Critical Benchmarks (References and Administrators’ Liability) Bill [HL]
Wednesday 13th October 2021
(3 years, 1 month ago)
Lords ChamberCritical Benchmarks (References and Administrators’ Liability) Act 2021 View all Critical Benchmarks (References and Administrators’ Liability) Act 2021 Debates Read Hansard Text Read Debate Ministerial Extracts
The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)
My Lords, through this Bill, the Government are supporting the transition away from Libor by providing further legal certainty for contracts that rely on Libor past the end of this year.
This Bill builds on the Financial Services Act 2021, which provided the Financial Conduct Authority with powers to effectively oversee the cessation of a critical benchmark in a manner that protects consumers and minimises disruption to financial markets. In particular, it draws on the work and engagement of my noble friends Lady Noakes and Lord Blackwell, who proposed amendments to that Act which are similar to the provisions in this Bill. I thank them for their constructive engagement on this issue.
I will first take a few minutes to put the Bill in context and to explain the connection to the Act passed by Parliament earlier this year. A benchmark is an index in a wide range of markets to help set prices, measure performance or establish what is payable in financial contracts. Libor is one such benchmark. It seeks to measure the cost that banks pay to borrow from each other in different currencies and over various time periods. It is calculated using data submitted by a panel of large banks to Libor’s administrator, the IBA.
Libor is used in a huge volume and variety of contracts, including in derivatives markets, mortgages, consumer loans, structured products, money market instruments and fixed income products. For example, a simple loan contract may say that the interest payable is Libor plus 2%. In this example, Libor represents the cost to the lender of getting access to the money to lend it out, and the 2% represents the additional risk to the lender associated with making the loan.
Libor was designated as a critical benchmark. This reflects the fact that it is systemically important. Libor is referenced in approximately $300 trillion of financial contracts globally but, from the end of this year, the FCA has said it is clear that Libor will no longer represent the interbank lending market it seeks to.
There is significant history to this. As many will remember, in 2012 it emerged that the Libor benchmark was being manipulated for financial gain. Following the subsequent Wheatley review, Libor came under the jurisdiction of the FCA in 2013. Significant improvements to the regulation and governance of Libor have been made since the Libor scandal. However, in 2014 the G20’s Financial Stability Board declared that the continued use of these kind of rates, including Libor, represented a potentially serious source of systemic risk. The FSB said that financial markets should voluntarily transition towards the use of more robust and sustainable alternatives.
This is because Libor has become increasingly reliant on expert judgments rather than real transaction data, due to the structural decline in the frequency of banks borrowing from each other through the unsecured wholesale lending market. The market that the benchmark seeks to measure increasingly no longer exists. This underscores the fundamental need to transition away from Libor.
Since the FSB’s recommendation, the Government, the FCA and the Bank of England have worked together to support a market-led transition away from use of the Libor benchmark. Primarily, they have pushed contract holders to voluntarily move to robust alternatives before the end of this year, in accordance with guidance from the FCA and the Bank of England. The vast majority of contracts are expected to make this transition away from Libor without any government intervention. We expect 97% of all sterling Libor-referencing derivatives to have transitioned by the end of the year.
However, despite this extensive work and progress, there remains a category of contracts that face significant contractual barriers to moving away from Libor by the end of this year. The measures in the Financial Services Act 2021 sought to provide a safety net for these “tough legacy” contracts. Through the Act, the Government granted the FCA powers to “designate” a critical benchmark if it determines that the benchmark no longer accurately represents what it seeks to measure. The Act also provided the FCA with powers to require the administrator of such a designated benchmark to continue to publish it and to change how the benchmark is calculated.
In the case of Libor, the FCA has announced that it will use these powers to compel the continued publication of Libor using a revised methodology, referred to as “synthetic Libor”. The FCA has done this so that these tough legacy contracts can continue to function. They will have a Libor rate to refer to in its synthetic form, providing for the benchmark to cease in an orderly manner. It is important to emphasise that this synthetic rate is a temporary safety net for those legacy contracts that have not been able to move away from Libor in time for year end. It is not intended to replace Libor in the long term.
The Bill is vital to support the use of the synthetic rate. Clause 1 provides explicitly that Libor-referencing contracts can rely on synthetic Libor. This is covered in the new Articles 23FA and 23FB. Specifically, where the FCA imposes a change in how the benchmark is determined, such as a synthetic methodology, the Bill is clear that references to the benchmark in contracts also include the benchmark in its synthetic form. In the case of Libor wind-down, this means that where a contract says “Libor”, that should be read as referring to synthetic Libor. The effect of that is to provide legal certainty for those contracts that now reference synthetic Libor.
The Bill also provides a narrow and targeted immunity for the administrator of the critical benchmark for action it is required to take by the FCA. This includes where it is required to change how a critical benchmark is determined, such as a change in the benchmark’s methodology. This will protect the administrator from unmerited and vexatious legal claims. The Government have done this in the narrowest way possible. This does not protect the administrator in any area where they act with discretion. It protects the administrator only to the extent that it is acting purely on a direction from the FCA. It also does not in any way change the ability to challenge the FCA; its decisions on setting a synthetic methodology are subject to challenge on the usual public law grounds.
The Bill reaffirms the Government’s commitment to protecting and promoting the UK’s financial services sector. As the global home of Libor, having a clear legal framework and process in place for the Libor wind-down will further underpin our position as a global financial hub. However, I understand that some are concerned that the synthetic methodology may result in a rate higher than the current Libor rate. That is not an issue for the Bill, which does not seek to instruct the FCA on how this synthetic rate should be constructed. That role has already been delegated to the FCA under the Financial Services Act 2021.
It is appropriate that the FCA takes these technical decisions. Indeed, our regulatory system often sees independent bodies empowered to produce calculations which reflect and influence economic reality, such as the Bank of England setting interest rates. It is vital that the FCA is able to create the methodology free of political interference.
I understand concerns about the possible retail impacts of Libor transition and would like to try to address these. First, I remind noble Lords that Libor is primarily the preserve of sophisticated financial operators, not retail investors. The vast majority of Libor contracts are derivatives. These are sophisticated financial products and 95% of these will transition away from Libor voluntarily.
Secondly, synthetic Libor is a last resort. The regulators have been working with the market to encourage operators to move to alternative rates for several years. The vast majority of contracts will not need to use this synthetic rate at all. Thirdly, the FCA’s approach is entirely in line with the global consensus among industry and regulators internationally.
However, I am sympathetic to concerns raised by some noble Lords about the impact this could have on some mortgage holders. I remind noble Lords that the Financial Services Act 2021 allows the FCA to impose a synthetic methodology only if it considers it desirable to do so to protect consumers or to protect and enhance the integrity of the UK’s financial system. The FCA’s proposals have been approved by its statutory consumer panel.
