The FCA recently published its expectations for firms selling client banks. The FCA commented: “In our view the client bank is the firm’s asset. We explain this clearly and we will act where these lists are being sold with redress liabilities.”
It goes on to explain: “A client bank is 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.
Client banks are an important part of a firm’s business. Firms may seek to sell or transfer client banks. A client bank forms part of a firm's assets. We accept that they may be sold for legitimate reasons – for example, to merge with another firm or so that an adviser can retire.
However, evidence has shown that in a small number of cases, firms have sold a client bank when they either knew they had redress liabilities or had failed to detect them.”
Existing FCA guidance
The FCA sets out its existing guidance as follows:
“A firm selling a 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, the FCA expects firms to assess and set aside adequate financial resources to meet any potential redress liabilities.
In November 2022, the regulator also reminded firms that firm failure and phoenixing remain key areas of focus in the financial advice sector. This is why they recently published a consultation paper (CP23/24) on changes to the prudential regime for Personal Investment Firms (PIFs) who are subject to IPRU-INV, and issued a Dear CEO letter with immediate actions for firms.
The FCA’s approach
The FCA sets out their approach as follows:
“We will make clear, through our supervisory work, that in our view the client bank is the firm’s asset. Where a firm claims that someone else owns some or all the client bank, firms should expect that supervisors will want proof.” The FCA will…
- Expect a firm intending to sell its client bank to notify them via a SUP 15 notification where the sale could affect the firm’s risk profile, value or resources.
- 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. ongoing servicing.
- Investigate firms and/or individuals closely associated with firms the regulator suspects are structuring their business in a way that avoids their liabilities.
- Carefully scrutinise arrangements that a firm has with its employees or third parties to ensure that they do not present a risk to effective supervision or otherwise undermine a firm's ability to meet regulatory requirements or threaten FCA objectives.
- Expect that when two firms agree a transfer of investment business, the receiving firm provides its newly acquired customers with its written basic agreement.
- Encourage firms to address and/or amend any arrangements to reduce the risks they pose to FCA objectives – including the risk they could be used to assist phoenixing.
The FCA may also invite a firm selling its client bank to agree to some of the following measures:
- A voluntary asset retention requirement to ensure that the firm retains its client bank and other financial resources for potential redress. For example, where the firm has a large defined benefit transfer back book and a history of complaints.
- An undertaking or attestation, where a selling firm wishes to leave the market, to maintain an increased level of capital until the firm has applied for cancellation of their permissions and this has been approved by the regulator.
The FCA may also invite a firm purchasing a client bank to agree to some of the following measures:
- A voluntary requirement to restrict those closely associated with the selling firm from receiving a benefit from the sale of the client bank or the use of the client bank at the purchasing firm.
- A deed poll to assume some or all liabilities where the FCA has particular concerns.
Behaviours that could lead to the FCA taking action against a firm:
This is a serious area of focus for the regulator and we believe that the FCA may act where they see any of the following circumstances occurring:
- Where a firm tries to sell its client bank in a deliberate move to avoid any redress liabilities which have arisen or may arise.
- Where a firm attempts to compromise with its customers by offering less than the full value of redress owed.
- Where a client bank is transferred to a holding company or where an adviser/ Appointed Representative agreement is altered to state clients are not owned by the firm.
- Where a firm seeks to ‘lifeboat’ and sell its client bank below market value to another firm, and / or where no consideration has been given to requesting an independent valuation of the client bank and subsequently the selling firm’s staff and directors move to the purchasing firm.
This is clearly an area of high priority and focus for the FCA. Firms should be mindful of the regulator’s expectations in this area and act with due care and consideration when selling or acquiring client banks.
