Summary: Today the FCA published its interim findings of its market study of investment and corporate banking services. The study reveals that many clients feel well served by primary capital market services but concerns were raised around cross-subsidies between corporate banking and investment banking signalling that improvements could be made to encourage competition.

The FCA seeks views on its findings by 25 May 2016. Separately the FCA has published a discussion paper on the IPO process with responses requested by 13 July 2016.

Interim findings

  • The provision of lending and corporate broking services for low or no fees in return for future transactional business makes it harder for those banks providing only transactional services to compete.
  • Compared to larger corporates who often have relationships with a wide range of lending banks or joint brokers, small and medium–sized corporates with fewer banking relationships may feel the need to “reward” a lending bank/broker with future transactional business. This is often exacerbated by the use of “tail gunner clauses” in client engagement letters providing the bank/adviser with the right of first refusal or right to act in respect of future mandates. No clear evidence that syndicates have grown.
  • League tables ranking investment banks can be misleading as some banks engage in loss-making transactions to gain league table credit or present league tables to clients in a way which inflates their position.
  • The practice of having a blackout period lasting 14 days between publication of research and circulation of the pathfinder prospectus reduces the diversity and independence of information available to investors.
  • The allocation of shares in IPOs may be skewed towards favoured investor clients including buy-side investors from whom banks derive greater revenues from other business.

Potential remedies and next steps

The FCA:

  • will seek views to reduce barriers to entry and/or expansion for non-universal banks without undermining the benefits of cross-selling;
  • proposes to remove the practice of banks using contractual clauses that restrict client choice; and
  • proposes to improve the credibility of league tables by exploring ways in which they could they be better presented.

IPO Discussion Paper

The FCA has published a separate discussion paper on the availability of information in the IPO process. The FCA’s observation is that investors only have access to important information late in the process due to the timing of publication of the connected analysts’ research and pathfinder/approved prospectuses. In addition, the FCA notes that analysts unconnected with the IPO are not provided with the same access to the management team of the issuer, resulting in them having little information on which to base their own independent research. The FCA is keen to improve the IPO process to ensure that investors are given appropriate information in a timely fashion.

The FCA proposes three possible models: (i) requiring a blackout on connected research until seven days after an approved prospectus is published; (ii) opening any analyst presentation to unconnected research analysts and requiring a blackout on connected research until seven days after publication of an approved prospectus; or (iii) opening any analyst presentation to unconnected analysts and prohibiting such a meeting from taking place before publication of an approved prospectus.

These reports follow on from previous discussions/reports from institutional bodies and market participants over a number of years. If these proposals are implemented, they will have significant consequences for banks/brokers and those involved in the IPO process.