The FCA’s synthetic rate seeks to provide a reasonable and fair approximation of what Libor would have been had it continued to be based on panel bank contributions, while removing a major factor in the volatility of the rate. This is to the benefit of mortgage holders and other retail borrowers, who will no longer be exposed to perceived changes in bank creditworthiness or liquidity conditions in wholesale funding markets.
Today’s Libor rate is at historic lows, but it can fluctuate significantly. Three-month sterling Libor has varied from 0.28% in September 2017 to 0.92% at the end of December 2019 and is now 0.09%. The FCA’s synthetic methodology will protect contract holders from these large swings. We do not know precisely what the difference between synthetic Libor on 4 January 2022 and panel bank Libor on 31 December 2021 will be. We can reasonably expect that it will remain at a historic low when the synthetic methodology is imposed and that contracts referring to this rate will be protected from large swings in the Libor rate.
Finally, only a relatively small number of mortgages use Libor in the UK—around 200,000 out of some 11 million. It is much more usual for a mortgage to reference the Bank of England base rate. The FCA estimates that only around half of these 200,000 mortgages are residential; the rest are buy-to-let mortgages. The FCA expects that the majority of these mortgages will transition away from Libor before the end of the year and so never use the synthetic rate.
Customers holding Libor-referencing mortgages should speak to their lender to switch to an alternative rate. The FCA does not expect firms’ transition efforts to result in worse customer outcomes than would be achieved through synthetic Libor, given the clear market consensus on fair replacement rates that has been established in the market for some time. The FCA would pay close attention to any evidence or feedback suggesting the contrary and take the necessary action to intervene.
The approach the FCA has taken produces a fair approximation of the Libor rate and is the best thing for any consumers or businesses which will need to rely on this rate. The alternative is having no rate at all or being put on an unsuitable fallback rate, which may well be designed for a different situation, such as a short-term problem with publishing Libor.
The Bill supports the wind-down process. It ensures that contracts remain unaffected by the Libor transition if they are not able to move to alternative rates in time. The Government have carefully considered responses to their consultation and the complex range of contracts which reference critical benchmarks. The FCA has confirmed the process to wind down Libor by the end of this year. The Government will continue to engage with Parliament with a view to securing passage ahead of the end of the year.
I hope that, having provided the House with the background to the Bill, an explanation of its provisions and an update on the broader work being undertaken by regulators on the Libor transition, we can debate the provisions in the Bill in a constructive manner and push forward this vital legislation. I beg to move.
Lord Sharkey (LD)
My Lords, I thank the Minister, the Economic Secretary to the Treasury and their teams for their engagement with us on this short but complex Bill. The input from the Ministers and their teams has unravelled a lot of that complexity and answered a lot of questions. We broadly support the Bill.
The need to replace Libor has been well flagged. As the Minister has noted, the FSB made it clear in 2014 that the continued use of Libor represented a potentially serious systemic risk. It made this judgement in response to cases of what it described as “attempted manipulation” of the rate
“and declining liquidity in key interbank unsecured funding markets.”
The imminent end of Libor has already been well flagged, at least to major players. Ideally, the Ibors would be replaced by risk-free rates, such as SONIA, but it has been obvious for some time that there would be existing, continuing contracts that would be unable to transition easily or in a timely fashion—or, perhaps, at all—to the new RFRs.
As the Minister has explained, the provisions of this Bill enable the FCA to address the problem. It gives powers to the FCA to allow, for some as yet unspecified categories of tough legacy contracts, continued use of synthetic Libor after the demise of the index at the end of this year. The Bill also provides some narrowly drawn legal protections for the administrators of the synthetic Libor.
It is worth noting that the Bill does not include in its scope the synthetic Libor mechanism itself. There has been no parliamentary scrutiny of this mechanism. Consultation is not the same as, or equivalent to, parliamentary scrutiny. It is regrettable that Parliament has not had the opportunity to scrutinise this mechanism and its likely consequences, or any alternative mechanisms, such as the linear transition mechanism mentioned in paragraph 28 of the FCA’s recent technical note. There is a very large gap in our scrutiny system where financial affairs are concerned. The exercise of unscrutinised power by the FCA illustrates the need, once again, for a dedicated financial affairs select committee.
The measures in the Bill are intended to produce an orderly end to the existing regime and to provide a temporary bridge for some exceptional contracts. I have been impressed by the depth and quality of the work that has gone into preparing for transition and for creating the synthetic Libor. I have no issues with the fundamentals of the proposals, but some questions remain, and I would welcome the Minister’s clarifications.
The first question is to do with timing. Why was the end of this year chosen as the cut-off point? What discussions have we had with the US authorities about synchronising our moves away from Libor? Would it not have been better and simpler to act together and give more time for contracts to be transitioned, reducing the number of those moving to a synthetic Libor substitute.
My second question is also to do with timing—in this case, the timing of the formal announcement of who may use synthetic Libor. As things stand, the FCA’s consultation on the matter does not close until the end of this month. Only after that will the FCA issue a formal policy paper setting out the rules for qualifying for the use of the synthetic Libor. That is two months before the general expiry of Libor—not long to prepare if the rules do not allow your contract to qualify. Why has it been left this late?
When I asked the Minister about this in our meeting on Monday, he pointed to the fact that the enabling powers in the Financial Services Act 2021 became active only in April. But we had been preparing this transition for long before that, and the Government cannot seriously have expected their proposals to have been overturned during the passage of that Bill. Surely, it would have been possible to at least have the consultation ready to go as soon as the Act was passed, or even to consult as it was being debated—something the Government have done in the past. I know the FCA has signalled that the rules may allow wide but time-limited scope, but can the Minister reassure us that it does not foresee the disruptive exclusion of significant tough legacy contracts from the synthetic regime?
My next question is about the absence of safe harbour provisions. The narrow immunity on offer to the administrator may not, of course, prevent an outbreak of lawsuits. New York has dealt with this problem more comprehensively than we propose to do by adopting safe harbour provisions.
During the Report stage of the Financial Services Bill 2021, the noble Baroness, Lady Noakes, who I am glad to see in her place, proposed, in Amendment 6, such a safe harbour provision. The Government rejected the amendment, and the Minister explained why, saying:
“Amendment 6 may seem to solve those problems by seeking to give the Treasury powers to make regulations providing for contract continuity and safe harbour through secondary legislation, having had more time to consider these matters. The Government are of the view that, if legislation were needed to address this, it should be in the form of primary legislation. Further legislation providing for safe harbour, as proposed by these amendments, while consistent with the provisions already in the Bill, may be considered by some parties to represent a significant intervention in the contractual rights of parties using critical benchmarks. Primary legislation would therefore be preferable, to provide all parties with an appropriate level of transparency. Crucially, given the volume and value of contracts impacted, making such a provision in secondary legislation would carry a risk of legal challenge to the Government’s exercise of their powers. Any such challenge could bring further uncertainty and disruption, which is precisely what these amendments are seeking to mitigate.”—[Official Report, 24/3/21; col. 923.]
