Critical Benchmarks (References and Administrators’ Liability) Bill [HL]

Lord Blackwell Excerpts

2nd reading
Wednesday 13th October 2021 Lords Chamber

[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.