Summary: On 18 October the FCA published its final report of its market study of investment and corporate banking services and sets out a package of remedies to ensure effective competition in the market.

The final report confirms the findings of the interim report that whilst many clients feel well served by primary capital market services there are some practices that could have a negative impact on competition, particularly for smaller clients.

Separately the FCA has published a consultation paper on the prohibition of restrictive contractual clauses. Responses are requested by 16 December 2016.

Final findings

  • 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 FCA are working with the BBA and AFME to develop and adopt industry guidelines to improve the way in which banks present this information and have also asked league table providers to review their recognition criteria so as to reduce the incentives for banks to undertake such league table trades.
  • In a separate discussion paper published at the time of the interim report, the FCA discussed changes to the IPO process. It observed 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, 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 proposed three new models to improve the IPO process and is continuing to consult on these. It expects to publish a separate consultation paper with policy proposals in winter 2016/17.
  • The allocation of shares in IPOs can be skewed towards favoured investor clients including buy-side investors from whom banks derive greater revenues from other business. In the run up to the implementation of MIFID II, the FCA will carry out supervisory work with those firms where it has identified shortcomings in their allocation policies or a skew in their allocation practices.

Consultation paper on banning restrictive contractual clauses

In its interim report the FCA discussed the use of contractual clauses in client engagement letters which seek to limit clients’ choice on future transactions. The FCA has now published a consultation paper proposing to ban the use of:

  • ‘Right of first refusal’ clauses which prevent clients from accepting a third party offer to provide future services unless they have first offered the mandate to the bank or broker on the terms proposed by the third party; and
  • ‘Right to act’ clauses which prevent clients from sourcing future services from third parties, regardless of any potential third party offers

in investment and corporate banking engagement letters where they cover future corporate finance services carried out from an establishment in the UK. This prohibition would apply to agreements entered into after the restrictions come into force but would not apply to existing agreements. It would also exclude future service restrictions in bridging loans as these type loans are provided on the basis that the client will replace it with longer term financing, typically a bond issue, equity issue or term loan.