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.
- Annex 1: Glossary of investment and corporate banking services (PDF)
- Annex 2: Data collection and analysis (PDF)
- Annex 3: Client case studies (PDF)
- Annex 4: Selection criteria (PDF)
- Annex 5: Transparency of scope of services and fees (PDF)
- Annex 6: Cross-selling, bundling and cross-subsidisation supporting analysis (PDF)
- Annex 7: Fee outcomes and international comparisons (PDF)
- Annex 8: List of consultation questions on potential remedies (PDF)
Our market study
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.
Our interim findings
Choice, universal banking and cross-subsidies
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.
Other market practices
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:
- The ‘blackout’ period in the UK IPO process between publication of research by syndicate banks and the circulation of the ‘pathfinder’ prospectus means that the pathfinder and approved prospectuses, both key sources of information, are made available too late in the process to be used by buy-side investors, non-syndicate banks’ analysts and independent research providers. When coupled with a lack of access to the issuer’s management for non-syndicate bank analysts, this reduces the diversity and independence of information available to investors.
- Allocations of shares in IPOs are skewed towards buy-side investors from whom banks derive greater revenues from other business lines (e.g. trading commission). Although these investors may be long-term holders and of benefit to issuing clients, there is also a risk that allocations do not align with issuing clients’ best interests and may shut out other investors.
- League tables that rank investment banks can be misleading because some banks carry out loss-making transactions purely to generate a higher position in league tables. Furthermore, banks routinely present league tables to clients in a way that inflates their own position. Many clients are aware of these practices; nonetheless we believe they impede effective client choice.
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:
- remove the practice of banks using contractual clauses that restrict client choice
- improve the IPO process to ensure more diverse and independent information is available earlier
- investigate further with individual banks where our analysis raises questions about conflict management in IPO allocations
- improve the credibility of league tables
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 Autumn 2016 (rather than summer as previously stated). This will set out our findings and conclusions. If appropriate, we will consult at the same time, or subsequently, on any proposed actions. Please send any queries about the market study to ICBmarketstudy@fca.org.uk.