That was not a rebuttal of the notion of safe harbour. It was simply an explanation of why primary legislation would be a better way of achieving it. Well, we are now discussing primary legislation. Did we consider using safe harbour provisions similar to those adopted in New York and, if we did, why we chose not to use them? Did Her Majesty’s Government identify any benefits provided by the safe harbour approach that would not accrue under our scheme?
Next, there is the issue of a possible cliff edge at the end of the year. In the first Peers’ meeting with the Economic Secretary to the Treasury, we were told that there may be a difference of 10 basis points between the old Libor and the first runs of the new synthetic Libor. The very helpful FCA technical note on the end of year impact says in paragraph 23:
“We do not know precisely or with certainty what the difference between synthetic LIBOR on 4 January 2022 and panel bank LIBOR on 31 December 2021 will be.”
Does this not raise the possibility of significant market disturbances and disputes? The mechanisms proposed for generating synthetic Libor outputs have been published by the FCA in its draft notice of 29 September. Can the Minister say whether these mechanisms for determining synthetic Libor can be adjusted to produce a smoother, less step-like transition, if this looks to be desirable? If that cannot be done, can the Minister say what reactions he expects in the markets as a result of a variation of 10 basis points or more at the beginning of the new year. Can he also say what a realistic upper bound of this differential might be?
I have one further question: will there be some contracts which will never be able, or will decline, to transition to RFRs? If there are, what characterises them? Do we have any idea of how many there might be in number and value, and what does the FCA propose to do about them?
I realise that I have asked a lot of questions. I entirely understand if the Minister does not have time to answer them all this evening, but I would be very grateful for a written response before we get to Committee.
Baroness Noakes (Con)
My Lords, I declare my interests as recorded in the register and, in particular, my holdings in financial services companies, which could be affected by the Bill.
I welcome the Bill and thank the Government for responding to the very real issues that are raised by tough legacy contracts. I also thank the Minister and my honourable friend the Economic Secretary for arranging two very helpful briefing meetings for Peers. Before getting into my speech, I must say how much I am looking forward to the maiden speech of my noble friend Lord Altrincham, and I welcome him to the select group of noble Lords who speak on financial services matters.
When we considered the Financial Services Act 2021 earlier this year, I argued that we needed provisions beyond those contained in that Act to deal with tough legacy contracts. I tabled some amendments in Committee and on Report, none of which found favour with the Government. It was plain to me that legislation was needed to avoid disruption in financial markets, and I warned about the clock ticking down towards 31 December this year, when Libor ceases. I therefore rejoice that the Government have now seen the light, and I hope that this Bill can be speedily dealt with both here and in the other place.
In the previous Bill, I argued for two measures to deal with the tough legacy problem: a contract continuity provision and a safe harbour provision, as referred to by the noble Lord, Lord Sharkey. This is what the financial services industry said that it needed and what the responses to the Treasury’s consultation showed. The Bill provides for contract continuity but not safe harbour. If nothing else, that is regrettable for being out of line with the approach already taken under New York law, where a safe harbour has been provided.
As I understand it, the Government believe that they have drafted the continuity provisions in such a way that a safe harbour is not needed. The theory is that the continuity provided by the Bill should be watertight against any actions that arise from transition to synthetic Libor. There are concerns about this. Experience shows that legal challenges can and do emerge to legal drafting, even if that drafting is initially believed to be bombproof—whether in contract or statute law. No self-respecting lawyer would claim otherwise.
There is clearly a risk of litigation by parties who think that they have suffered from the transition to synthetic Libor or who could gain from being released from a contract. The risk of successful litigation may not be high, but there is a risk. This could be disruptive and costly. I hope that my noble friend agrees that it is important to avoid this.
The scale of the risk may well be difficult to quantify and will, of course, depend on the number and type of contracts that actually transition to synthetic Libor at the end of this year. There will, however, be clear winners and losers. As the noble Lord, Lord Sharkey, said, the new, synthetic rate will probably be higher than Libor—possibly by about 10 basis points. I spent some of our recent Recess acquiring new knowledge about the overnight interest swap rate and the ISDA five-year historic median credit adjustment spread. If nothing else, this shows that your Lordships’ House is a wonderful place for lifelong learning. Ten basis points may not be much on a retail mortgage but, on a large nominal in a commercial transaction, it could be a pretty big deal.
Last week, the Financial Conduct Authority provided us with a very helpful note on synthetic Libor. I fully accept that the FCA has consulted extensively and that there is general market acceptance that the methodology is the best that could be achieved for Libor-like rates. Nevertheless, there has not been a debate about the quantum of the difference between Libor and synthetic Libor and its impact on litigation risk. A question about quantum was tabled last week at a webinar arranged for the financial services industry together with the Treasury and the FCA, but that question was not selected for answer. This will be in the public domain at some stage and I believe it could increase the likelihood of litigation.
An important risk mitigant will be the clarity of the government messaging in relation to the impact of this Bill. I hope that my noble friend the Minister can be crystal clear on three points. First, the Government need to intend for the drafting of Clause 1 to have the same substantive effect as the New York legislation. In other words, the Government’s clear intention should be that the continuity drafting must be watertight in relation to litigation targeting the transition to the use of synthetic Libor.
Secondly, the Government need to be very clear that the ISDA credit adjustment spread—the main source of the difference between Libor and synthetic Libor—is set by the FCA, that it may well result in higher rates, and that it is out of the control of the parties to the contract.
Thirdly, with the strong encouragement of the Treasury, the FCA and the PRA, the industry has been actively transitioning contracts by agreement, generally using SONIA—with or without a credit adjustment spread or base rate. The FCA briefing note to which I referred said that they regarded these formulations as fair. Do the Government agree that these rates are fair, given that they may not be the same as the synthetic rates to be used for tough legacy contracts? It is just as important to avoid litigation on contracts transitioned by agreement as it is on those designated tough legacy contracts, especially as the draft scope from the FCA will potentially put a very large number of outstanding contracts into synthetic Libor for 2022 at least.
