Competition and investment banking

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Speech by Mary Starks, Director of Competition, FCA, at the Chartered Institute of Securities This is the text of the speech as drafted, which may differ from the delivered version.

This is the text of the speech as drafted, which may differ from the delivered version.

The FCA has this morning launched a review of competition in the wholesale sector. 

And so I would like to spend some time today focusing on this competition review, which marks a significant step for the FCA. 

I will explain its scope, the types of issues we are looking at, and how the review links to the FCA’s competition mandate.  More importantly, I will set out the ways in which you can engage with the FCA.  And we very much hope that you will take up this opportunity, as the more input we get, the more likely we are to be able to target our efforts to where they are most needed.     

we intend use it to identify any areas that might merit further investigation through a full, in-depth market study.

So, what is the Wholesale Sector Competition Review? 

The answer is that it is an exploratory exercise that will enable us to determine where competition may be weak or not be working effectively in the wholesale sector.  And we intend use it to identify any areas that might merit further investigation through a full, in-depth market study.  We are starting this process today with the publication of a ‘call for inputs’.

And why is it important?

Because wholesale financial markets play a crucial role in the economy, and the UK plays a key role in the international markets.  So it is essential that these markets work well.  Ensuring effective competition within these markets is a key part of this. 

Although wholesale market participants are typically more sophisticated than many retail consumers, wholesale markets are not immune from competition issues.  We only need to look to issues such as LIBOR to see that the impact of poor conduct in the wholesale markets can be significant, and far reaching.  So it is important that the wholesale markets are examined in an appropriate way. 

While we work closely with wholesale market participants, and have a strong familiarity with the sector, we have not yet scrutinised it from a competition standpoint. 

In conducting this exercise we will draw on two sources of internal expertise; the sector knowledge we have already built through our ongoing regulatory involvement, and the competition expertise that we have brought into the FCA over the last few months.  This review will draw on both pools, and will strengthen our understanding of how competition works in this sector.

In a moment, I’ll move on to provide some examples of the types of issues that we might consider in the Review.  But it is first worth pointing out that this Review is distinct from the Fair and Effective Financial Markets Review that the Chancellor announced recently in his Mansion House speech.  That Review, which is to be jointly carried out by the FCA, HM Treasury and the Bank of England over the next 12 months, is also looking at wholesale markets.  But its main focus is on trading practices and conduct.  Its objective is to make recommendations for further action to strengthen the operation of fair and effective global financial markets.

While the Competition Review that I’m talking about today is looking into the same sector, its focus on competition makes it very different.  And the scope of covered activities, which I’ll discuss in a minute, differs in a number of ways to the joint Review.  So, quite deliberately, we expect there to be limited cross-over.

However, both reviews are central to the FCA achieving its overarching strategic objective of making financial services markets work well.  And so we will ensure that we work closely with the team carrying out the joint review, to avoid duplication and ensure that any issue that could potentially fall within both reviews will be analysed and taken forward by the team that is best placed.

Our review is wide ranging, covering activities relating to the markets and market infrastructure itself, asset management, corporate banking, and investment banking.

Turning now to the scope of the Review.

As I mentioned before, we are using the competition Review to seek evidence and views on areas in the wholesale sector where competition is not working effectively.  Our review is wide ranging, covering activities relating to the markets and market infrastructure itself, asset management, corporate banking, and investment banking.  In other words, it has a strong focus on those areas and participants that are involved in the investment chain.  

We think it is important to take this wide scope at this stage.  When the FCA was created last year, it was given a clear mandate ‘to promote effective competition in the interests of consumers in the markets for regulated financial services.’  So the scope of our competition mandate is broad, and the Review matches this.  Focusing this widely will enable us to consider potentially important interactions between different elements of the investment chain.  This will provide us with a better idea of where significant issues might lie, and in turn, allow us to target our resources to the areas where we can help consumers the most.  

