The FCA’s Supervision Strategy for Corporate Finance Firms

 

What is the FCA Saying?

The FCA has recently issued a “Dear CEO” letter to Corporate Finance Firms (“CFFs”) to outline potential harms to consumers and markets it anticipates will arise from business models of CFFs.  The letter also provides a strategy to address these harms and communicate its expectations of these firms.  The FCA expects firms to remain up to date on regulatory changes and will hold firms who fail to do so accountable.  If a firm does not consider itself to meet all of the following FCA requirements, it must notify the FCA immediately.

The FCA makes it clear that it is a firm’s responsibility to identify those drivers of harm applicable to the firm, which could include:

  • Unsuitable products to consumers – can arise when firms deal with retail and professional clients, especially through inappropriate classification for Financial Promotion Order purposes or smaller businesses that are unable to be treated as professional clients;
  • Market abuse – typically where firms act for listed corporate issuers;
  • Financial crime – dealing with overseas clients and investors involving complex corporate structures; and
  • Financial resilience – where firms hold client assets, are significant liquidity providers or advise large numbers of AIM and AQUIS listed clients.

The FCA also has a number of supervisory priorities with which firms are expected to comply.  These include:

  • Client categorisation – are firms correctly categorizing their clients?
  • Consumer Duty – has the scope of the Duty been correctly identified by firms and have they taken appropriate action?
  • Dealing with problem firms – are firms using their permissions for which authorisation has been given?
  • Market abuse – do firms have robust prevention cultures, and systems and controls to discharge their obligations under UK MAR? Can they properly identify, record and manage conflicts of interest?

 

What Must Firms do?

1.       Client categorisation

The FCA expects firms to comply with client categorisation requirements in COBS 3 and, in particular, the rules of COBS 3.5 for treating retail clients as professional clients (“opt ups”).  In the next CFFs survey, the FCA will ask firms for data about their investors and types of products marketed to them, which it will use to undertake targeted reviews of firms’ investor categorisation practices.  These firms will need to be able to provide adequate documentary evidence of the categorisation of their clients, especially elective professional clients.

Firms must therefore ensure that their categorisation processes, whether for regulated advice, for financial promotions (FPO exemptions) or as corporate finance contacts, are fit for purpose and that historical records are satisfactorily evidenced.

2.       The Consumer Duty

It is a firm’s responsibility to ensure that the Duty’s application to a firm’s activities is considered and correctly applied where relevant.  Firms should consider the entire distribution chain or, where a distribution chain is complex, firms should do what is reasonable in assessing retail customer outcomes. The FCA’s initial focus will be on firms with retail clients but it will also be mindful of those firms that opt up clients to professional client status to ensure that this is not being abused to avoid commitments under the Duty.

Firms should consider the impact they face from the Duty, if any, and must be prepared to explain its rationale and approach.  The FCA will hold senior management responsible where firms neglect to do this.

3.       Dealing with problem firms

Firms should review their activities and map these to the required regulated activities in their scope of permission.  If any permissions are not being used or are unlikely to be used, firms should consider removing them via a variation of permission (“VoP”).  The FCA will also expect CFFs to have an appropriate corporate finance business Limitation or Requirement if this reflects the firm’s business model.  Again, this can be added via an appropriate VoP.

Additionally, a firm must notify the FCA of a change in business model, should it have been changed since the last communication with the FCA.

4.       Market abuse

Firms will be required to ensure that market abuse controls, as well as robust prevention cultures, and systems and controls to discharge their obligations under UK MAR, are tailored to their individual business models.  Firms must also properly identify, record and manage conflicts of interest and have appropriate personal account dealing procedures. The FCA expects compliance functions to actively challenge and monitor a firm’s activities and to efficiently inform senior management of issues in the area of market abuse, conflicts of interest and PAD.

By 30th November 2023, the FCA expects firms to have discussed at senior management level the following information and requirements, and to have agreed next steps.

 

How Can Complyport Help?

We can work with you and your Compliance team ahead of the November deadline to assess the current state of your existing policies and procedures in these key areas and provide assurance around current practices.  We can guide and assist with the implementation of any necessary changes to meet regulatory expectations.

On an ongoing basis, we can provide horizon scanning services and ongoing monitoring practices to ensure that the required standards are maintained.

Contact us today at thomas.salmon@complyport.co.uk  to discuss how our services can be tailored to meet your specific needs.

 

About Complyport

Complyport is a market-leading consulting firm supporting the UK financial services industry for over 20 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.

Complyport can assist with the preparation of a GAP analysis and impact assessment on the investment firm’s capital adequacy and risk management framework of the Company under the regulatory framework.

We specialise in supporting the UK financial services industry with compliance guidance, advice and best practice.

  • Prudential support, IFPR, ICARA and financial resilience advice
  • Financial Crime support and Forensics
  • Consumer Duty implementation advice
  • Operational resilience & Cybersecurity advice
  • Financial Promotions guidance, support, and management software solutions
  • CASS advice and protections of client assets
  • Comprehensive compliance work-flow management software
  • Compliance managed services and resourcing compliance personnel
  • Skilled Person Reviews and Regulatory Investigation

Contact Thomas Salmon in our Regulatory Solutions team via email at: thomas.salmon@complyport.co.uk to book a free consultation.

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