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What has happened? 

The FCA issued in September 2023 a Dear CEO letter to corporate finance firms, outlining its supervision strategy.

What are the key points of the letter?

The key points of the letter are noted below.

• The FCA expects CEOs and their Boards to discuss the contents of the letter, consider how the risks identified in it apply to their business and take action to manage them effectively. By the end of November 2023, it expects them to have agreed on their appropriate actions and next steps.

• Earlier this year the FCA issued a survey under s165 of FSMA to all corporate finance firms. It intends to update the survey annually to explain its view of the key sectoral risks and its supervisory strategy. In the next survey, it will ask firms for data about their investors and the types of products marketed to them and it will use this data to undertake targeted reviews of firms’ investor categorisation practices (see below).
  
  
• Corporate finance firms can cause harm to retail investors by inappropriately treating them as corporate finance contacts when the relevant conditions are not met, while retail investors who are inappropriately classified as sophisticated investors or high net worth individuals may lose significant protections from high-risk products and suffer losses they may not be able to afford. Similar harm to investors can occur when firms do not properly consider the client category of a prospective recipient of a financial promotion for the purposes of complying with the financial promotion rules, particularly the rules applying to communications with retail clients.
  
  
• The FCA’s supervision strategy expects firms to comply with the client categorisation requirements in COBS 3 in relation to clients they provide a service to in the course of carrying on a regulated activity. In particular, COBS 3.5 sets out the criteria to be met for a client to be treated as a per se professional or elective professional client. The FCA will undertake targeted reviews of firms’ client categorisation practices to ensure their processes are effective and follow procedures for the quantitative and qualitative tests required under COBS 3.5.
  
  
• Many corporate finance firms undertake unregulated activities as part of their business model or may hold FCA permissions they have not used and do not need. The FCA continues to see firms that appear to hold permissions for no clear business purpose, or in order to favourably influence public perceptions of their unregulated business. It expects firms to have the corporate finance business limitation to their designated investment business or retail customer type permissions if this reflects the firm’s business model.
  
  
• The FCA has seen examples of corporate finance firms with poor UK Market Abuse Regulation systems and controls. These include ineffective information barriers, inadequate processes for the identification of inside information, poor wall-crossing controls and incomplete or inaccurate insider lists. Other failings noted when undertaking market soundings include not obtaining the consent of recipients before disclosing inside information and not communicating to recipients that they are no longer inside.
  
  
• The FCA has seen situations where firms do not identify and record allflicts by considering both the conflicts that arise in the business model, and conflicts in relation to clients and transactions, and also examples of incomplete and not sufficiently detailed conflict registers and examples where conflicts arising from staff directorships and staff or firm shareholdings in corporate clients are not properly discussed at committee meetings.
  
  
• The FCA continues to see examples of poor personal account dealing (PAD) practices, where firms do not adhere to their PAD procedures, their staff trade without proper compliance approval, and securities are not properly added to restricted lists.
  
  
• The firm survey has in the past collected data about firms’ approach to the Consumer Duty. The initial FCA focus will be on firms with retail clients. If a firm has retail clients and has not considered the Duty, or it considers that it is not impacted by the Duty, it will be asked to explain its rationale and approach. The FCA may ask to see relevant analysis about how the Duty applies and the firm’s approach to complying with the rules.

How can Thistle Initiatives help? 

Thistle Initiatives has supported corporate finance firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting you as-and-when, our team of specialists can serve as your right hand in meeting and complying with FCA regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.

Are you looking for help with your corporate finance arrangements, Consumer Duty or more general regulatory questions? Contact our specialist team now to schedule a free consultation. Get in touch with us by calling 020 7436 0630 or sending an email to info@thistleinitiatives.co.uk.