FCA to conduct first review of competition in UK investment and corporate banking

Full terms of reference will be published in the spring, but will be likely to reflect industry concerns about transparency, conflicts of interest and the impact that bundling services together has on competition, the FCA said. The announcement follows a review of the wholesale banking industry by the FCA, based on meetings with and written responses from around 70 industry participants.

Financial regulation expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, said that the FCA had "lit the touch paper" under its new objective to promote effective competition in the banking sector. From April, the regulator will also have its own powers to take enforcement action against firms for breaches of the Competition Act and to refer markets to the Competition and Markets Authority (CMA) for in-depth investigation, he said.

"The FCA was clearly concerned with its findings during its recent review of competition in the wholesale sector," he said. "Firms should not only take note of the FCA's intent, but ensure that they take action and that any liaison with the FCA during its study is both informed and the subject of careful scrutiny."

Christopher Woolard, the FCA's director of strategy and competition, said that effective competition between these firms could have "significant" benefits.

"The UK is a global hub for investment banking, and this sector plays a crucial role in our economy, helping companies raise capital for investment, expansion and funding ongoing operations," he said.

The FCA began gathering industry views on competition between wholesale banks in July 2014, with the intention of drawing up a list of those areas that might benefit from further investigation through an in-depth market study. Issues identified by respondents included the potential difficulties clients experienced when assessing value for money due to limited clarity over price and quality of services; as well as the fact that cross-selling and 'bundling' of services could make it difficult for new entrants or smaller firms to challenge the established large banks.

Other areas identified by respondents for potential investigation in the future included value for money when buying asset management services. The FCA said that it would consider a full market study of asset management and related services later this year. However, other issues identified including data services, clearing and execution would likely be addressed by upcoming regulatory changes, it said.

"Banks are currently redesigning their financial products and business lines in a new era of restricted balance sheet lending, conduct risk, heightened regulation in payments and evolving technology," said banking law expert Tony Anderson of Pinsent Masons. "They will be braced for further change pending the findings of this study."

The FCA said that there would likely be some overlap between its investigation and the Fair and Effective Markets Review into wholesale financial markets, which is due to report in June. This exercise is a joint review by the Treasury, Bank of England and FCA. The CMA, which is the UK's main competition watchdog, is currently carrying out a full investigation into competition between banks that offer personal current accounts and retail banking services to small businesses.