On 28 September 2023, the FCA published a portfolio letter addressed to the CEOs of corporate finance firms (CFFs). The letter outlines the harms to consumers and markets that the FCA thinks are most likely to arise from the business models of CFFs, and sets out its strategy to address these harms and its expectations of those firms.
The FCA explains that its supervisory priorities are:
- Client categorisation: The FCA expects firms to comply with the client categorisation requirements in COBS 3 in relation to clients they provide a service to in the course of carrying on a regulated activity. In the next CFFs survey the FCA will ask firms for data about their investors and types of products marketed to them, and will use this data to undertake targeted reviews of firms’ investor categorisation practices. Given the risk of investor detriment, firms can expect the FCA to take robust action, including the application of business restrictions, if the FCA sees abuse of the corporate finance contacts regime or financial promotion exemptions.
- The Consumer Duty: Where CFFs provide services to retail clients in the course of carrying on regulated activities, their activities may be in scope of the Duty. Further, the Duty applies to the process used by firms for client categorisation. CFFs encouraging clients to seek professional client classification simply to circumvent the protections afforded to retail clients would breach the Duty. If a client has been incorrectly classified, or the firm becomes aware that a client has been previously incorrectly classified, the firm should reclassify the client and restore the correct level of protection.
- Dealing with problem firms: The FCA expects CFFs to use their regulatory permissions to advance a legitimate business purpose, and to construct and maintain their permission profile in a way that accurately reflects this. However, it notes that it continues to see firms that appear to hold permissions for no clear business purpose or in order to favourably influence public perceptions of their unregulated business. The FCA will contact firms that do not appear to be using their regulatory permissions to understand why they need them and will invite firms to vary or cancel their permissions where appropriate. Where firms do not do so voluntarily, the FCA will use its powers to remove firms’ unused permissions and prevent firms from misleading consumers.
- Market abuse: Firms must ensure market abuse controls are tailored to their individual business models. The FCA expects CFFs to have robust prevention cultures, and systems and controls to discharge their obligations under UK MAR. The FCA also expects CFFs to properly identify, record and manage conflicts of interest. These requirements are set out in Principle 8 and the rules in SYSC 10. CFFs must consider conflicts arising both from their inherent business model and from new clients and new transactions taken on.
Other points highlighted in the letter include:
- The UK Listing Review and the Future Regulatory Framework Review marked the onset of wide ranging reforms to improve the effectiveness of UK primary and secondary wholesale markets. These reforms propose significant changes to the UK regimes for listing, admission to trading and public offers to streamline the primary and secondary capital raising process for issuers. The FCA will make new rules to implement these new regimes when consultations conclude. The FCA also aims to make new rules in response to the Investment Research Review. CFFs are important stakeholders in these reforms and are expected to keep abreast of regulatory changes.
- The FCA has seen examples of firms that keep FCA permissions they have not used and do not need. Often these firms are connected to groups, entities or individuals undertaking unregulated business. In these circumstances, there is a risk that FCA authorisation can appear to lend credibility to unregulated activities and mislead consumers into thinking they are protected when they may not be. Of particular concern are retail customer type permissions that are not used for regulated activity or are not limited to corporate finance business.
CEOs are asked to notify the FCA immediately if they consider that their firm does not meet the requirements. By the end of November 2023, the FCA expects firms to have discussed with their directors and Board the contents of the letter and to have agreed appropriate actions and next steps.