UK Finance provides more support resources for small and medium sized businesses for a smooth transition to alternative and more robust rates
In 2017, the Financial Conduct Authority (FCA) announced that LIBOR (London Interbank Offered Rate), the most common benchmark that lenders use to calculate interest rates for financial products in the UK, was no longer sustainable and the market should move to robust alternative rates by 31 December 2021.
In the UK, the Bank of England and FCA have set out the need for this transition. The replacement near-risk-free rate is the Sterling Overnight Index Average (SONIA), calculated on actual (and not predicted) transactions. Other rates will also be available, including fixed rates and the Bank of England policy rate, known as the bank rate or base rate.
As part of this transition process, UK Finance launched an introductory guide in February to help small businesses understand what was happening and what members may need to do if they or their clients would be impacted.
UK Finance has now launched a new LIBOR transition SME resource, which signposts businesses to all the key information available and hopefully provides a useful place for any clarity needed on the transition.
While the transition doesn’t affect all, or even most, smaller businesses, members should ensure that those that are impacted have the right support and can take action well before the deadline.
For example, as a result of Covid-19 disruption, many businesses will have accessed borrowing through UK government lending schemes. The guidance clarifies that borrowing under the Bounce Back Loan Scheme (BBLS) is not impacted by this change. However, borrowing under the Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Larger Business Interruption Loan Scheme (CLBILS) may be linked to LIBOR but is likely to include terms setting out what will happen to loans when LIBOR ceases. If there are any doubts, it would be best to check with the bank or lender.
Over the coming months, banks and lenders will be increasing communications with their customers who have products linked to LIBOR to engage with them on the actions required, such as moving contracts onto replacement rates by the end of Q3 2021 where possible. An increasing number of SMEs will want and need information to help them respond.
Members are encouraged to review the exposure that they or their clients may face, assess the impact of different rates if necessary, and talk to the relevant banks and/or lenders if they have any questions. This will help those businesses that have read about the transition feel confident about meeting the deadline.