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Dear CEO | Release Date: 28th September 2023

To read a shorter summary of this Dear CEO letter, click here.

To access the original FCA document, click here.

Long Summary

In a recent communication to Chief Executives of Corporate Finance Firms (CFFs), the Financial Conduct Authority (FCA) outlines its supervision strategy for these firms. This letter addresses potential risks to consumers and markets posed by the business models of CFFs and details the FCA’s strategy for mitigating these risks. It also clarifies the expectations placed on CEOs and their boards to manage these risks effectively.

The Role of Corporate Finance Firms

CFFs are integral to the UK economy, providing essential services such as advising corporate clients on fund-raising and strategic transactions, and offering ancillary services like corporate broking and investment research. These firms play a pivotal role in sourcing capital for businesses, supporting small and medium-sized enterprises, facilitating price formation, and maintaining market liquidity. The FCA emphasises the importance of CFFs in maintaining the integrity, transparency, and competitiveness of UK capital markets.

Identified Risks and FCA’s Supervisory Focus

Market Abuse and Consumer Protection

The FCA identifies a significant risk of market abuse due to the insider information that CFFs might handle, especially those that act for listed corporate issuers. Poor management of this information and inadequate control systems can undermine market integrity and consumer trust. Furthermore, CFFs that raise funds for unlisted companies can expose consumers to high-risk investments that may not align with their needs, posing additional consumer protection challenges.

Financial Crime and Financial Resilience

CFFs dealing with complex corporate structures and cross-border transactions face heightened risks of financial crime, including money laundering and breaches of sanctions, particularly in light of international events such as the Russian invasion of Ukraine. The FCA stresses the importance of robust financial crime due diligence. Additionally, the financial resilience of CFFs is crucial, as their failure could significantly impact markets and consumers, especially those that hold substantial client assets or provide significant liquidity.

Regulatory and Market Context

The sector is currently navigating through challenging market conditions characterised by lower IPO and M&A activity, prompting cost rationalisation and consolidation among CFFs. Despite these challenges, the sector has shown resilience. The FCA underscores the importance of strong controls, particularly for CFFs engaging in higher-risk business during periods of low activity. Additionally, impending reforms from the UK Listing Review and the Future Regulatory Framework Review are expected to bring significant changes to market operations, affecting how CFFs conduct their business.

FCA’s Expectations of Corporate Finance Firms

Client Categorisation and Consumer Duty

CFFs are expected to adhere strictly to client categorisation requirements to prevent misclassification that could strip clients of necessary protections. The introduction of the Consumer Duty, effective from July 31, 2023, mandates that firms prioritise consumer needs, potentially extending the Duty’s implications across various aspects of CFF operations. The FCA will closely monitor compliance with these regulations, focusing particularly on firms’ categorization processes and the treatment of retail and elective professional clients.

Dealing with Problematic Practices

The FCA intends to address issues around firms that maintain unnecessary regulatory permissions which might mislead consumers regarding the level of protection offered or imply credibility to unregulated activities. Firms are urged to review their permissions and ensure they accurately reflect their business activities to avoid misleading consumers.

Conclusion and Next Steps

Chief Executives are instructed to ensure their firms’ activities and internal controls are aligned with FCA regulations and to prepare for the evolving regulatory landscape. The FCA expects CFFs to actively engage in reviewing their business models, particularly in how they handle client categorisation and manage financial promotions. Firms must also ensure their response strategies are robust against the backdrop of financial crime risks and market abuses. The letter concludes with a call to action for CFFs to discuss the contents and implications of the FCA’s supervision strategy with their boards and to define clear steps forward to align with the FCA’s expectations.

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