The Financial Supervisory Authority (FIN-FSA) has mapped how reforms concerning reference rates will affect credit institutions supervised by the FIN-FSA and what kind of preparations have been made for these reforms as well as exceptional circumstances which may be involved.
According to the credit institutions, any impacts of the reforms on contractual relationships are minor. However, the responses received imply clear differences across banks in the level of preparedness for the reference rate reform. In addition, customer communications leave room for improvement.
Not all oncoming changes had been adequately taken into account in credit institutions’ activities
Some of the credit institutions applying EONIA failed to consider in their responses that the changes may have an impact on the valuation of certain balance sheet items. Neither were needs for operational changes caused by the reference rate reforms, such as the change in the time of quotation of the interest rate, taken into account in all responses. As a result of the responses received, the FIN-FSA will contact the credit institutions to ascertain that they acknowledge the impacts of the reform in these regards.
Furthermore, the survey indicates that the credit institutions do not have fully aligned policies for customer communications, and the majority of them have not informed their customers, at least so far. The FIN-FSA finds it advisable that credit institutions inform their consumer customers generally on the content of the reference rate reform and its potential impacts on contracts with customers.
The FIN-FSA also reminds that, in accordance with chapter 7, section 9(3) and chapter 7a, section 4(2) of the Consumer Protection Act, banks must, before entering into a credit contract, inform the consumer on
- the benchmark
- the name of the administrator of the benchmark
- potential impacts of the use of the benchmark on the consumer
where it is intended that the credit contract makes reference to a benchmark as defined in Article 3(1)(3) of the Benchmarks Regulation.
Not all banks’ continuity plans are compliant with the Benchmarks Regulation
The respondents (excluding branches) where also requested to submit the plans required in Article 28(2) of the Benchmarks Regulation setting out the actions that they are prepared to take in the event that the reference rates used by them change materially or cease to be provided. The continuity plans submitted to the FIN-FSA demonstrated different levels of content, and not all of them necessarily meet the requirements of the Benchmarks Regulation. Three credit institutions did not have the requested plan to submit at all.
According to the European Securities and Markets Authority (ESMA), Article 28(2) of the Benchmarks Regulation requires that the plan is thorough and adequate. The plan must determine the operative procedures the supervised entity intends to take as a result of a change or cessation of the provision of a benchmark. The plan must include
- detailed courses of action
- relevant communication channels
- arrangements for different scenarios and contingencies
To maintain the plans, credit institutions must continuously monitor relevant factors and update arrangements as appropriate1. Furthermore, Article 28(2) of the Benchmarks Regulation requires that supervised entities reflect these plans in the contractual relationship with clients2.
The FIN-FSA will contact certain credit institutions separately regarding the plans. In addition, the FIN-FSA requests other credit institutions to assess themselves whether their plans are consistent with the ESMA interpretations and complement them as necessary.
Implementation of the survey
Due to the requirements of the EU Benchmarks Regulation, there are projects ongoing in the euro area to reform the most significant interest rate benchmarks, EURIBOR and EONIA. A new hybrid methodology has been adopted in the calculation of EURIBOR, while EONIA is now calculated by applying a fixed spread to the €STR. The quotation of EURIBOR will cease entirely on 3 January 2022.
The FIN-FSA survey was implemented using a questionnaire sent to thirteen credit institutions operating in Finland in 2019.
For further information, please contact:
- risk management: Marjo Risku, Senior Risk Expert, tel. +358 9 183 5275 or marjo.risku(at)fiva.fi
- customer communications: Armida Rantanen, Assistant Legal Advisor, tel. +358 9 183 5532 or armida.rantanen(at)fiva.fi
- continuity plans under the Benchmarks Regulation: Jyrki Manninen, Senior Policy Advisor, tel. +358 9 183 5205 or email jyrki.manninen(at)fiva.fi
1Q&A 8.2, Questions and Answers On the Benchmarks Regulation (BMR)¸ ESMA70-145-11 Version 14
2Q&A 8.1 ja Q&A 8.3, Questions and Answers On the Benchmarks Regulation (BMR)¸ ESMA70-145-11 Version 14.