FCA to study the investment banking market as part of wholesale sector competition review

The Financial Conduct Authority (the FCA) has announced a market study into investment and corporate banking services. The study will assess whether competition in the market is working properly.

The study furthers the FCA’s strategic objectives of seeking appropriate customer protection, enhancing the integrity of the UK financial system, and promoting effecting competition. In the FCA’s words:

“We have chosen this particular area because the benefits of effective competition in the market could be significant. The UK is a global hub for investment banking, and this sector plays a crucial role in our economy, helping companies raise capital for investment, expansion and funding on-going operations.”

The study forms part of FCA’s review of the wholesale financial markets which was launched in Summer 2014, and comes ahead of the FCA gaining formal competition enforcement powers on 1 April 2015.

Background: the wholesale sector competition review

The FCA became responsible for the conduct supervision of all regulated financial firms in April 2013. The regulator was clear from the outset that it saw competition in the wholesale markets as having a significant potential knock-on effect for consumers, and confirmed in September 2013 that it would be inviting evidence on this in 2014.

The wholesale financial sector review was launched in July 2014. The review looked at competition in wholesale securities and investment markets and related activities, such as corporate broking. The FCA met with around 70 organisations and individuals, and received 40 written responses.

The FCA’s analysis of the feedback suggested that competition may not be working effectively in the investment and corporate banking sector. So the FCA has decided to launch a market study into those areas now. The FCA, summarising the feedback received, says:

“What was clear from the discussions we had with stakeholders and firms was that there are unanswered questions about potential conflicts of interest and value for money in this market.”

The scope of the study

The formal scope of this market study into investment and corporate banking will be set out when it is formally launched. However, the FCA has indicated that the study will focus on:

• transparency over price and quality: the FCA believes a lack of transparency may prevent clients from assessing value for money; and
• bundling and cross-selling of investment and corporate banking services: although bundling may be a natural result of a strong client relationship, the FCA is concerned that it can lead to distortions of competition. For example, the exclusion of competitors, a lack of transparency over relative costs and restricting the ability of smaller customers to switch.

Specifically, the FCA will examine:

• the difference in bargaining power between smaller and larger clients/issuers;
• competition in equity and debt issuance (in particular, the implications of the trend towards larger underwriting syndicates); and
• potential conflicts of interest in share allocations.

Market studies: a formal process

A market study is a formal tool, allowing a regulator to carry out extensive research into a market and assess whether intervention is necessary. We will find out when the study is formally launched if, as we anticipate, it is being carried out under the FCA’s new competition powers. If so, the FCA will have to adhere to the statutory timescales for market studies set out in the Enterprise Act 2002. These include a binding legal obligation to reach a preliminary view and make a proposal as to whether or not to make a market investigation reference to the Competition and Markets Authority (the CMA) within six months of the formal start of the investigation. The FCA must consult on this interim decision and reach a final decision within a further six months.

In deciding whether to refer the market to the CMA, the FCA’s draft guidance states that it will consider various factors, including whether it is appropriate to use its own competition enforcement or other regulatory powers and whether market participants have offered undertakings to avoid a reference.

Osborne Clarke comment:

This initial market study under the FCA’s wholesale sector review offers those interested in this sector a chance to engage with the FCA and influence future market regulation. It will be interesting to see the approach adopted by the FCA in discharging its brand new competition law powers.

Source: Financial Conduct Authority, Feedback Statement FS15/2