Corporate Finance Firms: Read Our Analysis of the FCA's Portfolio Letter - September 2023

Introduction

The FCA issued a comprehensive Dear CEO in September 2023 to Corporate Finance Firms (CFF), outlining its critical regulatory priorities and expectations. This letter provides a framework for maintaining market integrity, fostering competition, and enhancing consumer protection within the corporate finance sector. 

It has been nine months since the letter was published, the FCA expected CFFs to have considered the contents of the Dear CEO letter by November 2023 and implemented appropriate actions and next steps.  How has your firm assessed itself against the FCA’s expectations and what is there left to do?  Can Compliance Matters UK Limited assist?

Strategic Priorities

The FCA's strategic focus areas include:

1. Market Integrity: Ensuring fairness and transparency in transactions is paramount. The FCA stresses the importance of accurate disclosure and fair dealing to maintain stakeholder trust.

2. Consumer Protection: Safeguarding clients, especially retail investors, is a primary goal.  The FCA encourages firms to adopt robust risk management practices to protect consumer interests.

3. Operational Resilience: The FCA urges firms to develop systems that can withstand and quickly recover from operational disruptions.  This includes cyber resilience and contingency planning.

Key Risks and Expectations

The FCA identifies several key risks and outlines expectations for firms to address them effectively:

1. Conflicts of Interest

• Risk: Not managing conflicts of interest effectively can undermine trust and lead to poor outcomes for clients.

• Expectation: Implement policies and procedures to identify and manage conflicts of interest.  Firms should regularly review these policies to ensure effectiveness.
  

1. Financial Crime

• Risk: That your business may be used to facilitate the proceeds of financial crime.

• Expectation: Implement robust AML/CTF policies and procedures to ensure that CDD is carried out for all clients and beneficial owners of businesses.
  

1. Governance and Culture

• Risk: Poor leadership and the ‘tone from the top’ can lead to a culture of unethical practices within your firm.

• Expectation: Members of Boards and Senior Management Committees should be mindful of their responsibilities under SMCR to drive a culture of ethical behaviour through strong leadership and training.  The Consumer Duty reinforces this with its focus on good outcomes for retail consumers.
  

1. Market Abuse

• Risk: CFFs may be party to information about mergers and takeovers before they are in the public domain.  The use of this information for personal gain by individuals is in breach of the FCA’s Market Conduct Rules.

• Expectation: Implement robust systems to detect and prevent market abuse within your firm.  Regularly review and update these systems to address new threats.

Supervisory Approach

The FCA's supervisory approach is proactive and includes:

1. Engagement: The FCA plans regular interactions with firms to provide guidance and feedback.  These may include Dear CEO letters, speeches, and surveys.

2. Assessments: In addition to the above, the FCA will carry out desk based or on-site supervisory assessments to ensure compliance with regulatory standards.

3. Thematic Reviews: The FCA will conduct thematic reviews focusing on specific issues or areas of concern.  These reviews help identify industry-wide risks and best practices.  The output of Thematic Reviews highlights good and poor practices observed during the reviews.

Regulatory Developments and Implementation

The FCA acknowledges that CFFs play an important role in the UK economy as a source of capital all businesses and for small and medium sized businesses in particular.  They have a key role in IPO and M&A activity.  However, not all clients of CFFs can be classified as professional clients and CFFs should be mindful of the loss of regulatory protections when not treating a client as a retail client.  Client categorisation is an important priority for the FCA in all sectors but is highlighted in the Dear CEO letter.  CFFs are reminded to review the criteria for a client to be treated as a per se professional or an elective professional client.

The introduction of the Consumer Duty with its requirement for firms to act to deliver good outcomes for retail customers should be a focus CFFs in the way they work with all clients, particularly those in which will impact retail clients directly.

CFFs, like all firms, should regularly review their regulatory permissions to ensure that they meet the business purpose of the firm.  Incorrect or outdated permissions on the Financial Services Register can mislead consumers about the level of protection a firm offers.

Conclusion

The FCA's 2023 portfolio letter is a crucial document for corporate finance firms, detailing the regulator's expectations and strategic priorities.  By addressing key risks, enhancing operational resilience, and staying abreast of regulatory developments, firms can align with the FCA's vision of a fair, transparent, and resilient market.

For a comprehensive understanding, you can access the full FCA's Corporate Finance Firms Portfolio Letter 2023 here.

For more information on how Compliance Matters UK Limited can support your regulatory compliance needs and goals, to ensure your business meets the requirements outlined for corporate finance, please book a free consultation call with us here.

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