Firms carrying on designated investment businesses that acquire new clients through a transfer of business or takeover need proof of customer consent. We explain what firms need to do and the issue of unresponsive clients.
They must generally enter into a written basic agreement with those clients in accordance with relevant requirements set out in our Handbook (see COBS 8 and 8A).
When 2 firms agree to a transfer of business, or the takeover of 1 firm by the other, the receiving firm will need to supply each relevant acquired client with the new firm’s terms of business. They will need some form of proof that clients have consented to those terms.
In relation to non-MiFID business, COBS 8.1.2R[1] requires firms to enter into a written basic agreement with new clients (on paper or another durable medium) setting out the essential rights and obligations the firm and the client. This obligation applies to retail clients only (COBS 8.1.1R).
In respect of MiFID, equivalent third country and optional exemption business, this requirement is contained in Article 58 of the MiFID Org Regulation and applies to both retail and professional clients. Article 58 was a previously directly applicable requirement under EU law. It has now been onshored by the European Union (Withdrawal) Act 2018 and is part of UK domestic law. It is copied out in our Handbook in COBS 8A.1.4 UK (formerly COBS 8A.1.4EU) and applied to MiFID optional exemption firms as a rule by COBS 8A.1.2R.
Unresponsive clients
Some clients may not respond to communications telling them about the proposed transfer or takeover, which means that the firm taking over the business has no evidence of their consent and is therefore unable to enter into a client agreement with them.
In the context of MiFID business, COBS 8A.1.4 UK is not a rule made by the FCA except for a MiFID optional exemption firm (due to COBS 8A.1.2R) and cannot be waived by the FCA. We may, however, on a case-by-case basis consider whether the receiving firm can demonstrate that: its communications before and after the transfer identified the non-responsive clients it has acquired; and it has in place adequate procedures to identify, locate and contact ‘gone aways’ on an ongoing basis.
We would need to be satisfied that the newly acquired clients are being treated fairly, and as part of any agreement we would expect firms to prompt non-responsive clients to enter the new client agreement when they re-engaged with services.
For more on our expectations in these circumstances, see sub-outcome 2.4 on firms taking effective action to locate and make contact with ‘gone-away’ customers in FG16/8[2]. While this guidance has a specific application to life insurers who have closed-books for products that were subject to a thematic review, it is helpful to inform the practices and processes of product providers and intermediaries in respect of all investment business, as many of the same issues will arise.
COBS 8.1.2R is an FCA rule and, therefore, we would consider applications to waive/modify it in these circumstances in the usual way.
Firms intending to carry out a transfer of business should contact their supervisor or contact us[3] to discuss how they intend to deal with clients who fail to respond. Firms should have considered the nature of their business and determined the relevant rule(s) with which they believe they may be unable to comply before contacting the FCA.
