Helen Boyd, head of department, markets policy, at the FCA, said: “Advisers absolutely should talk to clients about Libor now.”
“Act now. Don’t wait until Christmas Eve to do your Christmas shopping. As conduct regulator, we look to see if firms have taken reasonable steps to treat customers fairly.
“It is up to firms to determine when and how to transition, but the choice of replacement rates should not disadvantage customers. Communication to customers should be clear, fair and not misleading and in good time,” Boyd said.
The Libor rate was used historically as a reference rate for calculating interest on mortgages and other loan products.
However, it became seen as less robust by regulators, since it was determined by the rate at which banks lent to each other and was found susceptible to manipulation, following the financial crisis.
The final deadline for lenders to have transitioned all their existing and new mortgage business to an alternative rate is end of December 2021.
The regulator’s message — delivered today on a webinar hosted by the Institute of Chartered Accountants in England and Wales — was that the transition and communications with clients ought to begin now.
The new rate, SONIA, is seen by the regulator as an acceptable alternative, while the Bank of England base rate, which is well-established as a reference point in retail lending, is another.
There is no hard and fast rule as to which alternative mortgage lenders must choose. Instead, the line from the regulator is to ensure that the messaging to clients is clear, fair and timely.
Lenders opt for different rates
Peter Beaumont, chief executive at The Mortgage Lender, said. “We looked at a number of different options to replace LIBOR and settled on the Bank of England base rate (BBR) as the simplest and fairest replacement, which is also easy to understand for borrowers.
“All of our recent residential and buy to let lending has the BBR as its revert rate and we’re communicating with existing borrowers in advance of transitioning them onto the BBR in September.”
Beaumont added: “We felt that was the right thing for the borrowers and it’s actually advantageous given that Libor generally trends above the BBR.”
Paragon, conversely, confirmed it had chosen Term SONIA as its alternative reference rate to Libor. “This is a forward looking rate, so customers know what their repayment will be for the three months following their quarterly reset rate,” the lender said.
Paragon will be transitioning customers from June to December, and has already written to let them know.
Meanwhile, another lender contacted by Mortgage Solutions had not yet made a final decision on which alternative rate to use.