FCA warning to banks on treating corporate customers fairly when they are preparing to raise equity finance

The UK's Financial Conduct Authority (FCA) has issued a stern Dear CEO letter warning banks to treat corporate customers fairly when they are preparing to raise equity finance.

The FCA says that it has received credible reports of certain banks using their lending relationship to exert pressure on corporate clients in order to obtain roles on equity mandates that they may not otherwise have been appointed to. In some cases, these are roles "in name only" with limited or no additional services being provided in exchange for a share of the fee pool.

The FCA has said that it wants any practice of this kind to "cease immediately", warning that it could be a breach of its rules and principles including those in relation to integrity, market conduct, acting in the best interest of clients and management of conflicts. Firms and individuals should also consider the requirements of the Senior Managers and Certification regime, including the conduct rules.

The FCA notes that firms need to meet the requirements of the Market Abuse Regulation (MAR) in relation to the identification, handling and disclosure of inside information received in connection with the renegotiation of a corporate client's existing facilities, which may include details of a potential equity capital markets transaction. The FCA observes that depending on the circumstances, sharing such information within a lending bank could be inconsistent with the bank's obligations under MAR.

The regulator is clear that it will take action if evidence is found to support the concerns identified. Firms that are active in both equity and lending markets are asked to review their systems and controls to satisfy themselves that they are appropriate for ensuring the proper treatment of clients, identification and mitigation of conflicts of interest, and the handling of inside information. The FCA warns that this review should have regard to the increased volumes anticipated in equity capital markets, and the concerns raised with the FCA.

The FCA plans to contact senior managers at firms who have had both a lending relationship and equity role with any issuers who have recently raised significant equity capital. Firms will have to satisfy the FCA that they ensured clients were treated fairly and inside information was handled in accordance with the rules - otherwise it seems highly likely that enforcement action will follow.

{ We are concerned that tying clients to take additional services, or demanding fees for services not provided 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.

 https://www.fca.org.uk/publication/correspondence/dear-ceo

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