Striving to ‘promote’ effective competition means not just waiting for problems to occur, but being proactive in rooting out competition issues so that they can be addressed early on.  We see this review as a key way of doing this in some of the wholesale markets we are responsible for.  And we will use this information to consider whether there are any areas that we should investigate further via a market study.

Clearly the wholesale sector is wider than the areas I just described.  And at this stage we have chosen to exclude a number of areas that are more or less separable from the investment chain.  These areas include credit rating agencies, payment systems, and insurance.  In addition, as I just mentioned, we are not focusing on the trading practices that are within the scope of the Fair and Effective Financial Markets Review, including benchmarking activities.   These exclusions will hopefully ensure that the Review is more manageable, although we are fully aware that even with these omissions the task remains significant. 

Of course, if there are relevant competition issues that exist in the areas that we have left outside of scope, we will not ignore them.  So if this is the case, please send through any evidence that you have so that we can then consider how best to take these issues forward; whether as part of this Review, or separately.  What is important to emphasise is that our approach is very much an open one.  Because the better the information that we receive, the greater our ability to implement our competition mandate effectively.

Now that I have described the broad areas that are within scope, I would like to spend a bit of time explaining some of the types of issue that we are interested in.  

To aid discussion and guide responses, we provide a number of examples in the call for inputs document that we published today.   

But before going into these it is important to emphasise that our analysis is at a very early stage.  We have not yet conducted detailed evidence gathering and analysis from a competition perspective.  Instead, we have drawn on issues raised by stakeholders previously, or obtained from our internal research and existing supervisory and thematic work.  So we are not saying that we are sure these issues raise important concerns. Instead, we are calling for evidence on whether these are issues that stakeholders recognise, and if so, what their impact is. 

Within the scope we have set out, we also welcome evidence on any other areas that you might wish to bring to our attention.  As I said before, our approach is very much an open one.  So when thinking about which issues might be taken forward, we feel in no way confined to those examples we have presented in the call for inputs document, and will give due consideration to any others that stakeholders bring to our attention in the course of consultation. 

To help you with your responses, we also set out a number of prioritisation principles that we will be taking into account.  For example, it is unlikely that we would carry out a market study in an area that is likely to be addressed through impending regulatory developments, domestic or international.  Nor are we likely to prioritise a study where market changes are expected to take place that might ameliorate the issue.  And at a higher level, we will also need to consider the prospect and likely impact of intervention, and whether other means of intervention would be more appropriate than a market study.

So, what types of issues are we interested in?

The answer is that we are interested in any feature of a market or behaviour that could inhibit or distort the healthy functioning of competition in the market.  This could apply to the supply side, the demand side, or how the two interact.  In the document we set out some broad categories of competition issues that might arise.  We also provide a number of specific examples, covering a range of potential issues, including barriers to entry or expansion, information asymmetries, conflicts of interest, and the cross-selling or bundling of products and services.  Clearly these are just some examples, and you may well have other suggestions for issues to explore.  Equally, there are some issues that will be more relevant to you, your businesses, and your stakeholders, and others that will not. 

It is important to stress that we are not just looking at competition in isolation.  Our competition objective refers specifically to promoting effective competition ‘in the interests of consumers.’  So where competition issues are raised, we also want to see evidence and views on the potential scale of any associated consumer detriment. And when we say consumer, we mean it in the widest sense, since the 2012 Act recognises not just retail consumers, but also wholesale ones. 

It is also important to point out that our aim is not to protect every competitor.  We don’t, and won’t.  Because inefficient firms should be allowed to exit the market.  But we do want to protect existing or potential competitors from anti-competitive practices by established firms with strong market positions.   

So by way of example, I just mentioned that one issue we are considering is the cross-selling and bundling of products and services.  These are a significant element of many business models, and can provide a diverse source of potential revenues.  The Review describes various areas where this market feature might exist; from investment banking, to asset management, to trading venues and clearing houses that are vertically integrated.

Of course bundling and cross-selling can benefit clients, such as where relationships are built up and wholesale firms come to understand a client’s profile and needs through the range of services they provide.  Consumers might also benefit from cost savings, better quality, or a greater range of complementary products and services.    

