FCA publishes the interim report of its investment and corporate banking market study and a discussion paper on the IPO process

The FCA has today published the interim conclusions of its investment banking market study, finding that while many clients feel well served by primary capital market services there were also some areas where improvements could be made to encourage competition.

The FCA has put forward possible remedies for the issues identified and also published a discussion paper on suggested improvements to the way in which information is provided to investors during the Initial Public Offering (IPO) process.

Christopher Woolard, director of strategy and competition at the FCA, said:

“These markets are a cornerstone of the real economy, helping companies raise capital for investment and expansion. Our study shows that many investment and corporate banking clients are getting a service they want, but we have also identified some areas where improvements could be made.

“Overall this is a package of proportionate measures intended to remove potentially anti-competitive practices.

“In addition, we want to start a discussion on changing the sequence of the IPO process to make the market work better by giving investors the right information at the right time.”

Investment and Corporate Banking Market Study

The FCA’s market study focused on choice, transparency, bundling and cross-subsidisation in debt and equity capital markets, and mergers and acquisitions. It also considered links between competition in these primary market services and related activities such as corporate lending and broking, and ancillary services.

Despite most, particularly larger, clients feeling well served by the universal banking model* the FCA found that cross-selling could make it harder for banks that do not offer lending facilities to compete for primary market services. The FCA noted widespread use of contractual clauses that purport to limit clients’ choice of providers on future transactions. The FCA is calling for an end to the use of such clauses.

In addition, the FCA is looking for the industry to address concerns that league tables on investment and corporate banking services may be unreliable, which means they are at best ignored by clients and at worst could distort clients’ decision making.

Analysis in the market study has also found evidence that some banks may seek to reward favoured investor clients when allocating shares in an IPO. As a result, the FCA will undertake supervisory work with a targeted group of banks to better understand how potential conflicts of interests are managed when shares in IPOs are allocated.

Initial Public Offering discussion paper

In a paper also published today, the FCA has opened a discussion with the aim of ensuring market participants have access to the right information at the right time during the IPO process. Currently there is a blackout period, typically of 14 days, between research on the issuer being published by the banks supporting the IPO and circulation of the issuer’s prospectus. This means that investors only have access to an important source of information late in the process. In addition, analysts unconnected with the IPO generally lack access to the management of the issuer, leaving them with little information on which to base their independent research.

The alternative IPO process models put forward for discussion in the FCA’s paper comprise different combinations of two simple ideas: a requirement to delay the release of any research by analysts at banks connected to the IPO until after the prospectus is published, and a requirement to invite analysts from unconnected banks and independent research providers to any meetings with management. These options have been presented to stimulate debate.

Notes to editors

  1. *The universal banking model involves banks providing both investment and corporate banking services, with lending and corporate broking services usually provided at low return or below cost in exchange for more lucrative transactional business.
  2. Investment and corporate banking market study interim report
  3. Availability of information in the UK Equity IPO process discussion paper
  4. What determines IPO allocations? Occasional paper
  5. The FCA is asking for views on the interim report and potential remedies by 25 May 2016. Following engagement with stakeholders, the FCA expects to publish its final report in the summer, and consult on any proposed interventions. 
  6. The FCA is asking for views on the IPO discussion paper and potential changes to the IPO process by 13 July 2016. After this discussion period has closed, the FCA will analyse the responses and publish feedback. The FCA will consult if it decides to take forward any specific policy proposals, and would ensure they are consistent with relevant EU legislation.
  7. Terms of reference for the FCA’s investment and corporate banking market study, May 2015.
  8. Wholesale sector competition review, February 2015.
  9. On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
  10. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
  11. Find out more information about the FCA.