warned that this list is not exhaustive.  Instead, responsible Senior Managers must determine the specific actions that are necessary in order for their firm to implement an orderly transition away from LIBOR which mitigates risk, ensures good client outcomes and preserves market integrity.

And now for the sting in the tail…

The PRA/FCA expects that LIBOR transition will form part of the performance criteria for determining the variable remuneration of Senior Managers.

Moreover, the PRA/FCA is quite upfront in stating that it will use information from firm meetings and relevant MI to assess firm’s progress on this front.  They warn that they “are keeping a range of supervisory tools under review for use where we see either insufficient progress, or incidents of poor risk management or governance of transition”.

So, Senior Managers who want to keep both their reputation and their bonuses intact should take heed.  No firm can guarantee an outcome, but this letter should focus minds on the need to develop and implement a well-documented process.  Robust record-keeping will be key.  Having an undocumented process is as bad as having no process at all.

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