Changes to IPO process proposed as part of FCA investment banking study

An interim report published by the regulator as part of its investment and corporate banking market study found some evidence of banks seeking to "reward" favoured investor clients when allocating shares during an initial public offering (IPO). Along with "targeted" supervisory work on managing conflicts of interest, the FCA is also consulting on proposed changes to the rules around IPOs which would allow unconnected market participants access to "the right information at the right time" during the process.

Christopher Woolard, the FCA's director of strategy and competition, said that investment and corporate banking was "a cornerstone of the real economy, helping companies raise capital for investment and expansion".

"Our study shows that many investment and corporate banking clients are getting a service they want, but we have also identified some areas where improvements could be made," he said.

"Overall this is a package of proportionate measures intended to remove potentially anti-competitive practices. In addition, we want to start a discussion on changing the sequence of the IPO process to make the market work better by giving investors the right information at the right time," he said.

The FCA announced the terms of reference for its market study in May 2015, after an earlier review of wholesale banking uncovered "unanswered questions" about potential conflicts of interest and value for money. Its focus was on "choice, transparency, bundling and cross-subsidisation" in debt and equity capital markets, mergers and acquisitions and acquisition financing; as well as the extent to which competition for these services affects competition for corporate lending, broking and other related services.

Its interim review found that most corporate banking clients, particularly larger ones, felt "well served" by the universal banking model, in which banks provide lending and corporate broking services at low or below cost in exchange for more lucrative transactional business. However, this model potentially made it harder for banks that do not offer lending facilities to compete for transactional business, not least because of the "widespread" use of clauses preventing clients from conducting future business with other providers.

The FCA also found evidence that industry 'league tables', compiled by the likes of Dealogic and Bloomberg, were unreliable and were "routinely" presented by banks to clients "in a way that inflates their own position". League tables were at best ignored by clients, and at worst had the potential to distort decision making, it said. It has called for "an industry-led solution" to address its concerns, and has also proposed banning contractual clauses restricting clients' future choice of supplier.

Although not condemning the cross-subsidy as such and noting the efficiencies that may arise from cross-selling, competition law expert Jenny Block of Pinsent Masons, the law firm behind Out-Law.com, said that restricting the use of contractual clauses that impose some constraint on client choice may lead to some cross-subsidies being unwound, at least in part.

"While the FCA found no evidence of a clear quid pro quo in terms of lower fees for these provisions, it will be interesting to monitor whether their removal leads to increases in fees overall for some customers," she said.

"The FCA's perspective on league tables is also an interesting example of the potential distortions in decision-making that to which badly designed comparison tables can give rise. At a time when the use of price comparison websites as a remedy is becoming increasingly prevalent to help open up markets to competition, as the FCA says, what matters is whether they enable meaningful comparisons to be made by reference to issues that matter to clients. Getting that right in relation to services where quality is a major component of value is often very difficult indeed," she said.

In a separate discussion paper, the FCA set out its proposals for reform of the IPO process based on giving investors and analysts at banks unconnected to the IPO access to information on similar terms to connected parties. The current 14 day 'blackout' period between the publication of research by the issuing bank and the final approved prospectus means that potential investors only have access to an important source of information late in the process, while third party analysts get little on which to base their independent research, it said.

The FCA is seeking views on the IPO discussion paper by 13 July 2016, and on its potential investment banking remedies by 25 May 2016. It expects to publish its final report in the summer, and will consult on whether to take forward any specific reforms to the IPO process at a later date, it said.