Recently, the FCA launched a market study looking into potential competition concerns in investment and corporate banking in the UK.
The terms of reference confirm that the focus of the FCA’s study will be on choice of banks and advisers for clients, transparency of the services provided by banks, and bundling and cross-subsidisation of services.
The launch of this market study coincides with the FCA’s assumption of new powers on 1 April 2015 to investigate and take enforcement action against financial firms under competition law. These powers include the ability to refer a market, which has features that it suspects may be restricting competition, to the Competition and Markets Authority for an in-depth “market investigation”. This opens the possibility that FCA concerns about aspects of a financial services market could end up leading to an 18-month investigation by the CMA and the spectre of intrusive remedies, such as mandatory contractual provisions and break-up orders.
The study’s genesis can be found in the Wholesale Sector Competition Review, started in July 2014 and concluded in February 2015, from which the FCA identified potential concerns relating to the operation of both the investment and corporate banking markets – the FCA also intends to conduct a separate study concerning asset management later in the year. The concerns were twofold: first, that limited transparency over pricing in fees and quality of services may make it difficult for clients to assess value for money and monitor conflicts of interest; and, second, that bundling and cross-selling of services make it difficult for new entrants to compete, and may contribute to the limited transparency identified as the first concern.
While the FCA acknowledges that buying a set of services from the same provider that has built a deep client relationship may be efficient, it has indicated that it intends to examine concerns raised by participants in the Wholesale Sector Competition Review about transparency and value for money where services are bundled, in particular for smaller corporate clients who may have relationships with only one bank.
The FCA has identified concerns that banks may not be adequately fulfilling best execution requirements and, instead, may be over-reliant on the presumption that clients will switch providers if they are not receiving best execution. Related to this, the FCA will look at principal-agent issues, that is, that brokers may execute orders to serve their own interests, rather than acting in their clients’ interests, which may go undetected by clients.
The FCA also has an interest in examining syndication activities, including IPOs and debt raising, and whether the interests of participating banks are aligned with clients’ interests, including competition for mandates. This is likely to revisit issues considered previously by the Office of Fair Trading – the predecessor of the CMA – in its 2011 report on equity underwriting, which found that an increase in the average number of banks participating in IPOs has some positive effects – for example, more banks being involved may increase competition for the lead underwriter position as co-managers become competitors for future issuance. It concluded that “the potential conflicts identified initially generally seem to be managed appropriately, or do not raise significant concerns”. However, in the new study, the FCA intends to look at persistent suggestions that investment banks may favour their prime brokerage and hedge fund clients when allocating shares in an IPO, which may not be in the interest of the issuer, and that larger syndicates may result in an inefficient book-building and allocation process.