FCA ban use of restrictive contractual clauses in corporate finance business
The FCA propose to ban the use of restrictive contractual clauses in investment and corporate banking engagement letters and contracts where these clauses cover future corporate finance services carried out from an establishment in the UK. This prohibition would apply to all agreements entered into after the commencement date. It would not apply to existing agreements.
The ban would prohibit the use of two commonly used forms of restriction:
‘Right of first refusal’ clauses- these prevent clients from accepting a third party offer to provide future services unless they have first offered the mandate to the bank or broker on the terms proposed by the third party.
‘Right to act’ clauses- these prevent clients from sourcing future services from third parties, regardless of any potential third party offers.
FCA have excluded from the prohibition future service restrictions in bridging loans. This type of loan is provided on the basis that the client will replace it with longer term financing, typically a bond issue, equity issue or term loan. The bank would be unlikely to provide the bridging loan at all or on the same terms if it did not also know that it would be mandated on the subsequent longer term financing.
The FCA propose to include this restriction in the Conduct of Business Sourcebook (COBS 18.3), which applies to corporate finance businesses.