FCA publishes further guidance for firms selling client banks

The FCA regards a client bank as “a name for a list of clients or accounts maintained by someone who provides financial services. It may include all clients the firm has worked with in the past and may include a right to income streams.”[1]. The FCA notes that client banks may be sold for legitimate reasons (e.g., to merge with another firm or so that an adviser can retire), however the FCA has found evidence that in a small number of cases, firms have sold a client bank where they either knew they had redress liabilities or had failed to detect them. Regulatory requirements: A firm selling or transferring client bank must comply with FCA principles and rules and take account of relevant guidance. Under the Consumer Duty, firms must act to deliver good outcomes for their retail customers. If considering selling or transferring a client bank, under the Duty firms must be open and honest, act in good faith, and avoid causing foreseeable harm. As set out in framework (FG20/1) for assessing adequate financial resources[2], the FCA expects firms to assess and set aside adequate financial resources to meet any potential redress liabilities. On 29 November 2023, the FCA reminded personal investment firms (PIFs)that firm failure and phoenixing remain key areas of focus in the financial advice sector[3]. The FCA has also published a Consultation Paper CP23/24 proposing improvements to the prudential regime for PIFs and a Dear CEO letter with immediate actions for PIFs. PIFs can include financial advisers, wealth managers and other intermediaries based on their primary business model. Dear CEO Letter[4]: This serves as a reminder to PIFs that they must not seek to avoid complaints responsibilities and potential redress liabilities as this may prompt regulatory action. This includes actions such as changing the corporate structure to isolate liabilities, selling client banks to evade redress liabilities, overpaying dividends, or allowing the firm to run into an insolvent position. The FCA expects that firms have adequate financial resources to meet any potential redress liabilities. The FCA provides rules and guidance on when it should be notified by firms in line with the SUP15 notification requirements. Whilst the SUP15 notification requirements are not new, the Dear CEO letter provided further commentary on the FCA’s expectations by stating firms are expected to notify the FCA immediately when they become aware, or have information which reasonably suggests, that any of the following has or may have happened, or may happen in the future:

• The firm does not have adequate resources to provide potential redress.
• The firm intends to sell or transfer its client bank, and the sale could have an impact on the firm’s risk profile, value or resources, and/or
• The firm has potential redress liabilities and wants to offer consumers less redress than they might be due.

The FCA affirmed that if it identifies firms or individuals who have sought to avoid potential redress liabilities, they will consider appropriate further action. This may include using enforcement and/or supervisory powers against these firms or individuals. The FCA is expected to increasingly monitor firms applying to cancel or seeking to apply for new authorisations consistent with their expectations of PIFs under the Consumer Duty. Examples of further action that the FCA may ask firms to implement as part of the deauthorisation process include taking out professional indemnity insurance to cover potential future claims, conducting a customer contact exercise, seeking assurance from third parties involved in business transfer scenarios and reviewing high risk business and paying redress where necessary. If the FCA is not satisfied that customers are protected, it might ultimately refuse an application. Further recent guidance: In December 2023, the FCA updated its webpage on expectations for the treatment of client banks. The FCA included further guidance on its supervision approach by stating that “we encourage a selling firm to carry out due diligence to ensure the firm buying the client bank can provide the same level of service – e.g., regarding ongoing servicing”. The FCA will also scrutinise arrangements with employees or third parties to reduce risks to effective supervision and regulatory compliance. The recent guidance discourages firms from off-loading their books to a buyer who may not be able to meet the needs of the customers. Conclusions: Overall, the FCA’s Dear CEO Letter provides further commentary on the FCA’s approach and acts a reminder to firms of their existing obligations. The SUP15 notification obligations are not new, and it is important to flag that the SUP15 notification requirements are wider than the notification examples listed within the Dear CEO Letter. Firms considering selling client banks should engage with their professional advisors at an early stage to ensure that they meet their regulatory obligations. For expert legal advice, please contact our commercial team. [1] https://www.fca.org.uk/firms/expectations-firms-selling-client-banks [2] https://www.fca.org.uk/publication/finalised-guidance/fg20-1.pdf [3] https://www.fca.org.uk/publication/correspondence/portfolio-strategy-letter-for-financial-advisers-and-intermediaries-2022.pdf [4] https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-capital-deduction-for-redress.pdf