Financial Conduct Authority: Are banks using their lending relationship to exert pressure on corporate clients?
On 28 April 2020 the Financial Conduct Authority (FCA) published a letter to CEOs detailing its concerns having received reports that a small number of banks may be using their lending relationship to exert pressure on corporate clients to secure roles on equity mandates that the issuer would not otherwise appoint them to. In some cases they advised that these roles may be ‘in name only’ with few or no additional services being provided in exchange for a share of the fee pool. As such the FCA have indicated real concerns that this behaviour is likely to cause an increase in transaction costs for corporates trying to raise money.
Appropriately the FCA have advised that this practise should cease immediately, warning those firms active in both equity and lending markets to undertake a review of their systems and controls to ensure that they meet the requirements expected by the regulator.
It is clear that capital markets have an essential role in financing business and improving transactional efficiencies. An attempt by firms in both equity and lending markets to use their position to pressure already struggling companies could not only effect economic recovery but undermine market confidence.
Firms will be mindful of their obligations under the FCA rules and principles when dealing with clients, and must ensure that when undertaking any internal review of their systems and controls that they are able to demonstrate they were acting with integrity and with the clients’ best interests in mind. Senior managers must also be mindful of the senior managers and certification regime and the individual conduct rules, to ensure that when performing their specific functions they too have complied with their obligations.
It is clear that where there is evidence of poor lending behaviour that firms will be required to demonstrate that they have in force clear policies to prevent conflicts of interest, insider trading, any market abuse and mechanisms to ensure such policies are adhered to. Where a firm is unable to demonstrate this it is likely to face significant criticism by the FCA and potential enforcement action.
If your firm has concerns that there may have been a potential breach of the regulations it should seek independent legal advice to consider its obligations and next steps.