I will touch briefly on the fallback provisions in new Article 23FB. It is certainly welcome that contractually agreed fallbacks can continue, particularly where they have been negotiated in the clear knowledge that Libor would be ceasing. However, many contracts and other documents have fallback language which would be problematic if they were saved by Article 23FB. The risk-free rate working group, which has done splendid work on Libor during the last couple of years, highlighted formulations which used “cost of funds” as being problematic. The term sounds more straightforward than it is. There is no agreed method of computation for standard market practice. It is thus a rich source of potential disagreement between parties and, hence, of lengthy and costly litigation, which I am sure the Government will want to avoid. Can my noble friend say whether any contracts with cost of funds fallbacks are likely to stand, or is it expected that they will all be transitioned to synthetic Libor? The latter is clearly preferable, given the difficulty of applying that particular fallback.
Lastly, I want to raise the 10-year time limit on the use of synthetic Libor under the 2021 Act. The New York legislation does not have a time limit. I understand that it is widely believed that there will be a rump of contracts which will go beyond this period. Do the Government accept that some contracts will need a solution beyond 2031? If so, when do they expect to deal with these? I hope that we can avoid the brinkmanship that has characterised the timing of this Bill and some of the FCA decisions in the run-up to the deadline at the end of this year.
In conclusion, despite the concerns I have outlined, I am a big supporter of this Bill. I hope that it will become law as soon as possible and give the market the certainty it needs.
Lord Altrincham (Con) (Maiden Speech)
My Lords, I am honoured to follow the noble Baroness and to speak on this Bill and in this House for the first time. I declare my interest as a director of the Co-operative Bank in Manchester.
I should start with thanks for the welcome that I have received from all sides of the House and for the help from Black Rod, the clerks, the doorkeepers, security staff, technology staff and the Library, and for the welcome in the dining room. In working for this House, each of them is working for our country. I also thank my two mentors, my noble friends Lord Leigh of Hurley and Lord Parkinson of Whitley Bay, and my two noble friends Lord Sandhurst and Lord Leicester who were elected alongside me in June—the first time that three Peers have joined this House by election since 1816.
It is with sadness that I stand before noble Lords because my election follows the death of my father, Anthony, and of his brother, John. The Altrincham title was given to my grandfather, Edward Grigg, in 1945, for service in the wartime Government. It passed to John Grigg, who then disclaimed the title for life in 1963, events reconstructed in season 2 of “The Crown”. Although I have lost my father, my mother, Eliane, is in good health. She was a child in occupied France and watched the RAF bombardment in 1944 from the air raid shelter in their garden.
With an English father and a French mother, I was lucky in my career. At 30, I was at Goldman Sachs and married to Rachel Kelly, a journalist on the Times, and we had our first child. The following year, 1997, I stood for Parliament in the general election. We had a privileged life, but we did not have privileged health. We were combining Goldman Sachs, the Times, the general election and little children. Later that summer, Rachel got very sick very quickly and we thought she was having a heart attack. I helped her into an ambulance and she was taken away to a psychiatric hospital, which was obviously quite a surprise. Then I learned that she had depression, and this was more or less the first time that I had ever heard of depression. That has been something important to our family ever since. Rachel recovered—she was sick for about a year—and went on to write about her experience in her bestselling book Black Rainbow, and subsequent books Walking on Sunshine and Singing in the Rain. I did not stand for Parliament again, but stayed at Goldman Sachs for another 10 years and then went on to work at Credit Suisse.
Libor was the bedrock of the financial system throughout this whole period but was shaken by the financial crisis. I saw the events of October 2008 as an investment banker working for the Labour Government at the time. We advised the Government on the rescue recapitalisations of both the Royal Bank of Scotland and Lloyds Banking Group—the so-called drive-by shooting. On the weekend of Saturday 11 October 2008, and on behalf of Her Majesty’s Treasury, we took control of the Royal Bank of Scotland; the recapitalisations took place on this day, 13 October 2008. I also worked on the bank asset protection scheme through that period, which, as noble Lords might recall, was the insurance scheme put in place behind the banking system. The learnings around that are still very relevant to understanding sovereign credit today.
Libor was put under great strain during this period, as was subsequently revealed in 2012. Quite apart from the integrity issues, the market needed a new rate. The changeover to SONIA, as noble Lords will know, is now substantially done and this Bill picks up the residual issues that arise around the year end. SONIA, meanwhile, is correlated to base rate, is less volatile than Libor and tracks short-dated gilts very closely.
The Government would not normally interfere in contract, so this Bill is extraordinarily unusual for doing just that, but in the absence of what we are agreeing to today there would be extensive room for dispute over what to do at the year end. The Bill neatly reinterprets Libor as synthetic Libor, as a direct intervention. However Libor is expressed in a contract, it would just be reinterpreted as synthetic Libor, which is a very neat solution, albeit highly unusual under English law. That should be effective in closing off most areas of litigation. It is also worth adding, as the noble Lord mentioned, that the FCA has still not defined which regulated loans will go into this safety net. It is now relatively urgent for the FCA to decide on that because the loans are not defined in this legislation.
The Bill is a reminder of the importance of financial services to London, and maybe also a reminder of the importance of financial services, regulation and law to this country. The Bill also, in a sense, closes a chapter from 2008.
This is an important day for me. I first stood for Parliament 24 years ago. It is very meaningful for me to be here today. I still believe that government and regulation can be a force for good. I look forward to working with noble Lords and for this House for many years to come.
Lord Moylan (Con)
My Lords, in following my noble friend Lord Altrincham and his maiden speech, I start by saying that I think it is the first time since I came into your Lordships’ House a year ago that a maiden speech has been delivered with members of the family present in person to hear it. I take that as a very encouraging sign for our return to normality and a sign of great confidence. I thought it worth mentioning.
There is another first going on at the moment. This is, as my noble friend explained, the first time since 1963 that an Altrincham has sat in your Lordships’ House. That was something of a vintage year for departures from your Lordships’ House: I note that another peerage is returning that has been absent since 1963, though on the opposite Benches. Who knows what fruit might yet be harvested from that vintage year?
My noble friend is a banker. It is very brave nowadays to say you are a banker, and he had the courage to confess that he has spent most of his life as an investment banker. He has advised Governments and major companies, and since then he has gone on to set up his own corporate finance firm. Unlike some bankers—in the context of this Bill, I think everyone will know what I mean—his reputation for integrity in the course of his career has not only emerged intact but, in fact, been enhanced.
However, my noble friend is more than simply a banker. As he said, he has a keen interest in mental health issues, arising from his own family’s experience. His wife Rachel’s books have brought consolation to countless readers suffering from depression and, indeed, quite a lot of joy to those not suffering from depression. They are rather good and useful books in their own right, I have found. My noble friend will use part of his time in your Lordships’ House to promote interest in and support for mental health problems. I am confident that, with his great gifts and broad sympathies, he will make a wonderful contribution to your Lordships’ House.
