AFM issues recommendations to limit behavioural risks of benchmark transition

Dutch financial institutions have made a considerable effort to transition to alternative, risk-free benchmarks in recent years. However, this transition has slowed down worldwide. In a Joint Statement issued by the AFM and DNB, financial institutions are reminded of the need to speed up the transition. The delay is mainly due to the fact that new fees are not being introduced quickly enough and/or fallback provisions have not yet been included in contracts. The AFM urges the parties involved to take action to ensure they meet the deadline of 31 December 2021.

A transition with challenges and risks

The transition to alternative interest rate benchmarks is a demanding and complex process for the financial sector, as most alternative interest-rate benchmarks differ fundamentally from traditional interest-rate benchmarks.

The transition brings challenges and risks, including behavioural risks. These are risks that arise when there are differences in knowledge and bargaining power between financial institutions and their customers, or when changes are made to products prior to their end date.

Guidelines

One of the key factors in mitigating behavioural risks is that institutions are transparent to their customers. They should therefore communicate the relevant choices and considerations. In addition, a fallback provision should at minimum include a procedure that describes what steps will be taken if the current benchmark is no longer available. Furthermore, discussions of benchmark changes should not be used to go through the entire contract. As a final point, all contracts should be amended in such a way that the economic and legal consequences are minimised and as neutral as possible.