The Financial Conduct Authority (FCA) has just published its multi-firm review of client categorisation in corporate finance firms. There is a lot of interest in this paper, and it deals with quite a number of the old chestnuts in relation to the market. I wanted to pick out three of these.

Categorising corporate finance clients

The first relates to the fundamental question of categorising corporate finance clients, and I’m talking here about the situation where the firm accepts that the person is a client in the first place. 

The FCA clearly has concerns around the thoroughness with which firms are doing this. In particular, the scientific nature of their categorisation criteria. This has a number of aspects. 

First, FCA has comments about elective professional categorisation and the extent to which the elective criteria are done on a systematic basis in accordance with written guidance within the firm. The essential point is that the FCA does not consider that firms have a systematic enough approach to this process. 

In addition, the FCA criticises over reliance on self-certification in relation to elective professionals with policies and procedure being too higher level, not detailed enough and with a lack of consistent analysis over time of the eligibility of a client who is a natural person i.e. an individual, from being an elective professional. So, all of those points need to be taken into account by firms. However, so far, the conclusions are fairly predictable.

Corporate finance contacts

The second area, which is more novel, is the whole question of corporate finance contacts. It is a very British concept, which as we know does not exist in a number of EU member states. To remind everybody, the idea is that a corporate finance contact is not treated as a conduct of business client but merely as a financial promotion client. 

There are a number of aspects to this but the FCA, for the first time in my memory, has given some proper guidance on good and bad practice here and I think it’s really worth focussing in on this. 

The first. and perhaps obvious point is that a firm needs a proper organised list of its corporate finance contacts from time to time. There needs to be a clear process to updating this, for example, it needs to be done not just for one transaction on a sort of “eternal” basis but should be done on at least a regular, and probably a transaction by transaction basis, and there needs to be clarity across the firm around the relationships that individual members of the firm have with corporate finance contacts. So that’s a pretty fundamental series of issues. 

I think there is also a larger underlying question around the treatment of corporate finance contacts. There has been a tendency historically to assume that the mere disclaimer wording that says that a corporate finance contact is not a client for purposes of the conduct business rules is sufficient. 

Well, the FCA basically says that good practice is making the corporate finance contact aware at ‘multiple points in the client onboarding and transaction lifecycle that they are not a client of the firm and will not be given conduct business protections’. That is a pretty fundamental issue, and I think it’s fair to say that the market does not necessarily universally do this at the moment. This is fully applicable to institutional corporate finance business, and I think that it is a very important point to note.

I think there is a separate question that the FCA raises around the timings for categorisation of corporate finance contacts and the fact that until that categorisation is done, there is essentially an assumption of going to the maximum level of financial promotion protection i.e. retail client, and this is particularly true in relation to elective professionals. 

It’s fair to say on this whole topic of corporate finance contacts that what the FCA does not do is talk about some of the issues that have troubled the market over so many years, for example, on the many transaction fact patterns and how to get clear about who the client is. This has always been an issue on an M&A deal or any kind of corporate finance transactions where there are many parties. 

To take one example, a firm may be acting for some sellers on a transaction but there may be other sellers of shares whose legal representatives join the negotiations but who do not have financial advisers. 

Clarity on who the client is or isn’t and what sorts of communications need to be made to other parties, particularly where there are active negotiations, has always been an issue. The firm can protect itself from the argument that, in practice, it is taking on obligations to non-client corporate finance contacts who may be part of the overall negotiations, for example, through appropriate disclaimers and its actual behaviour. It is the latter point that the FCA touches on in drawing the distinction between what firms may say they are doing and what they do with the impression being given to a corporate finance contact that it can rely on the firm for advice. 

My view based on the good and bad practices guidance is that firms need to take another look at this area as the message that one off disclaimers are not enough is loud and clear from the FCA. 

Policies and procedures

The third area I wanted to touch on briefly is policies and procedures. 

Perhaps this is obvious, but the FCA is critical of firms that have incomplete, fragmented or confused policies in this area, or policies that are high level or in their words ‘copy and paste of the handbook’. I think this is part of a more general theme that the FCA is now expecting deeper operational policies in so many different areas. 

Guidance through reviews

The final thing I would say about these bits of feedback from the FCA and the so called ‘high level observations of this area’ is that this is part of a growing trend to give some important guidance through these reviews. 

The FCA has the advantage in these reviews that it will not be required to do cost benefit analysis or formerly consult. The disadvantage for the market is that important expectations which may well feature in supervisory visits or 166s or worse, are now increasingly being found in these non-consultation papers that the FCA is pumping out fairly regularly.  There is a point here that firms should be aware of. 

We may all remember the high point of the “speech culture” within the FCA a few years ago when whatever was said in a speech almost took on the level of formal guidance. I think it’s probably fair to say that the high-level observations from multi-firm reviews are arguably leading in the same direction. So really a point to watch.