Big investment banks may be too dominant in some areas of the industry, limiting competition and hurting companies and consumers, the Financial Conduct Authority (FCA) warned yesterday.
Prices are not always transparent enough to allow firms to compare banks effectively, the FCA said.
The watchdog has received complaints that shares in major deals are allocated to favoured clients, that banks’ own analysts are not properly insulated from the deals the bank is working on, and that deal fees have been increasing.
The FCA launched an investigation into investment and corporate banking, looking at a vast range of activities, and aims to narrow down its probe over the coming weeks.
If the watchdog decides there may be cause for concern it can then investigate the sector more thoroughly over the coming year.
No action has been ruled in or out so far, with the full range of options on the table. Potentially, this can range from advice to investment banks through to orders to change certain products, to fines for bad behaviour or even to breaking up the banks to promote competition.
“There are two areas we want to look at – how much do corporate customers understand what they’re getting, and at what prices? It is a question of how closely they can monitor what they’re buying,” said FCA competition boss Mary Starks.
“And then the other is about how open the market is to new players and to niche players if they are not a full service universal bank.”
Analysts said the review could have far-reaching repercussions because of the very global nature of the sector – among the biggest investment banks, only HSBC and Barclays are UK-based.
“Any changes could have consequences outside of UK borders and on the competitiveness of the UK,” said EY’s Omar Ali. “The hope is the review is done in a way that actually cements London’s place as the centre for Wholesale Banking.”
PROFILE: THE REGULATORS ON THE CASE
Mary Starks was appointed jointly to the role of director of competition in late 2013, and has taken a leading position promoting its goals with a flurry of speeches to the sector over the past year.
Before joining the FCA Starks spent more than five years at the Office of Fair Trading, as well as time at the New Zealand Commerce Commission and NERA Economic Consulting.
She plans to spend the coming weeks heading her team of a dozen regulators to narrow the terms of reference in this probe to focus on any serious problems in investment banking.
Christopher Woolard has had a long career in regulation and competition, and was appointed as director of strategy and competition at the FCA in January 2013.
The job is keeping him busy – other cases include a probe into the cash savings market and a review of the insurance sector.
Before moving into finance he oversaw the communications industry as a group director at Ofcom, and as a non-executive at the UK Council for Child Internet Safety. Previous policy roles include positions at the BBC and the Department for Trade and Industry.
Q&A: WHAT DOES THE FCA DO NOW?
Q The investment and corporate banking sectors are massive – which bits are under investigation?
A The list is enormous, covering vast tracts of the wholesale banking sector. This ranges from debt and equity underwriting to securities trading and market making, to research, deposit-taking and post-trade services.
Q Are all of those really in need of an investigation? Can the FCA take on that much even if it wants to?
A The regulator can take on what ever it wants – other investigations are going on in big sectors including current accounts and savings. In this case, the FCA has not decided if there is any serious problem yet. It will spend the next few weeks deciding which, if any, areas to focus on.
Q What happens once it has decided to home in on these areas?
A The next step can take up to a year, depending on the scale of the investigation. Regulators will take more evidence from banks and their customers, and try to work out if banks’ behaviour or the shape of the market is hurting customers. If it is, then the FCA will try to work out how to stop that, either by asking firms to change behaviour, imposing bans and fines, or, at the toughest end, even breaking up banks to promote competition.