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Regulators raise lending conduct issues with bank chiefs

30 April 2020: the heads of the Financial Conduct Authority have written to the chief executive officers of banks over conduct when lending to corporate businesses. Financial Services Faculty commissioning editor Brian Cantwell reports.

Some banks have pressured corporates into giving them a share of fees when issuing equity shares during the pandemic, according to the latest correspondence from the Financial Conduct Authority (FCA) written to banking chief executives. In addition, some banks have been tying in additional services and asking for fees for future services upfront, according to the open letter.

Johnathan Davidson, FCA Executive Director of Supervision, Retail and Authorisations, and Megan Butler, Executive Director of Supervision, Investment, Wholesale and Specialists, said they had credible reports that a “small number” of banks were failing to treat their corporate clients fairly. 

“We are concerned that tying clients to take additional services, or demanding fees for services not provided is not in the best interests of those clients, distorts competition, undermines market confidence and calls into question firms’ and individuals’ integrity,” the FCA heads wrote.

“This conduct is also likely to increase overall transaction costs for corporates trying to raise money.”

The regulators reminded bank chiefs that according to the rules, banks needed to manage conflicts of interest and that individual senior managers could be held to account in future under the Senior Managers and Certification Regime (SMCR).

The SMCR is, in part, designed to make bankers directly responsible for their behaviour rather than attribute it to the bank.

The FCA also reminded CEOs that it had responsibilities to protect businesses’ information when deciding to extend their lending that could be enforced through market abuse regulation.

The regulator said any more evidence of abuse would result in action from the regulator, and that banks should move to review their controls, especially if they were lending and also taking an equity role to the same businesses.

In the meantime, the regulator said it would be reviewing equity lending in response to the complaints.

John Mongelard, ICAEW Financial Services Faculty Technical Manager, Risk and Regulation, said: “Right now, banks are being compelled to be used as a public policy tool - to provide the valuable cash ‘oxygen’ to UK businesses.

“But what of bank staffers’ other responsibilities: their duty to their shareholders and to their depositors? Both obligations ask them to think about returns and making sure their lending is sound. These competing pressures are all that is needed to incentivise sub-optimal behaviour in a few instances. And so far, SMCR is not acting as the check it is intended to be.”

Katerina Joannou, Manager, Capital Markets Policy, ICAEW Corporate Finance Faculty, said: “All market participants have a responsibility to demonstrate integrity and behaviour that contributes to the reputation of the UK’s capital markets.”

For UK practical business advice related to COVID-19, please check out ICAEW's coronavirus hub