The City watchdog is cracking down on UK banks that have been preying on corporate clients seeking financial help during the Covid-19 crisis.
The Financial Conduct Authority sent a strongly worded letter to bank chief executives on Tuesday, after hearing that some lenders were using loan negotiations to pressure corporate clients into hiring the banks for separate share sales.
“We have heard credible reports of a small number of banks failing to treat their corporate clients fairly when negotiating new or existing debt facilities, as clients navigate the current exceptional circumstances,” the FCA said.
“In particular, we have heard reports that banks may have used 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, banks were asking for a role in the equity fundraising “in name only” and with few or no additional services offered in exchange. However, it meant the banks would still get a cut of the fees.
“We will be looking into this further, but want any practice of this nature to cease immediately,” the FCA said.
“If we find further evidence to support these concerns, we will not hesitate to take action, as this conduct has no place in well-functioning markets.”
The regulator said forcing clients to take additional services, or demanding fees for services that were not delivered, risked distorting competition and undermining confidence in the market. It would be likely to increase overall costs for companies trying to raise emergency funds during the outbreak.
The offending banks could be in breach of FCA rules that require lenders to act with integrity, prevent conflicts of interest and avoid drawing up contracts that would restrict which banks borrowers can work with in the future. Market abuse regulations also limit how banks use inside information – such as a planned share sale – that they might come across during debt negotiations
It is understood the FCA has started directly contacting banks that have worked on recent share sales for companies to which they already lend.
“We want to understand how you ensured your clients were treated fairly, and inside information was handled appropriately,” the regulator said.
John Cronin, a financials analyst at stockbroker Goodbody, said: “I am not surprised to see the FCA seek to clamp down on these moves.”
“It calls into question why certain businesses are being supported over others – at a particularly sensitive time given the public’s focus on the dearth of fresh lending under CBILS,” he said, referring to government-backed loans that banks have been slow to distribute.