Final Report: FCA on Investment & Corporate Banking

The Financial Conduct Authority (FCA) has published its final report on the investment and corporate banking sector.  The document was created to help foster competition in the this sector of finance.  The report reflects the interim publication that was released this past April.

Christopher Woolard, Director of Strategy and Competition at the FCA, released a statement alongside the report;

christopher woolard 2“Wholesale financial services markets play a vital role in the economy and the FCA has an important role to play to ensure these markets work well. The universal banking model clearly works well for a wide range of participants but areas such as the use of restrictive contractual clauses, league table credibility and the allocation of shares in IPOs are not always working as well as they could. We’ve developed a package of remedies designed to address these problems. This sends a signal that we expect firms to compete on the merits, not by restricting clients’ choice on future transactions, drawing misleading comparisons with competitors’ performance, or exploiting conflicts of interest.

“We are also continuing to look at how we can improve the IPO process.”

The FCA said their findings indicate that many clients, particularly large corporate clients, feel the universal banking model of cross-selling and cross-subsidisation from lending and corporate broking services to primary market services works well for them, there are some practices that could have a negative impact on competition, particularly for smaller clients.

The original study on investment & corporate banking was launched in May of 2015.

The remedies in brief, as defined by the FCA, are as follows:

  • Banning banks from using contractual clauses that seek to limit clients’ choice on future transactions. The FCA has published a separate consultation paper alongside this final report setting out the proposals. Depending on the responses to the consultation paper, the FCA expects to publish the final rules in early 2017.
  • Ending league table misrepresentation in banks’ pitches to clients: banks routinely present league tables to clients in a way that inflates their own position. The FCA is working with the BBA and AFME so that they can develop and adopt industry guidelines to improve the way such information is presented.
  • Removing incentives for loss-making trades to climb league tables: league tables that rank investment banks can be misleading because some banks carry out loss-making transactions purely to generate a higher position in such tables. The FCA has asked league table providers to review their recognition criteria so as to reduce the incentives for banks to undertake such league table trades.
  • Supervisory programme for initial public offering (IPO) allocations: allocations of shares in IPOs are at times skewed towards buy-side investors from whom banks derive greater revenues from other business lines (for example, trading commission). In the run up to the implementation of MIFID II, the FCA will work with those firms where shortcomings in their allocation policies or practices have been identified.

The final report is embedded below.

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