We are examining issues around choice of banks and advisers for clients, transparency of the services provided by banks, and bundling and cross-subsidisation of services. We are focusing on primary market and related activities provided in the UK.
In this interim report, we set out our views based on our work to date on how competition works and on outcomes for clients.
In the feedback statement to our wholesale sector competition review we heard of a number of concerns in relation to primary markets. Many of these concerns centred on cross-subsidies in the universal banking model between corporate banking and investment banking as well as specific market practices such as syndication and reciprocity.
We published our terms of reference in May 2015. This outlined the scope of our market study. Since then, we have conducted data analyses of over 10,000 transactions spanning a period of up to five years, and we have met with over 100 stakeholders.
There are often between 20 and 40 banks active in any particular sector and for different types of client – sovereigns, supra-nationals and agencies (SSAs), financial institutions and corporate clients.
Lending and corporate broking are typically supplied at a low rate of return or below cost in exchange for a flow of transactional business, which is typically more lucrative. Nearly three-quarters of debt capital market roles are awarded to a bank with whom the client has an existing corporate banking or lending relationship, however the link is significantly weaker for initial public offerings (IPOs). Pressure to award transactional business to a lending bank or corporate broker can be exacerbated by the widespread use of contractual clauses in client engagement letters restricting future choice of supplier.
The provision of cheap lending and corporate broking makes it harder for those banks providing only transactional services to compete. We have seen little evidence of emerging technology-driven disruption or disintermediation of primary market activities.
We looked at a range of market practices to assess whether they restrict or distort competition and adversely affect outcomes for clients. We found the following concerns:
We also analysed the practices of reciprocity and syndication. We are not minded to pursue these issues further at this stage although we may revisit reciprocity if its prevalence or impact develops significantly.
Based on these findings, we propose a targeted package of potential measures designed to ensure that competition takes place on the merits by reducing artificial incumbency advantages, improving clients’ ability to appoint banks that best suits their needs, ensuring that conflicts are properly managed, and improving the IPO process.
Specifically we aim to:
In addition it is crucial that the market remains open to entry and innovation. We are very keen to hear any concerns from stakeholders about barriers to such entry. We are also keen to hear views on our interim findings and potential remedies.
We will continue to develop our thinking on whether we should intervene in this market, and what interventions would be most effective in improving competition to the benefit of issuing and investor clients, and ultimately end consumers. We will have regard to the further evidence we collect and responses of stakeholders.
We expect to publish our final report in Summer 2016. This will set out our findings and conclusions. If appropriate, we will consult at the same time, or subsequently, on any proposed actions.
We would like to hear your views on this report, including on the need for intervention and, if so, your views on what form it should take. Please send us your comments by 25 May 2016 to email@example.com.
Copyright © 2016 FCA. All Rights Reserved.