Hedging ties to be relaxed?
The Financial Conduct Authority ("FCA") has recently made proposals 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. Clauses being targeted by this prohibition are known as 'future service restrictions’ and ‘restrictive contractual clauses’ (also referred to as 'right of first refusal' clauses and 'right to act' clauses). In a nutshell, such clauses prevent a client from accepting a third party offer to provide future services unless they have first offered the mandate to the original contracting bank and will prevent a client from sourcing future services from third parties, regardless of any potential third party offers.
Restrictive clauses of the type considered above are typical under hedging letters; however they may also be contained under a finance document or more informal arrangements between service providers and their clients (i.e. side letters). The current proposals put forward by the FCA are intended to catch all agreements incorporating such clauses, which are used by (a) all firms providing primary market services, and (b) all clients of those firms. Therefore, even those more informal arrangements mentioned above will be caught by this prohibition. A breath of fresh air for real estate finance lenders is that the current proposals will not catch future service restrictions in bridging loans.
Given that the use of such clauses is increasingly prevalent in the small to mid-cap corporate lending and real estate financing space, it is imperative that service providers and borrowers alike know what these clauses are and what they do. We will therefore be following this article up with a further market update once the FCA has issued their Policy Statement on the matter and have amended the Conduct of Business Sourcebook. Nonetheless, it is advisable that primary service providers and borrowers keep an eye on the FCA's website to track the status of this prohibition. Please see the link below to track this and/or to find further information on the matter: https://www.fca.org.uk/publications/consultation-papers/investment-corporate-banking-prohibition-restrictive-clauses