The FCA has published Policy Statement 17/13: Investment and corporate banking: prohibition of restrictive contractual clauses (PS17/13).
The final rules contained in PS17/13 are being introduced as a result of the FCA’s findings in its October 2016 market study on investment and corporate banking and follows Consultation Paper 16/31: Investment and corporate banking: prohibition of restrictive contractual clauses (CP16/31).
The FCA’s market study covered a wide range of primary market issues and it assessed the effects of cross-selling and cross-subsidisation. The FCA found that primary market providers generally use a ‘universal banking’ model, which involves the cross-selling and cross-subsidisation of services. While many primary market clients, particularly large corporates, feel this model works well, the FCA found some practices that could hinder competition, especially for smaller clients. In particular, banks use clauses in contracts, mandates or engagement letters that oblige clients to award or offer future services to that bank (which the FCA refers to as ‘future service restrictions’ or ‘restrictive contractual clauses’).
In CP16/31 the FCA proposed to ban contractual clauses that restrict competition without being clearly beneficial to clients. The FCA stated that based on its analysis implementing such a ban would not likely result in significant compliance costs or other significant negative unintended consequences. In particular, the regulator did not expect the prohibition to change the current universal banking model in which some services, such as corporate lending and corporate broking, are provided below cost or for free in the expectation of receiving other future business from clients. The FCA’s analysis indicated that restrictive contractual clauses were not essential for this business model to continue.
In PS17/13 the FCA confirms its intention to proceed with the ban.
Key points in PS17/13 include:
- the ban applies to written agreements only. However, the FCA does not expect the ban to mean that firms replace written clauses with unwritten oral agreements and it would be concerned if undue pressure were to be placed on clients by such means;
- the ban applies to unspecified and uncertain future services only. As mentioned in CP16/31 the application to future services ensures that firms can continue to use, for instance, so-called ‘tailgunner clauses’, which are designed for recuperating fees for work already undertaken by a financial institution if the client decides to use another firm for the same service or transaction;
- the FCA considers that ‘right of first refusal’ clauses should be banned but that the ‘right to match’ clauses are acceptable so long as these do not oblige the client to use the firm if it matches a third party’s terms. Rights to pitch or to be considered in good faith are also acceptable;
- the FCA consulted on the basis that the ban would affect future service restrictions related to ‘corporate finance services’, a new glossary definition based on the existing definition of ‘corporate finance business’ in the FCA Handbook. In light of feedback to the consultation the FCA has now chosen to create a new Handbook definition for primary market and M&A services, covering ECM, DCM and M&A activities. The ban would apply to clauses affecting future primary market services (the ban does not apply to future services which are a form of corporate lending, so the ban would not apply to, for example, an accordion clause in a loan which would set out the subsequent incremental increase in terms of the loan);
- the FCA’s definition of primary market services is based on the relevant definitions for ECM, DCM and M&A services used in MiFID II and the descriptions used during its earlier market study;
- the definition of a bridging loan has been amended and such loans are excluded from the ban. Warehouse facilities used as a vehicle for a collateralised loan obligation transaction are also excluded from the ban; and
- the geographic application of the ban is in line with the jurisdictional scope of COBS 1.1.
The final rules come into effect for agreements entered into after 3 January 2018. If a firm is affected by the changes, they need to ensure procedures are in place to ensure that they do not enter into these types of clauses in any written agreements with clients. This could include amending templates for contracts and engagement letters, and updating any guidance, policies and training around the terms that a firm is able to agree with clients.