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This note looks at which aspects of corporate finance business are regulated, in particular:
• Which activities are FCA/PRA regulated and what the exemptions are;
• Which activities are MiFID and which not;
• The effect on prudential and conduct of business requirements;
• The regime for authorised professional firms and for firms licensed by a Designated Professional Body.
What is corporate finance business?
The Markets in Financial Instruments Directive (MiFID) gives a useful definition.
‘Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings’
Corporate finance has long been regarded by the regulators as being different in kind from the giving of financial advice and the distribution of investment products to consumers. As a result, the UK regime has been designed to exclude many corporate finance activities from regulation and to bring into regulation only those activities that impinge on retail investors. While there have been many scandals over the last two decades in the retail sector, corporate finance has, so far, been relatively free.
The Financial Services and Markets Act 2000 (FSMA)
The FSMA bites on particular activities, those relevant here being:
• Making arrangements
Prima facie most corporate finance work involves advice of some sort. However advice is only regulated if it
• Is advice given to a client as an investor, and
• It involves a specified investment (such as a share), and
• It relates to the merits of investors or potential investors buying, selling etc the investment.
Thus a number of activities are excluded from regulation, for instance
• Preparing forecasts and cash flows;
• Advising on business structure;
• Valuing a company;
• Advising and arranging the purchase or sale of an unincorporated business;
Many of these activities are commonly carried out by firms of accountants and it is common for accountancy firms to advertise that they give corporate finance advice. Provided they keep within these parameters, there is no need for them to be authorised.
Another type of advice that is not regulated is advice given to a client other than as an investor. So advice on how to raise finance is not a regulated activity (though arranging the transactions may be regulated, see below).
The Regulated Activities Order divides arranging into two categories
• Arranging (bringing about deals in investments), and
• Making arrangements with a view to transactions in investments
Arranging is a more nebulous concept than advising. FCA guidance suggests that any activity that serves to bring contracting parties together, or facilitates transactions, is regarded as arranging.
This is any invitation or inducement to engage in investment activity in relation to a controlled investment. It is not itself a regulated activity (or a MiFID activity, see below), but only authorised firms can make or approve financial promotions.
Markets in Financial Instruments Directive (MiFID) and Capital Adequacy Directive (CAD)
These EU directives have major effects on authorised corporate finance firms in two areas, the prudential category and the conduct of business rules. The MiFID definition of advice is similar to that of the FCA (ie advising an investor is a MiFID activity, advising an issuer is not). The MiFID equivalent of ‘arranging’ is ‘receiving and transmitting orders in relation to one or more financial instruments’ which is extended to include arrangements that bring together two or more investors, thereby bringing about a transaction between those investors. Arranging funding for an issuer is not a MiFID activity (as the issuer is not an investor) and thus a firm that only advises organisations that are seeking to raise capital (and assists in the necessary arrangements) is outside the scope of both MiFID and CAD. This has the advantage that the firm can have the prudential category of ‘non-MiFID corporate finance adviser and arranger’ with a capital requirement currently of £10,000.
If a firm carries out a broader range of corporate finance activities, it will be a MiFID firm. This may be, for example, because it wishes to act for an investor or potential investor. However, provided that the firm does not hold or control client money and confines its MiFID activities to advising and arranging corporate finance activities (ie it cannot take positions) it may become ‘exempt CAD’ which requires a simple capital adequacy of €50,000. This compares with the onerous reporting requirement and potentially greater prudential requirement of a BIPRU firm.
If a firm wishes to recategorise a retail client as an elective professional client, the quantitative rule applies if it is doing MiFID business. If it is a non-MiFID firm or a MiFID firm doing non-MiFID business (for example advising and arranging funding) the quantitative rule does not apply.
Many of the exclusions from regulation, such as that for the purchase or sale of control of a body corporate, do not apply for MiFID business.
Only a MiFID firm can passport its activities to other EEA countries.
Authorised professional firms
These are professional firms, such as accountants and solicitors, that are FCA authorised. There are a number of advantages in the regime for such firms, provided all their regulated activities are carried out in an incidental manner to their professional activities. All their business is automatically non-MiFID, the capital requirements are minimal and FCA reporting is currently more user-friendly than for other FCA authorised firms. However, since April 2013, all the ‘non-mainstream regulated activities’ (such as acting as a trustee or executor, or holding client assets such as share certificates) need to comply with FCA rules (previously they were subject to the rules of the professional body). As a result, there are now few professional firms that have remained FCA authorised.
Professional firms licensed by their Designated Professional Body (DPB)
Such firms are permitted to carry out certain restricted regulated activities provided they arise out of, or are complementary to, professional services provided to that client and are subject to the rules of the DPB. This enables such firms to provide many corporate finance services to clients under the rules of their DPB, the main exceptions being the making or approval of financial promotions, advising clients to purchase shares in listed companies and making arrangements for clients to raise funds . In addition, many corporate finance situations involve a change in control of a company and these would be within the scope of a DPB licensed firm.
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