Critical Benchmarks (References and Administrators’ Liability) Bill [Lords] — House of Commons, 2021-11-18
Topic: Domestic Commerce
John Philip Glen (Conservative, Centre-right): Thank you, Madam Chairman. I am grateful to you for being in the Chair at this point I realise that a number of these provisions have already been considered on Second Reading, but I am keen to explain the clauses in turn. Owing to their technical nature, I will explain them paragraph by paragraph at times. I hope that the House will bear with me As I said on Second Reading, the Bill provides important legal certainty for contracts that will rely on LIBOR after the end of this year. All its provisions deal with how a benchmark is treated in contracts once it has been designated an article 23A benchmark under the benchmarks regulation. The Financial Conduct Authority has power to make this designation when a critical benchmark is unrepresentative, or at risk of becoming unrepresentative, of the market that it seeks to measure. For LIBOR this will happen at the end of this year when the panel banks stop making their contributions. At that point, the FCA will ensure that LIBOR will continue to be published, using the synthetic methodology that we have already discussed In describing the purpose and effect of the clauses, I will use LIBOR as an example because it is currently the only benchmark to be designated under article 23A, but the provisions will also apply in future to any critical benchmark designated an article 23A benchmark by the FCA, although none is envisaged at this point Clause 1 means that LIBOR referencing contracts can rely on synthetic LIBOR. The clause inserts two new articles, article 23FA and article 23FB, into the benchmarks regulation. They supplement the legislative framework introduced by the Financial Services Act 2021 to provide for the orderly wind-down of a critical benchmark. Article 23FA clarifies how references to an article 23A benchmark should be interpreted in contracts and arrangements. Specifically, it provides that when the FCA designates a benchmark under article 23A and imposes a change in how the benchmark is determined, contractual references to the benchmark should be interpreted as including the benchmark as it exists after the exercise of the FCA’s powers. This is called "contractual continuity" For example, where LIBOR settings are designated under article 23A of the benchmarks regulation, this article would provide that contractual references to LIBOR should be interpreted as including synthetic LIBOR Article 23FA also sets out how contractual continuity will work in practice. It provides that this interpretation applies to all references to the benchmark in contracts or other arrangements, including references that do not refer to the benchmark by name but rather describe it, for example by reference to the economic or market reality that it intends to measure. It also applies where the parties were treating a reference in a contract as a reference to that benchmark immediately before the article 23A designation. That will ensure that any legal uncertainty is minimised, even when the contract does not explicitly use the name "LIBOR", or includes a reference to LIBOR that is out of date. Finally, it is formally retrospective, in that it also provides that the contract is to be treated as having always provided for the reference to the benchmark to be interpreted in this way once the synthetic benchmark was introduced In the Government’s view, for contracts that continue to refer to LIBOR, these provisions will comprehensively address the risk that parties might successfully dispute the use of synthetic LIBOR to calculate payments after the end of this year. They do so in a proportionate way while not interfering with other valid claims. The clause does not introduce a so-called safe harbour, as has been introduced in New York. The Government considered that approach and, as I said, concluded that it would not be appropriate. However, the clause does not prevent parties’ ability to seek legal redress via the courts for other matters I draw the Committee’s attention to paragraphs 6 and 7 of article 23FA, which provides that the Bill does not create a basis for new claims concerning actions by the parties in relation to the formation, variation or operation of the contract prior to the change to a synthetic methodology. That should ensure that if, for example, a misrepresentation claim were brought in relation to statements made before a contract was entered into, the claim is considered according to the reality at the time when the statements were made, not in the light of the Bill’s impact on the contract. It would also not be reasonable or proportionate for the Bill to extinguish existing legal claims. Paragraph 7 therefore ensures that article 23FA does not extinguish existing causes of action. Any claim that could have been brought prior to the article 23A designation of the benchmark can therefore still be brought regardless of the Bill. For example, a mis-selling claim brought on the basis that a lender had misrepresented LIBOR to the customer could still be brought and judged according to the situation at the relevant time I turn to article 23FB, which introduces further provisions necessary to provide legal certainty to parties to contracts or arrangements that reference an article 23A benchmark. It is designed to avoid unnecessary interference in contracts where parties to a contract have already agreed what should happen in the event that a benchmark is designated under article 23A. This new article is primarily concerned with how the contractual continuity provision will operate in contracts that already have fall-back provisions—that is, provisions that provide for the contract to operate by reference to something other than LIBOR, or to terminate in particular circumstances The new article provides that article 23FA does not apply if the contract expressly disapplies it or expressly provides that the reference to the benchmark is not to include the benchmark in its synthetic form. It also provides that article 23FA does not override the operation of contractual fall-back provisions, many of which are designed to cater for the wind-down of the benchmark. For example, a fall-back in a contract that is triggered by LIBOR becoming unrepresentative will not be affected by the Bill. However, article 23FB is also clear that the designation of the benchmark under article 23A, or the imposition of a synthetic methodology, will not trigger fallbacks designed for the cessation or unavailability of a benchmark. That is because the benchmark continues to exist and be available in its synthetic form, so it has not ceased Concern about inappropriate cessation fall-backs that were designed with only a temporary unavailability of LIBOR in mind was one of the drivers of the approach taken in the Financial Services Act 2021. It is one of the key reasons why the Government are allowing for the continuation of LIBOR under a synthetic methodology. Article 23FB also provides the Treasury with three limited powers to make regulations. The powers are intended to future-proof this legislation, allowing the Government to ensure that an appropriate legislative framework is in place to support the orderly wind-down of future critical benchmarks across the wide range of contracts and arrangements that could reference those benchmarks The right hon. Member for Wolverhampton South East (Mr McFadden) referenced concern about timing. As I mentioned, that provision allows for wind-down over a 10-year period. We want to continue to encourage the wind-down over the coming period. We reserve the right to make further legislative interventions, but we envisage that they would be on a smaller and diminishing pool of contracts I turn to clause 2. On Second Reading, I spoke to the narrow and targeted immunity that the Bill provides for the administrator of a critical benchmark for action that it is required to take by the FCA. That is the clause’s purpose. It inserts new article 23FC into the benchmarks regulation. The clause, as with clause 1, deals with the circumstance where the FCA has designated a benchmark as an article 23A benchmark. Article 23FC concerns the liability of the administrator of an article 23A benchmark. The administrator will be responsible for administering the change in methodology as directed by the FCA, and as I set out on Second Reading Importantly, the clause provides that the administrator of an article 23A benchmark is not liable in damages for action—or inaction—that it is required to take by the FCA under article 23D of the benchmarks regulation, or for publishing the benchmark as it exists as a result of the FCA’s direction under article 23D. In essence, that gives protection to the administrator in terms of liability related to the FCA’s direction of it.