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Law360 (May 21, 2020, 4:01 PM EDT) --
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| Claire Cross |
The year 2020 has seen a change in tack by the FCA and there has been a veritable flurry of these letters, which are designed to highlight specific issues of concern that have arisen in certain industry areas.
The April 28 missive relates to "credible reports" that some corporate customers, specifically those facing financial difficulty and seeking to raise equity finance, are not being treated fairly by banks. Even by the usual standards of a "Dear CEO," it is particularly strongly worded.
It appears that the FCA has recently been made aware of as-yet-unidentified banks using their corporate clients' current financial and cash-flow problems as a lever to obtain roles on equity mandates that they otherwise would not have obtained. In short, some clients who need to extend or instigate new debt facilities have been forced to agree that their lending bank can take part in other equity-raising activities, in order to obtain or maintain lines of funding.
For some, it will undoubtedly have felt like a gun to the head — let us in on the deal, or your debt provision will dry up. What is particularly worrying is that, in some cases, those who have allowed the lender to participate in the equity finance raising have received no real additional value or service in exchange for an often significant share of the fee pool.
Unsurprisingly, the FCA has not been best pleased to learn of such strong-arm tactics, particularly as it went to considerable efforts in 2017 and 2018 to outlaw similar practices.
Indeed, as of Jan. 3, 2018, firms have been banned from inserting restrictive clauses into written contracts, mandates or engagement letters that give them the right to provide future primary markets services to their clients.
The relevant FCA Handbook rules which banned these practices[2] were put in place specifically to ensure that corporate clients were not pressured to reward their lending bank or corporate broker with future primary market services in circumstances where the client might be better off obtaining those services separately elsewhere.
Some may say that the FCA was shortsighted in applying the ban only to written agreements, but it should be noted that, in its published policy statement, the FCA made clear that "We do not expect the ban to mean that firms replace written clauses with unwritten oral agreements."
This would mean that a bank that had entered into such an agreement with its client, but had not been committed it to writing, would still likely be in breach of the Principles of Business, the high-level statements that set out the core obligations of firms and act as an overarching framework to govern their conduct.
In this instance, the FCA's letter identifies Principle 1 (a firm must conduct its business with integrity) and Principle 5 (a firm must observe proper standards of market conduct) as those that may have been breached if a lender has attempted to tie its client's hands, even if only by oral agreement. If the bank were foolish enough to have committed the agreement to writing, then this would obviously also be a clear breach of the handbook rules as well as the principles.
However, it is not just institutions that could face sanctions. The FCA has spelled out in its letter that, in the new age of personal responsibility, individuals subject to the Senior Managers Regime may also be at risk of investigation and enforcement.
Recent reports seem to suggest that some of these decisions may have been taken unilaterally by more junior individuals, however depending on the level of seniority at which the decisions were made, senior management function holders should also expect to find themselves under scrutiny.
The FCA finished its letter with an almost school teacher admonishment that "we will return to this matter, but want any practice of this nature to cease." It is therefore not surprising to learn that banks are attempting to get their ducks in a row to be ready for when the regulator does eventually come calling.
It is not hard to imagine the FCA's consternation at receiving such reports. The organization will surely be left wondering just exactly what it is that must be done to hammer home the message of good culture and ethics in financial services.
Ethics is about what you do when no one is looking, but these practices will now be under the FCA microscope. Unfortunately for financial services customers, this is unlikely to be the last "Dear CEO" letter concerned about fair treatment in these toughest of times.
Claire Cross is a partner at Corker Binning.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] "Banks probe sales push linked to corporate loans" by Stephen Morris Financial Times, MAY 18, 2020.
[2] COBS 11A.2
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