Turning briefly to the matter of the Bill, we have come today to bury Libor. Not many people know—perhaps there is no reason why they should—but I spent a number of years lecturing on financial services and capital markets, and Libor was the meat and drink of what I did. I rather feel that Libor is something of an old friend. I have listened and learned a great deal from speakers in this debate so far about the very fine technical points that are at issue and dealt with in this Bill, but I would feel bereft if an old friend such as Libor were to be buried without someone like me at least reminiscing, in a mournful and doleful tone, about its departure. My old friend will be greatly missed.
As my noble friend the Minister said in his letter circulated before the debate, this is the only critical benchmark left that is generated in London. The loss of that is a harm to the prestige of London as a financial centre. It also raises a very small question mark about the robust connection with the legal profession and the documentation of financial services transactions. It is one of the boasts of London as a financial centre that the documentation is done under English law. Part of that was that connection with Libor, and that is gone. I do not think we are advancing when we see the City of London—not just the financial side but the associated legal side—lose the only benchmark generated in London.
Who killed my old friend Libor? A certain number of people have suffered criminal convictions and that is part of the answer, but the suggestion was also made at the time that the Bank of England was reasonably aware of what was going on. That suggestion—I know I am straying a bit into the history of the matter—was of course robustly denied by the Bank, but in 2008 or thereabouts the Bank was trying to drive interest rates down for monetary-management reasons while a very uncertain market, faced with a great deal of risk, was trying to put interest rates up, and to some extent Libor was the victim crushed between those two forces. Of course, I have no reason to doubt the Bank of England’s denial of that allegation, but I am sure that in the course of time more will be learned—although I do not know if I will be alive when it is.
Could my old friend Libor none the less have been resuscitated? I think in fact he could have been. If our regulators had had more confidence and less fear, and if they had not had removed from them at the time their earlier obligation to maintain the competitiveness of the City of London as a financial centre, I think that, with imagination, something could have been done to retain a London-based benchmark.
Of course, it is all too late for that. We are here simply to invite in the undertakers, and there is no going back. However, I hope that my noble friend and the Government will learn at least one lesson from this: if we are to have, as I hope we will, a successful and indeed internationally dominant financial services sector in this country—with the benefit that flows from that to other professional services such as law, accountancy, and so forth—then we need to have a clear framework for regulators that directs them to support that competitiveness and encourage the success of the City of London. Regulation is not all about risk minimisation. After all, if one were to minimise risk utterly, there would be no banking—it is a risk business by definition.
Lord Blackwell (Con)
My Lords, I welcome my noble friend Lord Altrincham into the House. He brings huge expertise in financial services, which will be extraordinarily valuable.
Before I address the substance of the Bill, I should declare my interest, or at least my former interest, as the chairman of Lloyds Banking Group until the beginning of this year, and I confirm that I have no ongoing interests other than as a shareholder.
Like other noble Lords, I very much welcome the Bill. I add my thanks to the Minister and his honourable friend the Economic Secretary to the Treasury for their efforts in listening and responding to the concerns that industry and a number of us have raised. There has been widespread acceptance in the remarks made so far in this debate of the need to replace Libor, and of the importance of doing so in a way that both is fair and provides legal certainty. I will not go over those arguments again but, as the Minister recognised, despite the best efforts of banks and other institutions to migrate contracts, there are, I understand, currently some 55,000 sterling Libor contracts with a value of around £340 billion that are still unresolved. While I hope the Minister and the FCA are right that most of those will be resolved by the year end, there are likely still to be a number left on Libor. Many of those will be individual mortgages and small business loans where the individual businesses or consumers simply have not responded to the offers made to them. However, there may also be some where the counterparty has deliberately withheld consent in order to achieve a better outcome.
As my noble friend the Minister has said, all of these are contracts that, under Libor regulations’ Article 23C, can be designated by the FCA as tough legacy contracts. Where they can then be mandated by the FCA for these contracts, references to Libor can continue—but, with the way that Libor is determined, replaced by a synthetic substitute, using the methodology that the FCA defines under Article 23D.
This methodology has been widely consulted on, and I am comfortable that it appears to be a sensible approach that will reduce some of the volatility that there has previously been in the market and that should provide a sensible outcome. Could the Minister confirm that this methodology—which, as he pointed out, the FCA, rather than he, is responsible for—is consistent with the internationally accepted methodology for Libor replacement and with the methodology that has been used by most commercial contracts so far in reaching voluntary agreement?
The reality is that there is no perfect substitute for the interest rate that might have prevailed under Libor, with the resultant risk that some counterparties might claim that the change negates their contracts or causes them losses. I welcome fact that the Bill provides the legislative underpinning to provide legal certainty that synthetic Libor should be recognised as a valid substitute for Libor in these legacy contracts.
The key provision is that this applies to contracts designated by the FCA, as covered by the legislation. As other noble Lords have pointed out, it is not yet clear what those contracts are, but my understanding is that this is expected to cover all outstanding contracts for a period of 12 months. To avoid further uncertainty, could the Minister, although he is not responsible for this, confirm that that is his expectation and that there is no intention to have a hard cut-off at 12 months or to exclude certain contracts from ongoing cover under these provisions at the end of 12 months? It would also be helpful if he could reconsider whether it is necessary to have a 10-year time limit for the use of synthetic Libor, given the tenure of some of those contracts.
As my noble friend Lady Noakes pointed out, the Government have decided not to include the other provision that they consulted on of a safe harbour against litigation, as a belt-and-braces measure to reinforce the legal certainty. I understand the reluctance to make provisions that might hinder legitimate claims of mis-selling, but I share the reservations that potential claims that run against the intention of this legislation may still be pursued and can be costly, even if they do not ultimately succeed. If the Government choose not to legislate for the safe harbour following these debates, it would be helpful if the Minister could put on the record that it should not be grounds for mis-selling simply to claim that the provider did not communicate any potential weaknesses in Libor as a benchmark or did not envisage or provide for a replacement if Libor ceased.
In confirming the intent of this legislation, on which I acknowledge that my noble friend the Minister has said some very helpful words, it might also help if he could confirm on record the specific and very helpful wording set out in writing in paragraph 25 of the Explanatory Notes to the Bill, which do not form part of the legislation, as it stands. It says:
“The provisions … are … intended to ensure the application of a synthetic methodology … does not inadvertently give rise to breach of contract claims or provide a vehicle for one party to claim that the contract has been frustrated.”
I also ask Minister to consider whether, as another way to discourage vexatious claims, it would be helpful, as an exception to the normal rules, to publish the Government’s legal advice that has given them confidence that the legal certainty provided under this legislation is adequate to avoid potential unwarranted litigation risks.
