FCA ‘Dear CEO Letter’: Corporate Finance Firms

On 28 September 2023, the Financial Conduct Authority (FCA) issued a ‘Dear CEO letter’ to corporate finance firms (CFFs). This communication outlined the potential negative impacts on consumers and markets resulting from poor CFFs’ business practices.

CFFs primarily engage in transactions related to capital raising for business creation, development, expansion, or acquisition, as well as mergers and takeover activities. They often offer various ancillary services associated with their capacity as corporate brokers. These activities carry inherent risks, including the possibility of market disruptions and consumer detriment or the exposure of consumers to high-risk investments that may not align with their financial objectives.

CFFs have been facing difficulties caused by the Russian invasion of Ukraine, which resulted in fewer companies going public and fewer mergers and acquisitions.

Despite these challenges, CFFs have shown resilience. However, FCA wants to ensure that CFFs that engage in riskier business during these challenging times establish robust controls to manage that risk while keeping up with the regulatory change.

Every CFF will need to assess the level of harm it can cause to consumers and markets, but the FCA highlights the below as the main risks:

Offering products unsuitable for consumers – CFFs must exercise caution when categorising clients, as miscategorising retail clients as elective professionals, can lead to the loss of important protections. Accurate categorisation is essential to protect client rights and ensure regulatory compliance, and the firm must ensure the provision of safeguards and protections to the investor.

Under the Financial Promotion Order, communications to sophisticated investors and high-net-worth individuals are exempt from certain financial promotion restrictions, provided they meet the criteria. As a result, clients wrongly categorised might also receive unsuitable financial promotions.

Unused Permissions – Some CFFs maintain regulated activity permissions for services not offered to clients, and CFFs often also engage in unregulated activities. Leaving unused permission on the FCA register can mislead consumers to think they are protected when dealing with the CFF in unregulated activities. Such practices have led to consumer harm, particularly in fraudulent or unsuitable high-risk investments.

Market abuse – Market abuse threatens the UK financial system’s integrity, diminishing trust and participation. The risk is amplified among CFFs exhibiting deficient market abuse systems and controls, ineffective information barriers, weak inside information identification processes, poor wall-crossing controls and incomplete or inaccurate insider lists.

Conflict management – Poor conflict management and the lack of transparency can harm market integrity and ultimately harm clients. CFFs that overlook conflicts, neglecting to identify, record or address them adequately in meetings will need to pay more attention.

Personal Account Dealing (PAD) – PAD carries a higher inherent risk of insider dealing and conflicts of interest. Consequently, poor PAD practices can lead to staff trading without compliance approval, as well as securities not being appropriately identified on restricted lists.

Financial crime – CFFs must undertake robust due diligence measures and regularly test and update their financial crime systems and controls.

Financial resilience – Most CFFs perform a purely advisory and pose a lower risk of harm in failure to markets and consumers. However, a number of CFFs hold material client assets, are significant liquidity providers or advise a large number of AIM or AQUIS listed clients and the disorderly failure of such a firm would have a material impact on markets and consumers and erode confidence in the sector as a whole.

Actions for CFFs: 

If your firm does not meet the requirements discussed in the letter, a SUP 15 notification to the FCA should be made immediately.

By the end of November 2023, each CFF’s board must have discussed the letter’s contents and agreed to appropriate actions and next steps. We strongly recommend that those discussions and plans be documented.

CFFs should review client categorisation processes, and where a Retail Client has been wrongly categorised as an elective Professional Client, the CFF should reassess immediately.

CFFs with incorrect or outdated permissions on the FCA register must contact FCA to ensure that their profile accurately reflects their current activities.

CFFs should consider their business model and whether the corporate finance business limitation is appropriate for their designated investment business or retail customer-type permissions. If it is and the limitation is not on the FCA register, the CFF will need to vary its permissions.

CFFs should revisit their ICARA and Wind-Down Plans to ensure that they are adequately capitalised and appropriately prepared for an orderly wind-down.

If you require support with any of the points mentioned above or think your firm may benefit from a review, please contact Dan Harasemchuk or Gurminder Mahal.