Other parts of this series:
Financial firms should address specific LIBOR-related concerns that could cause customers harm.
Our first post in this two-part series reviewed the communications challenges associated with mitigating LIBOR conduct risk. As the LIBOR transition deadline approaches, some financial services firms—notably large corporates—are leading the market and actively transitioning, while others—including small and medium enterprises, face challenges as the navigate away from LIBOR.
Supervisors, including the Financial Conduct Authority1 (FCA), have homed in on conduct risk as one element needing consideration. The Association for Financial Markets in Europe (AFME) and the Fixed Income, Currencies and Commodities Markets Standards Board (FMSB) have, independently, published guidelines for tackling conduct risk2 in the contest of the Interbank Offered Rate (IBOR) transition.
What the supervisors say
For review, the five areas of guidance covered by the AFME3 include:
- Establishing a client communications strategy
- Content of client communications
- Methods and timing of client communications
- Training and internal communications
- Monitoring and record keeping
The rationale for heavy focus on communications in the context of conduct risk is simple: Communications can be both a source and mitigant of conduct risk because it represents the touchpoint between firms and clients/counterparties. A prime example would be outreach communicating a client’s options regarding the transition of an existing product to a risk free rate (RFR).
The FMSB paper examines conduct risk using a wider lens, touching on subjects such as risk identification and governance, but likewise emphasises the importance of communications.4
Common themes for both papers are the need for appropriate, comprehensive and timely communications—making sure clients and counterparties are furnished with the right information (as appropriate to their needs and the product(s) in question), at the right time.
So, what should financial services firms do?
The FCA directs financial services to “…consider whether any LIBOR-related risks are best addressed within existing conduct risk frameworks or need a separate, dedicated program.”5 Supervisors aren’t necessarily expecting financial services to reinvent the conduct risk wheel; rather, that they kick the tires to develop a programme that considers the real and specific concerns originating from the transition which could cause customer harm.
This means really understanding who your customers are and designing an awareness and learning campaign approach to explain change.
The checklists in the AFME paper and commentary in the FMSB paper serve as a helpful starting point. In the context of communications with the SME, this means really understanding who your customers are and designing an awareness and learning campaign approach to explain change (wording of the message, delivery method, follow up approach and timing, as well as a product transition strategy and execution approach).
Consideration should be given to how to best train staff (especially in the remote working world) to allow them to explain this change in language that is readily accessible, as well as how to deal with the human nature of firms deferring engaging with this change to a date that is too late to allow the SME to proactively manage it.
The earlier financial services firms start to help customers understand the expected changes, the resulting impacts and the possible solutions available to them, the more likely they are to address these changes and introduce the right products.
How we can help
Accenture can support firms in their communication outreach efforts in these areas:
- Perform (or test existing) product-level conduct risk assessment: Identify conduct risks by leveraging data such as client profiles, product/documentation features and exposures. This can help prioritize high-risk areas and drive communication and outreach planning/execution.
- Communications and client outreach plan definition and delivery: Draft and execute an internal/external communication plan, including client outreach. This can support customer product transition.
- Tailored training for colleagues to understand and communicate the change effectively, as well as handling customer apathy to support effective transition: This can help colleagues to support customers and deliver on their best interests.
Please feel free to reach out to us if you would like to discuss further.
- “Conduct risk during LIBOR transition: Questions and answers,” Financial Conduct Authority, 19 November 2019. Access at: https://www.fca.org.uk/news/statements/conduct-risk-during-libor-transition-questions-and-answers.
- “LIBOR Transition: Managing the Conduct and Compliance Risks,” Association for Financial Markets in Europe, June 2020. Access at: https://www.afme.eu/Portals/0/DispatchFeaturedImages/20200623%20SS_AFME%20LIBOR%20Transition_Managing%20the%20Conduct%20and%20Compliance%20Risks_client%20communications-2.pdf. “LIBOR transition – Case studies for navigating conduct risks,” The Fixed Income, Currencies and Commodities Markets Standards Board, June 2020. Access at: https://fmsb.com/wp-content/uploads/2020/06/libor-transition-case-studies-for-navigating-conduct-risks.pdf.
- “LIBOR Transition: Managing the Conduct and Compliance Risks,” Association for Financial Markets in Europe, June 2020. Access at: https://www.afme.eu/Portals/0/DispatchFeaturedImages/20200623%20SS_AFME%20LIBOR%20Transition_Managing%20the%20Conduct%20and%20Compliance%20Risks_client%20communications-2.pdf.
- “LIBOR transition – Case studies for navigating conduct risks,” The Fixed Income, Currencies and Commodities Markets Standards Board, June 2020. Access at: https://fmsb.com/wp-content/uploads/2020/06/libor-transition-case-studies-for-navigating-conduct-risks.pdf.
- “Conduct risk during LIBOR transition,” Financial Conduct Authority, 19 November 2019. Access at: https://www.fca.org.uk/markets/libor/conduct-risk-during-libor-transition.