Corporate Finance: Shot Across the Bows

The FCA has published a portfolio letter to corporate finance firms (CFFs). There are a number of red and orange flags for corporate finance within it.

Action: By the end of November 2023, the FCA expects the contents of letter to be discussed with directors and Board and appropriate actions and next steps are to have been agreed.

The key actions/issues are:

• Market Abuse: The FCA has been focusing on MAR risks generally, corporate finance is now back in the spotlight. The list identified by the FCA as needing attention are familiar: PAD policies, inside information lists, information barriers, inside information identification, incomplete market soundings. The FCA found failings across the piece on these issues. The FCA will also carry out targeted cross-firm PAD reviews in the next supervisory cycle.
• Conflicts: FCA noted some firms are not identifying and recording all conflicts – "firms need to consider both the conflicts stemming from the business model itself and conflicts in relation to clients and transactions". It also noted conflict registers that looked incomplete/thin on the ground.
• Consumer duty: FCA highlight consumer duty and note that while much wholesale activity is outside of scope, it will be challenging firms on their analysis – in particular on financial promotions, professional opt ups and services performed directly to retail clients (note the corporate finance contact structure does not exclude automatically consumer duty).
• Compliance to do more: The FCA expects compliance functions to be actively challenging and monitoring firms’ activities and "to systematically escalate and inform senior management of issues in the area of market abuse, conflicts of interest and PAD"
• Client categorisation: The FCA will carry out targeted reviews of firms’ client categorisation practices to test effectiveness of processes are effective and to assess procedures for the quantitative and qualitative tests required under COBS 3.5 i.e. how have firms become comfortable that they are classifying persons/entities as "professional". This is particularly in light of consumer duty and concern over "opt up". Firms will be challenged if the FCA is not satisfied that retail clients are appropriately categorised or where it feels firms do not have the right customer type permissions for their business model.
• Regulatory permissions: The FCA will be contacting firms that do not appear to be using their regulatory permissions to understand the need for them and will invite firms to vary or cancel their permissions where appropriate. The FCA will use its powers to remove firms’ unused permissions and prevent firms from misleading consumers in the event that a firm does not voluntarily cancel/vary its permission.
• Limitations on permissions: The FCA expects CFFs to have the corporate finance business limitation to their designated investment business or retail customer type permissions where this reflects the firm’s business model. It will be inviting firms that it considers should have this limitation (but do not currently) to vary their permissions.