This week, the Financial Conduct Authority (FCA) issued a Dear CEO letter to financial firms. The letter reminds banks of their obligations when it comes to providing finance to businesses.
Here we look again at what has prompted the FCA action, what the Treating Customers Fairly rules comprise, and what banks need to do to ensure they meet them.
Why has the regulator written to banks now?
The FCA has issued the letter as a result of ‘credible reports of a small number of banks failing to treat their corporate clients fairly when negotiating new or existing debt facilities’.
The letter points out the ‘vital role’ that capital markets play in supporting the finances and cash flows of businesses. It stresses that the FCA will ‘expect financial firms to continue to provide strong support and services to customers during this period of disruption’.
It notes, though, that reports of unfair practices have reached the regulator: ‘In particular, we have heard reports that banks may have used their lending relationship to exert pressure on corporate clients to secure roles on equity mandates that the issuer would not otherwise appoint them to. In some cases, these roles may be ‘in name only’, with few or no additional services being provided in exchange for a share of the fee pool. We will be looking into this further, but want any practice of this nature to cease immediately.’
The FCA is concerned that these practices will tie clients to taking additional services, or cause them to be charged fees for services not provided.
This, as the letter states, ‘is not in the best interests of those clients, distorts competition, undermines market confidence and calls into question firms’ and individuals’ integrity. This conduct is also likely to increase overall transaction costs for corporates trying to raise money’.
It could also represent a breach of FCA rules and principles, in particular those that require firms to:
- Observe proper standards of market conduct (PRIN 5)
- Act with integrity (PRIN 1), and in the best interests of clients (COBS 2.1)
- Prevent or manage conflicts of interest (SYSC 10.1)
The letter also reminds firms and relevant individuals that they should remember the requirements under the Senior Managers and Certification Regime (SMCR), including the individual conduct rules. The regulator has already issued updates on how firms should approach their SMCR obligations in light of Covid-19, for both solo- and dual-regulated businesses.
Clauses in agreements that restrict clients’ choice of providers for future business could also be a breach of COBS 11A.2 (prohibition of future service restrictions).
The letter also reminds firms that they need to fulfil their obligations under the Market Abuse Regulation (MAR) around the identification, handling and disclosure of inside information received in connection with the renegotiation of a corporate client’s existing facilities.
This includes details of a potential equity capital markets transaction. Depending on the circumstances, sharing such information within a lending bank may be inconsistent with that bank’s obligations under MAR.
What will the regulator do next?
The FCA ‘will not hesitate to take action’ if it finds further evidence to support its concerns on this.
It asks firms active in both equity and lending markets to review their current systems and controls to ensure they are sufficient to meet the TCF requirements; to identify and mitigate conflicts of interest, and the handling of inside information.
The regulator will contact directly any firms that have had both a lending relationship and equity role with any of the issuers who have recently raised significant equity capital, and speak to the relevant senior manager. This will enable the FCA to understand how firms ensured that clients were treated fairly, and that inside information was handled appropriately.
Meeting the FCA’s expectations on TCF
The Treating Customers Fairly rules have six required outcomes:
- Outcome 1: Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.
- Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.
- Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
- Outcome 4: Where consumers receive advice, the advice is suitable and takes account of their circumstances.
- Outcome 5: Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.
- Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.
You can find out more about the TCF rules, here.
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