But there may also be implications for competition that are worth exploring.  For instance, it may be that cross-selling leads to active competition in one set of services, at the expense of competition in another. 

For example, if, in order to win advisory business relating to capital raising activity, an investment bank needs to compete effectively in the provision of liquidity or funding, this could have knock on effects for the supply of related activities. 

In considering whether this is an issue that merits further exploration, we will need to understand not simply how competition works, but also what impact there is on consumers.

We also look at conflicts of interest and principal-agent issues.  Again, this is raised in various contexts throughout the document; from the differences that might exist in the incentives of investors versus their asset managers in terms of ancillary services; to the relationship between clearing houses and the clients of clearing members.  And, perhaps of most relevance to the audience today, we consider conflicts of interest that might exist in both best execution, and the underwriting of equity and debt.

These conflicts can, in some circumstance, be appropriately monitored and managed.  But where they are not, they can lead to various types of detriment.  For example, firms may buy a product or service that a client doesn’t value, pay too much, or not buy something at all when a client would value it.   

The management of conflicts is not just down to the agents.  Principals may not monitor or place enough pressure on agents to keep down prices, seek out value for money, or boost quality.  There could be various reasons for this.  For example, consumers may appoint firms with whom they have existing relationships, even if they do not offer the most beneficial service. We discuss a few areas where such arguments have been raised in the past, including equity underwriting.

So we will be relying on stakeholders to provide evidence of the extent to which these conflicts materialise in practice, and if so, whether there are any adverse impacts that could, or do, arise.

We are also aware that some of these issues, like equity underwriting, have already been the subject of several studies in the past, or will be directly affected by future regulatory change.  So where this is the case, we ask that respondents take these factors into account in their responses.  Because, we are unlikely to prioritise an issue where in-depth investigations have already been carried out no consumer detriment has been identified.  Or, as I mentioned earlier, where regulatory developments are taking place that are likely to address the issue.

A final theme that I would like to discuss today is barriers to entry or expansion.  Again, this may arise in various ways.  Indeed, I have already discussed bundling and cross selling.  Regulation itself can also be a significant barrier.  If participants think our rules are significantly impeding competition in these markets, we welcome submissions to this effect.  And in the document we also discuss other barriers relating to client clearing, the availability and cost of co-location, and the capital that is needed in investment and corporate banking.       

Clearly, for many of these issues, competition cannot be considered in isolation.  For example, capital requirements that create barriers to entry may be essential for risk management or consumer protection.  So we will need to consider our other two statutory objectives - market integrity and consumer protection – as well as the objectives of the other regulatory authorities that we work with.   

Stakeholder engagement

As you can see, our Review is wide in both scope, and the types of issues that we are considering.  It is also broad in terms of the stakeholders that we want to engage with.  From buyers and sellers of the relevant products and services, to those that interact with them, or are indirectly impacted by the wholesale markets.

And to maximise the input we receive, we are considering a number of ways to engage with stakeholders.  Responses can, of course, be sent in writing.  But we are also looking to gather input in other ways, primarily through holding a series of round tables with interested parties. 

Our call for inputs will run for the 3 month period to the 9th of October, but we very much invite early responses.  And once the responses have been received, our aim is to analyse these, work out which issues to prioritise, and if a suitable candidate is found, to commence work on a detailed market study in early 2015.


Clearly, we are not starting with a blank page in terms of our regulatory approach for the wholesale markets.  Our remit, and that of our predecessor, has always covered both the wholesale and retail sectors.  And so we have considerable foundations on which to build. 

Nevertheless, with the competition mandate we have been given, we need to look at the industry from a new perspective.  And we will be using the Wholesale Sector Competition Review as an important step to implementing our competition objective, and ultimately making markets work well and deliver better outcomes for consumers; both retail and wholesale. 

I hope you agree with the importance of this work and of our goals, as we very much rely on your input and engagement if we are to make positive changes that will provide important benefits. For consumers.  For industry.  And for the wider economy.