In the spring of this year, the Financial Conduct Authority (FCA)
intends to conduct a review of the effectiveness of competition in investment and corporate banking services in the UK. The market study aims to test how effective and fair competition is and whether it is working properly. This is the first wholesale market
study of its kind into the investment and corporate banking system and follows on from its recent findings into the competition in the wholesale sector.
Competition in the Wholesale Sector
The FCA makes use of market studies to highlight and identify how well competition is working in financial sectors and to help them decide whether an intervention is required. The initial study into the wholesale sector was launched in July 2014 and was originally
an experimental exercise used to highlights areas of weakness in competition.
This review highlighted limited clarity over costs and questionable quality of service which made it almost impossible for customers to assess value for money. The study also revealed that bundling and cross selling of services also made it hard for new entrants
or smaller firms to enter and challenge the bigger players in the market. There are many industry players out there that fear there may be similar issues in the investment and corporate banking sector. It is for this reason that the FCA has decided to step
Concentration Level in the Market
The FCA has revealed in their review that market concentration is a high-level indicator of the effectiveness of market competition. This is perhaps obvious but yet extremely reliable. They found the level of concentration in the investment market to be ‘typically
moderate.’ The top 15 banks account for around 81 percent of the market share.
Despite this though, the FCA goes on to argue that concentration is not the only defining indicator on the efficiency of competition in the sector. They have also suggested there are three other primary concerns present in the investment and corporate banking
The quality of costs and information on corporate banking and investment services was highlighted as difficult to understand and hard to predict. This statement does take into account the commercial refinement of corporate customers.
Bundling and Cross-Selling Of Services
Another belief of the FCA is that when presented with a bundle of different services, many customers become confused as to whether or not they are getting value for money. The cross-selling of services often makes it difficult for small companies to assess
the quality or service against the asking price. The bundling of services has also been judged as a potential barrier against new market entrants or a block against expansion for SMEs.
Conflicts of Interest
The FCA has been particularly critical of the banks’ prospective lack of obedience with the regulatory constraint of ‘best execution.’ This obligation compels banks to make all the necessary arrangements to obtain the best possible outcome when executing orders
on behalf of their clients.
The review highlighted that banks are regularly incentivised to assign equity and/or debt to their favoured clients, rather than allocate it to individuals that would most benefit. Coupled with the issue of complicated bundled services, this poses a real risk
that clients are not being properly looked after by the banks.
Why Launch a Market Study?
Market studies are launched by the FCA when they are made aware of potential competition problems in the market. They do not require evidence of problems beforehand; they simply require suspicion caused by a number of reasons. The FCA has since outlined a number
of reasons why they are intending to launch a market study into investment and corporate banking services. The main reason is for poor disclosure of costs.
This is especially true when it comes to different components of a bundled service. This reason, alongside weak bargaining power for a client, acts as a distinct disadvantage to the client. The FCA accepts that there may be a strong and valid reason for bundling
services together; the market study aims to explore this in further detail.
There are also many potential benefits to be had from making improvements to competition in investment and corporate banking. The UK’s economy is massively affected by the cost and quality of investment and corporate banking services; in 2013 the sector alone
provided revenues of around £10bn. Many would argue that with these figures, this review has been a long time coming.
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(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice
should be obtained before taking, or refraining from taking, any action as a result of this article.)