On 27 June the Financial Conduct Authority (FCA) published Policy Statement 17/13 setting out its final rules to ban contractual clauses that restrict competition without being clearly beneficial to clients.
This Policy Statement, including the FCA’s final rules, can be found by clicking this link: https://www.fca.org.uk/publications/policy-statements/ps17-13-investment-and-corporate-banking-prohibition-restrictive
Here we briefly summarise these rules and the possible implications for regulated firms and their clients.
1. Key Features of the FCA’s rules
- The ban will affect firms that provide primary market services and clients of these firms. These include (i) services provided to an issuer comprising structuring, underwriting and/or placing an issue of shares, warrants, or certificates representing certain securities or debentures or (ii) advice and services relating to mergers and the purchase or disposal of undertakings.
- The prohibition applies to “future services restrictions” in contracts, mandates and engagement letters which force clients to award unspecified and uncertain future services to existing service providers. There is no prohibition on firms agreeing terms for specific and identifiable future work.
- “Right to match” clauses are acceptable – these give firms an opportunity to match a third party’s quote but the client remains free to choose which firm provides the service.
- Only regulated firms who provide services from their UK establishments or overseas branches are caught by the ban. It extends to clients of all sizes, whether or not based in the UK.
- There are exemptions from the ban – specifically in respect of bridging loans which includes for these purposes warehouse facilities (the thinking being that there are legitimate reasons for including restrictive contractual clauses in such arrangements).
- The ban takes effect from 3 January 2018 and agreements containing such restrictions entered into before this date will not be affected.
2. Implications
It is not uncommon to find various restrictions or mandates relating to future business in financing transactions. This ban will make people think very carefully in future as to whether those clauses will be prohibited or not.
For example, an engagement letter which mandates a regulated firm to act “in relation to a capital markets issuance that completes within the next 36 months” would appear to lack sufficient specificity to escape the ban.
On the other hand, the provision of incremental facilities under loan agreements do not fall within the scope of primary market and M&A services and are therefore outside the ban. The same is true of hedging arrangements.
The above said, the FCA has indicated that it may choose to extend the ban to wholesale market services in future (which could potentially include hedging and lending), if it learns that restrictive contractual clauses are being used against clients’ interests.
3. Next steps
Regulated firms should re-visit their standard form mandate and engagement letters to check if they contain any clauses that might be caught by the ban. Clients of such firms should check their future engagement letters carefully to ensure they are not being asked to accept contractual clauses which fall foul of the new rules.
Please get in touch if you would like to explore any of the above more fully with us.
Matthew Padian