FCA confirms scope of UK investment and corporate banking competition investigation

It will examine "choice, transparency, bundling and cross-subsidisation" in debt and equity capital markets, mergers and acquisitions and acquisition financing as part of the study, and intends to produce a final report next spring, it said. It will also consider the extent to which competition for these services affects competition for related services, such as corporate lending and broking, according to the study terms of reference.

Financial regulation expert David Heffron of Pinsent Masons, the law firm behind Out-Law.com, said that the study would raise some interesting challenges for the regulator.

"Many of the services that will fall within its scope are global in nature, particularly in investment banking, but the FCA believes that many of the issues can be considered at a national level," he said. "Also, some of the elements of the services that are bundled fall outside of what the FCA regulate, but they will look at how these are bundled with services it does regulate."

"Since the FCA obtained its competition objective in the 2012 Financial Services Act it has launched market studies in relation to insurance add-ons and the retirement income market. Both of those studies identified remedies that supported greater customer choice and providing customers with more information, including encouraging them to shop around. However, the sophisticated nature of the market may mean that the FCA will, for the first time, look at more far-reaching remedies here," he said.

The FCA announced that it would formally review investment and corporate banking competition in February, after a review of wholesale banking in the UK uncovered "unanswered questions about potential conflicts of interest and value for money". The regulator will work with a "wide range of firms" of all sizes as part of the study, but it is particularly keen to hear from "smaller firms who have recently raised capital" and new entrants to the market before 22 June, when it finalises the terms of reference, it said.

The market study will attempt to discover whether there are any areas of investment and corporate banking where there is insufficient competition. It will do this by focusing on the choice between banks and advisers and the impact of syndication; transparency in relation to quality of services and fees; and the extent to which cross-subsidisation and the 'bundling' of services together affects competition. It will also look at the potential benefits of reducing regulatory barriers to market entry or expansion.

"The FCA believes that the benefits from improvements in the way competition works in these markets could be high," said Heffron.

The study will also take account of ongoing domestic and international work, the FCA said. This will specifically include the UK's own Fair and Effective Markets Review, which is due to report in June; and the implementation of new EU legislation including the new Markets in Financial Instruments Directive (MiFID II) and the proposed capital markets union.

"Some of the core issues raised by the FCA in terms of transparency, engagement and incumbency advantage are familiar in retail markets, as well as possible concerns about bundling and cross-subsidisation," said competition law expert Jenny Block of Pinsent Masons. "It will be interesting to see how they are explored in a context where customers have always been assumed to have an altogether different level of sophistication and understanding."

"These processes can be demanding and require a commitment of resources from across an organisation. Firms that are the focus of the market study can expect detailed and comprehensive requests for information, with a relatively short timeframe for response," she said.

The FCA intends to publish the interim findings from its study and any proposed remedies around the turn of the year, ahead of a final report in spring 2016. Depending on the outcome of the market study, regulatory intervention to promote effective competition such as new rules, guidance on proposals for enhanced industry self-regulation could follow, it said.

"We want to see a sector that benefits the real economy by helping businesses of all sizes access capital," said FCA director of strategy and competition Christopher Woolard. "This means offering real choice, transparency and good service at every level."

"It is also essential that the regulatory framework encourages competition, and we will engage with banks, advisers, clients and investors throughout the review to assess which aspects of the market work well, and identify areas for improvement," he said.