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FCA Consultation: Proposed ban on restrictive clauses covering future corporate advisory work

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Summary: The Financial Conduct Authority (FCA) has recently published a Consultation Paper which outlines proposals to prohibit restrictive clauses in investment and corporate banking contracts and engagement letters. We discuss the scope of the consultation and the potential implications for UK based services.

On 18 October 2016, the Financial Conduct Authority (FCA) published a Consultation Paper concerning proposals to prohibit restrictive clauses in investment and corporate banking contracts and engagement letters where these clauses limit the ability of clients to select their provider of future “corporate finance services”.

Corporate finance services broadly involve advice and arranging activities in respect of underwriting new debt or equity issuances, corporate restructuring, takeovers and acquisitions, and business strategy. 

The proposal is to prohibit:

  • “Right of first refusal” clauses, which prevent clients from accepting third party offers to provide future services unless they have first approached the bank or broker on the same terms proposed by the third party; and
  • “Right to act” clauses, which prevent clients from sourcing future services from third parties, regardless of what terms are offered.

Future service restrictions in bridging loans would continue to be permitted, as would “right to pitch” and “right to match” clauses.

The proposed ban would not have a retroactive effect, and would apply only to services carried out from an establishment in the UK.  This means that the prohibition would not affect services provided to UK-based clients by banks located outside the UK, but would affect services provided from banks’ UK establishments to non-UK based clients.

Restrictive clauses of any duration, proposed by not only the bank or broker but also the corporate client, would be prohibited.  The changes would be implemented by way of amendments to the FCA Code of Business Sourcebook (COBS).

The FCA’s proposals stem from one of the findings of its recent Investment and Corporate Banking market study that medium and small sized corporate clients in particular are vulnerable to pressure exerted by lending banks or corporate brokers to enter into restrictive agreements to award the bank or broker future business.

The FCA is currently holding a two-month consultation on its proposals (ending 16 December 2016) , with a view to implementing new rules in early 2017. Responses to the consultation can be made using the online response form. Do let us know if you would like to discuss any aspect.
 

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