I very much welcome this legislation. I will support it through the House, and I thank the Government for bringing it forward.
Baroness Kramer (LD)
My Lords, I begin by welcoming the noble Lord, Lord Altrincham, to the House. I think that is a maiden speech that we are all going to remember. We particularly look forward to hearing him speak on Treasury issues but also very much on mental health issues. If one had to pick two issues pertinent to our time, I would say that those must be the two. I very much welcome him but have to warn him that to go from being a banker to being a politician is to go from one much-despised profession to another. I hope he recognises that he is unlikely to have any better reception in public today than he did as his former self. We recognise his capacities and honestly and sincerely welcome him.
I join others in thanking the Minister and the Economic Secretary to the Treasury for the briefings that they provided to us and particularly for the meeting that many of us were able to participate in yesterday with the relevant officials from the Treasury and the FCA. I know that I felt a much greater peace of mind at the end of that meeting. It was extremely helpful to have that level of expertise and people who have been so engaged in the process brought into that meeting with Peers.
We have always supported the essential tenets of this Bill—immunity for the administrator, synthetic Libor and provision of legal certainty that legacy contracts will remain valid. We in no way wish to challenge that. However, I am very much with my noble friend Lord Sharkey on the questions that he raised—I am not going to repeat them as this House and the Minister will now be fully aware of them—and on the questions raised by the noble Baroness, Lady Noakes, and the noble Lord, Lord Blackwell. We have to have some constructive responses to those.
I want to pick up on two questions that have particularly exercised me, although that is not to say that they are more important than the other questions. In a sense, both questions come down to the mechanism that the FCA has selected to determine synthetic Libor—how it determines the spread above the risk-free rate. As I say, I took a great deal of comfort from the conversation yesterday with the FCA but I think there must be some mechanism whereby this House should be able to scrutinise the process that leads to a mechanism of such significance. Again, it underscores the gap we have in making a regulator accountable to Parliament. I hope that the Minister will take that back. It is not a criticism of the regulator but points out the absence of an appropriate mechanism. We need to have that put in place.
My second concern has always been that cliff edge. On 31 December we will have a Libor rate created through the historic process and by the mechanism people expected to be used when they signed their various agreements. Then four days later synthetic Libor is likely to deliver a difference of something in the range of 10 basis points. I find that rather extraordinary. I hope it does not lead to the kinds of legal disputes that the noble Baroness, Lady Noakes, has indicated would be possible. I think it could. It also somewhat disturbs me that we have not found a better way to smooth that transition. Like others who have been bankers in this House, I suspect, I have fought hours through the night for one or two basis points; 10 basis points is such a significant differential. I am delighted if the financial services industry finds this entirely acceptable but I just wonder whether it will not be rather surprised when it actually sees the number.
One of my concerns has always been that that kind of gap as a result of two different approaches to creating a Libor benchmark also indicates the potential for various financial institutions to arbitrage and game in various ways because of the difference and the change. I have taken some reassurance from the FCA trying to explain that it does not think that small individuals will be the victims of any such gaming and arbitrage. I have concerns because loans to small businesses are not regulated and therefore the FCA’s ability to monitor them is very different from its ability to monitor loans to consumers. If it is the big boys all playing games with each other, I must admit my concerns are rather fewer, but I have concerns around that area.
I am going to close because so much of what has needed to be said has been said, but I want to pick up on the issue raised by the noble Lord, Lord Moylan. I, too, feel an incredible sadness in saying farewell to Libor. Back when I was in the United States, I spent more than 10 years structuring loans and a variety of transactions—some of the earliest swaps—around Libor, and I took great pride in a benchmark that was set in London not just for sterling but for every meaningful currency across the globe and all time zones. I confess the shock that I experienced, never having worked in the City of London, only in the United States in direct lending and structuring, to find that Libor had been manipulated, and so blatantly, by major financial institutions and that it was apparently well known to their chief executives.
I was on the Parliamentary Commission on Banking Standards. Those masters of the universe were very well aware of the manipulation that was going on and, frankly, the regulator was too weak or too deferential to intervene. It was a stain on London and on financial services in the UK and I am sad that that stain still overhangs this ending of Libor. I agree with the noble Lord, Lord Moylan, that there are consequences because of the loss of prestige and international standing that is attached to the disappearance of the role that London played in virtually every lending transaction across the globe. It is with sadness, and perhaps with a little bit of shame, that I stand here and speak to this Bill. We will support the Government, but we would like to see our questions answered, and we may press some of them when we get to Committee.
Lord Eatwell (Lab)
My Lords, first, I declare an interest as a recent chairman of the Jersey Financial Services Commission and therefore a financial services regulator.
I begin by congratulating the noble Lord, Lord Altrincham, on his maiden speech and welcome him to the small club he sees around the Chamber of people who have an almost obsessive interest in the details of these financial matters. I hope he will continue to contribute to our proceedings on these matters. It is nice to grow the club a little.
I say to the Minister that I think that the very last sentence in the Bill has it wrong. It should say “This Act may be cited as the Critical Benchmarks (Inspired by Baroness Noakes) Act 2021.” I congratulate the noble Baroness, Lady Noakes, who brought forward these issues so strongly in the discussions in Committee on what is now the Financial Services Act 2021, on seeing that the important points that she made at that time have been noted and have been taken up to a considerable extent.
This is a Bill with but two substantial clauses, both of which are eminently sensible in the context of the complexities associated with Libor transition. But one of them, Clause 2, may well cause collateral damage. I will focus my remarks on Clause 2, but will first comment briefly on Clause 1. This is an entirely sensible clarification of the interpretation of references to a benchmark in a contract where the FCA seeks to replace Libor. The clause provides legal certainty in a variety of circumstances and is thus to be welcomed. Let us now turn to Clause 2.
The Libor story has, from the outset, been a story of the professional creation of risk. First, there was the scandalous gaming of Libor, which created market risks, which have been widely debated; now, there is the replacement of Libor, which itself creates risks because new benchmarks are untried, their relationship to events and financial markets is as yet untested, and the insertion of new benchmarks into existing contracts will be problematic and will typically result in revaluation of those contracts, resulting in gains for some and losses for others. Then there is the issue of timing, raising by the noble Lord, Lord Sharkey. Further, in those cases in which it is impossible to replace Libor, the imposition of a synthetic Libor will potentially result in asset revaluation, again precipitating gains and losses. This replacement issue was referred to by the noble Baroness, Lady Kramer, who asked about the mechanism for how synthetic Libor is to be created and questioned the cliff edge. These are all risks which have been created by the replacement of Libor.
