Investment and corporate banking market study: FCA publishes its terms of reference

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On 22 May 2015, the Financial Conduct Authority (FCA) formally launched its investment and corporate banking market study and published the terms of reference, which can be found here.

The market study follows on from the wholesale sector call for evidence which the FCA carried out in July 2014. In February 2015, the FCA published the results of the call for evidence. The FCA found indications that investment and corporate banking sectors may not be working well for users of these services. In particular, it identified possible competition issues in relation to transparency of information and the bundling or cross-selling of services, as well as possible conflicts of interest. Therefore, the FCA decided that it was appropriate to launch a market study to investigate these issues further.

Terms of reference

The FCA has now formally launched the market study into investment and corporate banking by publishing its terms of reference.

The market study will examine whether there are areas of investment and corporate banking services where competition may not be working well. The FCA is focusing on primary and related activities provided in the UK, regardless of where the client may be based or the activity may be booked. The areas of focus in the primary markets will be:

  • Equity Capital Markets: advising on and managing the marketing, distribution, allocation and underwriting of equity issues, including initial public offerings, special warrants and private placements.
  • Debt Capital Markets: advising on and managing the marketing, distribution, allocation and underwriting of bond issues.
  • Mergers and acquisitions: identifying opportunities for clients and advising them on the potential for mergers and acquisitions or the sale of the business.
  • Acquisition financing: debt financing to support acquisitions.

Although identified as potential areas following the call for evidence, the market study will not be focusing on issues around best execution of client orders or barriers to entry in corporate banking.

The FCA has indentified three potential competition issues for primary market and related activities that warrant more detailed investigation:

  • choice of banks and advisers for clients, including: whether smaller clients are served as well as larger clients; the impact of clients’ preferences for a limited number and/or a syndicate of banks; and how entry and expansion may be restricted, including by regulation.
  • limited transparency in the provision of services, including: whether clients have adequate information to assess good value; transparency of the allocation process for issuing debt or equity; and the impact of existing rules and practices for disclosing information around initial public offerings
  • practices of bundling and cross-subsidisation of services: whether this occurs as between primary market and related activities and/or within primary market activities; and, if so, what impact it has.

Next steps

Although the FCA is not formally consulting on the terms of reference, it has said that it welcomes any comments on the issues raised by 22 June 2015.

The FCA has stated that it will shortly be approaching market participants for information and data to enable it to assess the issues set out above. The FCA will be hosting a number of roundtables and/or bilateral meetings with stakeholders.

The FCA plans to publish an interim report (including any proposed remedies) by the end of 2015, with a final report due in spring 2016.

If the FCA concludes that competition is not working well, it may intervene to promote effective competition using a number of measures, including:

  • market-wide remedies, including changing existing rules, publishing general guidance or proposing enhanced industry self-regulation
  • firm-specific remedies, including cancelling permissions, public censure, imposing fines as well as filing for injunction orders or restitution orders
  • making a market investigation reference to the Competition and Markets Authority for a more in-depth investigation.

Alternatively, the FCA may decide to take no further action. This could be because the FCA’s concerns are likely to be satisfied by upcoming legislative measures or actioned by relevant firms. In such cases, the FCA may continue to monitor the market in case its concerns are not addressed.

Further information or assistance

Should you require further information regarding this market study, or require assistance in making submissions to the FCA or in dealing with a Request for Information, please contact Trudy Feaster-Gee (Partner, Barrister and Head of Competition).