Other parts of this series:
As we discussed in our previous blog , Accenture’s 2019 LIBOR Survey highlights issues in the level of preparedness among firms facing the complex and potentially difficult transition from the London Interbank Offered Rate (LIBOR).
The survey also shows there are conflicting viewpoints regarding the financial service industry’s readiness for the LIBOR transition, as well as priorities the industry should set going into the transition.
These conflicts indicate respondents may lack a clear understanding of the level of granularity and focus required to address the true impact of the transition, which may lead to higher transition costs, less certainty in achieving transition goals, and even adverse client and reputational impact. For example, while over eight in 10 respondents have a formal transition plan, far fewer (59 percent) have a unified and consistent transition and remediation approach.
Respondents with a mature LIBOR transition program plan, on average, to spend upwards of $142 million, while a group of forward-looking firms (13 percent) plan on spending over $200 million on their transition.
Another major concern is that, while half the respondents agree the transition provides an opportunity to be more client driven, less than a tenth of respondents expect to fund client outreach activities. Furthermore, a lack of communication with clients, or missteps in keeping them abreast of developments on the adoption of new rate structures, could result in reputational and conduct risk issues.
What’s your LIBOR spend?
Consistent with the findings pointing to a general lack of readiness for the LIBOR transition, only 45 percent of respondents state that they had allocated (or plan to allocate) sufficient funding to their LIBOR transition. Our analysis also finds that two-thirds of respondents plan to spend under $100 million on their LIBOR transition. In contrast, respondents with a mature transition program plan, on average, to spend upwards of $142 million, while a group of forward-looking firms (13 percent) plan on spending over $200 million on their transition.
Surprisingly, a solid majority of respondents either do not have the funding in place or are under-investing. The concern in our view is that these respondents are underestimating the pointed demands and complexity of the transition and increasing the likelihood additional budgets and resources would be needed to properly complete the transition on time. As 2020 begins, global regulators, the Securities and Exchange Commission, the New York Department of Financial Services, the Financial Conduct Authority and the Office of the Comptroller of the Currency to name just a few, have all stated they are focused on financial firms’ preparedness for the LIBOR transition as part of their 2020 priorities. Firms are expected to have clear transition plans for client outreach, technology, operations and funding.
Even where budgets are in place, respondents’ funding priorities point to a conflicted understanding of where the largest impacts can be made. Nearly a quarter (23 percent) of respondents plan to allocate funds to product design over the next three years, while only 17 percent plan to allocate funds to risk models, 14 percent to technology, and about one in 10 to legal remediation, an area critical to an effective transition. This confliction in priorities indicates that LIBOR transition plans are not being planned holistically and across business lines, leading to the risk that legal, technology, operations and trading functions might not all be ready for the LIBOR transition.
This struggle speaks to a lack of understanding among firms on the importance of prioritizing necessary skills and aligning these with staffing needs. The understanding of where priorities lie is key to adequately staffing across business and technology functions. The inability to properly address this may result in areas of firms’ LIBOR programs struggling to meet people and technology objectives without significant increases in funding throughout this year and 2021.
Benefitting from the LIBOR opportunity
Though there is little consensus among financial firms on whether the LIBOR transition will be worth the cost, over nine in 10 respondents with a mature plan believe the LIBOR transition is an opportunity to replace their legacy systems and transform their operating model to be more client driven. These respondents see their LIBOR transition spend as a chance to invest in technology innovation and business growth.
For firms looking to benefit from this opportunity, we recommend that as they explore their commercial strategy, they should also validate how this exposes their organization to conduct risk.
We suggest firms take the following actions:
- Invest in training and upgrading of compliance and surveillance programs in order to monitor any misconduct in new product trading in a post-LIBOR environment.
- Design and implement rigorous controls when undertaking activities related to these new products and the migration of client contracts.
- Complete a comprehensive conduct review of all product strategies before mitigating, from an operational perspective, any future mis-selling remediation and/or regulatory action.
- Quantify the impact of new product strategies on the firm’s risk framework and actively monitor them.
In the next blog in this series, we will look at indications of overconfidence among some respondents as they prepare for the LIBOR transition. For further reading, download the full survey report.