On 18 October 2016, the UK Financial Conduct Authority (FCA) published its final report in respect of its investment and corporate banking market study.
It found that while many corporate clients feel well served by primary capital market services, there are some practices that could have a negative impact on competition, particularly for small clients.
The final report sets outs a package of remedies to address the problems that the FCA considers it has identified.
Separately, the FCA has published a consultation paper inviting comments by 16 December 2016 on its remedies, most notably a proposed prohibition on 'future service restrictions' or 'restrictive contractual clauses', which may be found in client engagement terms and which may (according to the FCA) limit clients' choices in terms future corporate finance services (see below).
The package of FCA remedies to address the relevant concerns indicated in the Final Report comprises:
The FCA has published a consultation paper proposing the prohibition of provisions limiting clients’ choice of providers for future services. These provisions include pre-emption rights or ‘right of first refusal' clauses and ‘right to act’ clauses, which can operate as an outright restriction on using third party services.
Clearly, while the ban may present opportunities for some institutions to contest profitable business, the danger in prohibiting these types of provision is that they may, in fact, reduce choice by discouraging banks from offering certain useful products and services at lower rates (or at all) because they cannot be confident that more profitable business will follow (e.g. a bridging loan for an acquisition in anticipation of a bond issue at a later date).
Other potential adverse consequences arising from a ban are the introduction of/increases in retainer fees for corporate broking services generally, which may currently be provided free of charge.
Further, if one regards the restrictions as being akin to exclusivity or non-compete restrictions, the proposed remedy also seems somewhat draconian/invasive given that it will potentially affect/apply to institutions with no/only limited market power (at least as that term is understood from a competition law perspective).
Finally, those institutions which consider they may be adversely affected by the ban (assuming it is implemented) will no doubt wish to review their terms of business to assess whether the cost of previously subsidised services can be clawed back if the customer does decide to go elsewhere.
The FCA concluded that league tables ranking investment banks can be misleading and reduce a client’s ability to compare providers.
The FCA considers that certain banks carry out loss-making transactions just to inflate their position when presenting league tables to their clients.
The FCA is working with the British Banking Association (BBA) and the Association for Financial Markets in Europe (AFME) to develop and adopt industry wide guidelines to improve the way in which banks present this information to clients. The FCA has also asked league table providers to review their recognition criteria so as to reduce the incentives for banks to undertake these league table trades.
The FCA noted that investors and analysts are left with limited or no information for a long period between the publication and the circulation of the pathfinder prospectuses and commented on the lack of access to the issuer’s management team.
The FCA has proposed a number of changes to the IPO process and is continuing to consult on this issue. A further consultation paper with policy proposals is expected in Q1 of 2017.
The FCA is concerned that banks may favour buy-side investors from whom banks derive greater revenues but not necessarily in the issuing client’s interests.
The FCA is carrying out supervisory work with firms where it has identified shortcomings in their allocation policies or a skew in their allocation practices, which are potentially inconsistent with the MiFID II regulations.
Firms have until mid-December to make representations to the FCA regarding the proposed remedies.
There are still some uncertainties regarding the scope of the proposed ban on restrictive contractual clauses and changes to the IPO process. Even if firms regard these remedies as proportionate, they may wish to engage with the FCA further to understand their ramifications.
While not specifically relevant in the context of this briefing, firms should also bear in mind that following a market study, the FCA has the power, based on evidence it has gathered and reviewed, to initiate enforcement actions against firms if it has suspicions of any anticompetitive conduct.
This has been the case in previous FCA market studies where the FCA issued warning letters to relevant firms urging them to comply with competition law.
If you are affected by any of these developments, we can help.
Whether you're keen to contribute to the FCA's remedies consultation or would like to review your terms of engagement, we have the knowledge and experience to assist you.
We provide full legal support to the Financial Services industry and have substantial experience dealing with competition law regulators, helping you to achieve your objectives as quickly and efficiently as possible.
Our Competition team has been involved in numerous market studies and investigations over recent years, including Retail Banking, Private Motor Insurance, Energy, Payday Lending and Digital Comparison Tools.
Our experience in advising firms during market studies and investigations (as well as on their commercial terms) enables us to ensure a smooth and effective interaction with the regulator and successful outcomes for our clients.
For further information, please contact TLT's competition team.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.