Dear CEO letter from the FCA regarding fair treatment of clients

The FCA has published a Dear CEO letter indicating that it has heard credible reports of a small number of banks failing to treat their corporate clients fairly when negotiating new or existing debt facilities, as clients navigate the current exceptional circumstances. Dear CEO letters are a regular tool for the FCA to communicate with senior management but to base one on “credible reports” is, we believe, unprecedented.

In particular, the FCA has heard reports that banks may have used their lending relationship to exert pressure on corporate clients to secure roles on equity capital markets mandates that the issuer would not otherwise appoint them to. The FCA indicated that in some cases, these roles may have been in name only, with few or no additional services being provided in exchange for a share of the fee pool (and, of course, the associated league table credits, although the FCA doesn’t mention this). The FCA stated that it will be looking into this further, but want any practice of this nature to cease immediately.

The FCA is 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 (we note the FCA has previously used its competition enforcement powers in the ECM space), undermines market confidence and calls into question firms’ and individuals’ integrity. The FCA stated that this conduct is also likely to increase overall transaction costs for corporates trying to raise money, and could be a breach of FCA rules and Principles. The FCA noted that firms are required to observe proper standards of market conduct (PRIN 5), act with integrity (PRIN 1), and in the best interests of clients (COBS 2.1), and prevent or manage conflicts of interest (SYSC 10.1). The FCA also indicated that firms and relevant individuals should also consider the requirements under the Senior Managers and Certification Regime, including the individual conduct rules. Clauses in agreements that restrict clients’ choice of providers for future business could also be a breach of COBS 11A.2. The FCA indicated that firms also need to fulfil their obligations under the Market Abuse Regulation (MAR) concerning the identification, handling and disclosure of inside information received in connection with the renegotiation of a corporate client’s existing facilities, including details of a potential equity capital markets transaction.

We recommend firms urgently:

1. Review their conflicts registers to ensure that any conflicts such
   as those highlighted by the FCA are appropriately identified and
   mitigating actions recorded;

2. That senior managers and others involved in either lending or
   capital markets decision making processes such as those on credit
   committees or similar satisfy themselves that they can demonstrate
   “reasonable steps” that the FCAs concerns are adequately addressed; and

3. That firms take steps to document the action they have taken in
   response to the Dear CEO letter.