Since the outbreak of Covid-19, there have been huge challenges for many businesses, with accountants playing a critical role in helping them navigate the uncertainties. Amongst this disruption, one significant change which may have slipped off some businesses’ radar is the discontinuation of LIBOR (the London Interbank Offered Rate), and deadlines are imminent.
As you are probably aware, public authorities globally have announced that LIBOR, a series of benchmark reference rates used for calculating interest rates for financial products, is no longer sustainable and the market should move to robust alternative rates.
In the UK, the Bank of England and the Financial Conduct Authority (FCA) have set out the need for this transition, and from April 2021 lenders will no longer be able to offer new sterling loans linked to LIBOR, and any existing LIBOR based loans will need to be switched by 31 December 2021.
This will affect a significant proportion of British businesses in some way. LIBOR is found in commercial loans, leasing and servicing contracts, discount rates used in valuations and company pension schemes.
The transition will have implications ranging from the way businesses finance themselves, to potential impacts on accounting systems and tax. Many businesses may now need support in understanding how the transition could affect the payment or receipt of interest after the end of 2021, the legal position of a new contract, and the nature and impact of the new alternative rates.
Replacements for LIBOR will be quite differently constructed. For example, the main alternative rate that may be used to replace LIBOR, particularly for medium to large businesses, is SONIA (Sterling Overnight Index Average). Whilst LIBOR is available as a forward-looking term rate for different tenors, for example one month, or three months, SONIA is a backward-looking overnight rate.
For smaller businesses, other rates such as Bank of England Base Rate may be offered, but this too is constructed differently to LIBOR. For example, unlike LIBOR, it does not include any term bank credit risk or liquidity premium.
The practical challenges when taking out new lending on alternative rates to LIBOR or transitioning existing contracts, are not insignificant. Additionally, lenders are now starting to contact clients to discuss contracts and new rates, so businesses need to be prepared.
To help with this preparation, ICAEW and UK Finance, working alongside the CBI, ACT and LMA, have developed a new simple introductory guide which can be given to clients and also used by any accountants or advisers of businesses who are not yet familiar with the transition. The guide sets out what is happening, helps businesses understand if it affects them, what they need to do and where they can go for further information.
Accountants and advisers have a very important role at the centre of this transition and can help secure the best outcomes for businesses and clients. Now is the time for both accountants and businesses to put LIBOR on their list of priorities for 2021.
For more information, please visit the Institute of Chartered Accountants in England and Wales’ webpage on LIBOR transition or in addition to its introductory guide, please also see UK Finance's detailed guide on the discontinuation of LIBOR.