It is not just a question of the creation of risk; it is also a story of the transfer of risk from professionals who create it to others. And not just to fellow professionals who may lose out in traded positions but to firms of all sizes—small, medium and large—to municipalities and to ordinary people, typically via their pension funds or mortgage contracts. This transfer of risk is a serious market inefficiency; the risk is imposed on someone who had nothing to do with its creation. Losses are suffered because of the actions of others.
That is why, as a financial services regulator for many years, I am allergic to the awarding of legal immunity to those who create the risk. The existence of legal immunity not only allows the risk creator to escape scot-free but creates a moral hazard, because the creator of risk suffers none of the adverse consequences that stem from his or her actions. Because of that, there is an obvious incentive to create even greater risks. Equally abhorrent, the legal immunity provided leaves no possibility of redress for those who have suffered losses because of where the risk has ended up. Legal immunity is, therefore, in the words of 1066 and All That, “a Bad Thing”, to be introduced only in extremis. Indeed, this case is in extremis, but it has other aspects that I wish to refer to.
Clause 2 of the Bill creates a legal immunity. It would grant the administrator of a critical benchmark immunity in circumstances where the administrator acts in accordance with requirements imposed by the FCA. The situations in which this is anticipated to happen are quite abnormal, because they arise from the peculiar circumstances created by the demise of Libor and the complexities involved.
As we have heard, legal immunity is provided in circumstances in which, in a very limited number of cases—the so-called tough legacy contracts—it is not practicable to replace Libor as the contract benchmark and the FCA has decided to require the administrator of the benchmark to use or change the benchmark in a specific way, particularly using synthetic Libor. In other words, immunity is provided to eliminate the possibility that the administrator of the benchmark might be subject to legal action as a result of complying with statutory requirements imposed upon it by the FCA.
By the way, in parenthesis I should add that I think it entirely correct that the Bill does not extend the safe harbour to acts taken by an administrator on his or her own discretion.
So far so good: we would not expect someone to suffer claims for damages for doing what their regulator has instructed them to do. But other people are suffering losses as a result—perhaps small firms, perhaps pension funds, perhaps individual non-professional investors. What about them? Who should be liable? The noble Lord, Lord Agnew, referred to these people collectively as bringing forward “unmerited and vexatious claims”. How does he know they are unmerited and vexatious at this stage?
So, who is going to be liable? Since action has been dictated by the FCA, should the FCA be liable? Of course not, because as a regulator it already has legal immunity with respect to regulatory action, and that makes sense. The regulator is required to meet its statutory responsibilities, and it would be surely unreasonable for it to be subject to legal claims for doing what, by statute, it is required to do, so that would seem to be the end of the matter—hard luck on those who suffer losses. But I suggest that there are aspects of this case that make it rather different.
The transition from Libor, and the introduction of synthetic Libor, arise from the behaviour of those miscreants who, in 2012, were discovered to have gamed Libor. Those who may be suffering losses are doing so because of the ramifications of those illegal acts. Unfortunately, there is no prospect of redress from the miscreants, but the core issue remains: surely, it is unreasonable and unfair, in solving our problems, to shift risk on to retail customers. Why should they suffer loss as a result of the need to fix the system to prevent the repetition of illegal acts? I put it to the Minister that this is the sort of legislation that gives the financial services industry a bad name: it is always the retail customers who take the losses, not the professionals. How does he propose that those who suffer losses should be compensated—or is he happy to leave them to their fate?
I have worked as a financial services regulator for nearly 30 years. I thought myself unshockable, but I was shocked, as was the noble Baroness, Lady Kramer, by the revelations around the gaming of Libor. As the noble Lord, Lord Altrincham, said, Libor was the bedrock of the UK financial system. The noble Lord, Lord Moylan, referred to Libor as the meat and drink of financial services. I think all speakers recognised that serious injury was done to the reputation of UK financial services by those actions. This Bill is part of the effort to repair that injury. However, this cannot be done, it seems to me, when the Bill imposes unrecoverable losses on retail investors. I really feel that it is incumbent on the Minister to tell the House this evening how the Government intend, while offering legal immunity to the administrator, to offset this collateral damage.
Lord Agnew of Oulton (Con)
My Lords, I thank noble Lords for their detailed and collaborative contributions on this very technical Bill. I would particularly like to welcome and thank my noble friend Lord Altrincham for his excellent and personal maiden speech. I know that his experience in financial matters will be of great benefit to us all.
The Bill reinforces the provisions in the Financial Services Act 2021 that provide the FCA with powers to oversee the wind-down of a critical benchmark in a manner which protects consumers and minimises disruption in financial markets. In doing so, it provides key support to the Libor transition and market confidence.
I will try to address a number of the questions raised by noble Lords this evening, but I will write on the more technical ones on which I may not be able to come up with the answers immediately.
I start with the noble Lord, Lord Sharkey, and his concern about the late running of this, so to speak. I accept his point that work could possibly have been done before the Financial Services Act 2021 received Royal Assent. The FCA feels strongly that it needs to follow an orderly and sequenced process to consult first on the framework for decisions and then on the decisions themselves, but I accept that the timing will be tight.
The noble Lord, Lord Sharkey, also asked why this year is taken as the cut-off. This date was selected back in 2017 after engagement with panel banks, so it has been in the works for quite a long time and there has been time for the industry to plan for it. We have had very close engagement with the US and the timings are aligned. It has now said that the new use of US dollar Libor rate will stop at the end of this year, following supervisory guidance from the US and UK and other international authorities.
The noble Lord, Lord Sharkey, also asked about the mechanisms for the synthetic rate to be smoothed. The FCA has confirmed that that is the approach. The synthetic methodology is based on a broad global consensus and it would cause significant market disruption to change course at this point. It is not clear that that would deliver better outcomes for markets or consumers. As discussed at the briefing yesterday, the smoothing has been put in place taking the five-year median rate, but I can write with more detail if the noble Lord would like, as I accept that this is an important issue.
The noble Lord, Lord Sharkey, said he was worried about congestion at the end of the year. We have been clear that the active transition is the main mechanism; we have seen a large transition away from Libor over the last few months. I take my noble friend Lord Blackwell’s point that the latest data shows that some 55,000 contracts are still outstanding, but they are moving quickly. The FCA has taken on board market feedback on distinguishing between contracts that can be amended before the year end and those that cannot. Every step it is taking is to minimise disruption, in line with the objectives.
My noble friend Lady Noakes asked about the cost of funds fallbacks. This legislation provides certainty on how references to the Article 23A benchmark should be interpreted in contracts and other arrangements in which the FCA has exercised powers under the benchmarks regulation to require a change in the benchmark methodology. Where a contract or arrangement has a fallback that is triggered by the temporary or permanent unavailability of Libor, Article 23FA provides that the benchmark continues to be available and consequently that it does not cease to exist, be published or otherwise be made available. This means that the cost of funds fallbacks, which are generally triggered by the unavailability of the benchmark, will not be triggered.
