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Update

The FCA has written a Dear CEO letter to Corporate Finance Firms (CFFs) to outline the harms to consumers and markets which they believe are most likely to arise from their business models. The letter also sets out strategies to address these harms. The FCA expects the content of the letter to be discussed at Board level by the end of November 2023, with firms considering how risks apply to their business and how to manage them effectively.

The varied types of CFFs and the activities they undertake means the potential harms will differ. Part of the supervisory focus is to check firms’ business models and their approach to the key risks of market abuse and selling unsuitable products to consumers. The FCA intend to update the previous s165 survey issued to CFFs in 2023 annually to continue to inform their view of the portfolio key risks and their supervisory strategy. The next CFF survey will ask firms for data about their investors and types of products marketed to them. Other changes include implementing the UK Listing Review and the Future Regulatory Framework Review once consultations conclude.

As part of the supervisory strategy for CFFs the FCA will be dealing with problem firms who appear to hold permissions for no clear business purpose or in order to favourably influence public perceptions of any unregulated business. These firms will be invited to limit or vary their permissions accordingly.
The letter outlines that firms are responsible for considering to what extent the three following drivers of harm apply to their business. 

The first of these is the provision of unsuitable products to consumers/categorising clients incorrectly. Retails clients in particular may be inappropriately categorised and treated as professional, which would deny them protection which should be afford to them. 

The second driver of harm is market abuse. The risks of market abuse are heightened in CFFs that act for listed corporate issuers and therefore routinely have access to insider information, and also trade in listed securities for the firm and for their clients. 

The last of the three drivers of harm is financial resilience. While many CFFs perform a purely advisory role, there are a number of CFFs that hold material client assets; are significant liquidity providers; or advise a large number of AIM or AQUIS listed clients. Disorderly failure of CFFs would have a material impact on markets and consumers and erode confidence in the sector as a whole.

Link: https://www.fca.org.uk/publication/correspondence/corporate-finance-firms-portfolio-letter-2023.pdf