My noble friends Lord Blackwell and Lady Noakes asked what happens after the proposed 10-year period. The legislative framework put in place in the Financial Services Act 2021 allows the FCA to support the orderly wind-down of the benchmark. Specifically, it allows the FCA to impose a synthetic methodology to provide for the continuity of a Libor setting for the benefit of tough legacy contracts for up to 10 years. The Government will continue to work closely with the FCA and the Bank of England to support an orderly wind-down of Libor and will continue to monitor the risks in this area, given its systemically important role in the UK economy.
My noble friend Lord Blackwell asked about the shorter term, after a year. The benchmark regulation provides that the FCA can review the decision to compel continued publication of a synthetic benchmark after a year. The FCA has been clear about the expected direction of travel with regard to the sterling synthetic Libor rate and does not intend that it will cease automatically after a year.
The noble Lord, Lord Sharkey, and the noble Baroness, Lady Kramer, are concerned about FCA accountability and, linking to that, parliamentary oversight. The FCA must operate within the framework of statutory duties and powers agreed by Parliament. The FCA is also fully accountable to Parliament for how it discharges its statutory functions. This direct accountability to Parliament reflects the FCA’s statutory independence and the fact that it is solely responsible for everyday operational decisions, without government approval or direction, and so is primarily accountable for them. The legal framework ensures direct accountability of the FCA to Parliament, including through a requirement for it to produce annual reports and accounts which are laid before Parliament by the Treasury.
The FCA is subject to full audit by the NAO, which has the associated ability to launch value-for-money studies on the FCA. The FCA is subject to scrutiny from Select Committees. The Treasury is the FCA’s sponsor in government; it is responsible for the statutory framework of financial services regulation and for the continued effective operation of the FCA as part of that framework. The mechanisms for the FCA can be directly accountable to the Treasury. This includes direct controls over appointments to the FCA board and powers under the Financial Services Act 2012 to commission reviews.
The noble Lord, Lord Sharkey, and my noble friend Lady Noakes asked about safe harbour. The responses to the Treasury consultation earlier this year identified the risks that parties may look to contest the continued publication of synthetic Libor by its administrator, or to seek damages against the administrator. This risk might be heightened if other avenues of litigation are closed off to parties by the Bill.
Where the administrator of an Article 23A benchmark is subject to legal challenge for complying with statutory requirements imposed by the FCA under the benchmarks regulation, it could impose a significant unreasonable and unmerited burden on the administrator of an Article 23A benchmark. If faced with too much legal risk, the administrator may seek to resign from administering the benchmark, which in turn risks causing disruption. Such action could serve to erode parties’ confidence in using the benchmark, undermining the operation of the FCA’s powers to oversee an orderly wind-down of it.
My noble friend Lady Noakes also asked about alternative benchmarks. The focus of this legislation is on providing legal certainty regarding the operation of the FCA’s powers to wind down this critical benchmark. Where contractual parties have acted in line with regulatory guidance to transition the contract to an alternative rate, the Government do not see that there is a need for further legislative clarity. The Government continue to encourage parties to contracts that reference Libor to transition those contracts to alternative benchmarks wherever possible, in accordance with regulatory guidance.
Several noble Lords, including my noble friend Lord Blackwell, asked about legal certainty. It is the Government’s view that it is appropriate to provide legal certainty as to how references to Libor should be interpreted in contracts or other arrangements, once the switch to the synthetic rate occurs. This legislation comprehensively addresses the risk of contractual claims relating to the exercise of the FCA’s powers to wind down a benchmark, as identified in response to the Treasury’s consultation on this matter.
It is important to stress how narrow the contractual continuity provision is. It does not protect the parties to the contract from all legal challenge. This would result in parties to those contracts not being able to challenge any element of that contract, and would be too broad. It simply specifies that where a contract references Libor, that should be read as referring to synthetic Libor. The effect of that is that legal claims cannot be brought on the basis that synthetic Libor is not included in the contract.
As the home jurisdiction of Libor’s administrator, the UK has a unique role to play in minimising financial stability risks and disruption to financial systems arising from the wind-down, both in the UK and globally. This plays to the comments made by several noble Lords in relation to London’s reputation as a financial centre and the unfortunate events that surrounded the problems with Libor 12 or more years ago.
In the UK framework, the FCA will be able to provide for the continuation of Libor settings under a synthetic methodology. Subject to the legislative framework in other jurisdictions, any change of methodology imposed by the FCA would flow through to global users of Libor contracts continuing to reference the rate. By taking this approach, the UK has provided a global solution rather than an approach that would have been effective only in the UK.
My noble friend Lord Blackwell asked about the methodology. Noble Lords will appreciate that setting this methodology is a responsibility that Parliament has granted to the operationally independent FCA, within the parameters established by the recent Financial Services Act. However, the FCA has an overriding responsibility to act in the best interests of consumers in this country. It is also important to note that the FCA’s approach is in line with the global consensus.
As we all acknowledge, and as I said in my opening remarks, Libor is mostly used by sophisticated financial operators, not retail investors. We estimate that there are only around 200,000 mortgages left on Libor, with that number estimated to fall to somewhere between 50,000 and 100,000 in the next few months. The synthetic Libor rate is a last resort and regulators have been encouraging markets to move to alternative rates for some time.
I remind noble Lords that the Financial Services Act 2021 allows the FCA to impose a synthetic methodology only if it considers it desirable to do so to protect consumers or protect and enhance the integrity of the UK’s financial system. Furthermore, the synthetic rate seeks to provide a reasonable and fair approximation of Libor while removing a major factor in its volatility: the variable credit spread, which has often spiked in times of economic stress. Reducing volatility will benefit consumers who pay interest with reference to Libor.
I will write to the noble Lord, Lord Eatwell, on his specific points; I am afraid that I do not have that information to hand at the moment.
This Bill is vital to the protection of consumers and the integrity of UK markets. I would be happy to arrange another detailed technical session in a similar form to the two we have had so far, because I am aware of how technical this Bill is. I hope that we have noble Lords’ support.
Lord Tunnicliffe (Lab)
My Lords, may I raise a bureaucratic point before the Minister sits down? He intends to put letters in the public domain through the medium of the Library. It would be convenient if he could simultaneously copy them to everybody who has participated in the debate and registered interested parties like me.
Lord Agnew of Oulton (Con)
I would be happy to do that. I am pleased to see the noble Lord, Lord Tunnicliffe, back here without Covid; we were worried that he might have had it. I will certainly do that.