Do CIBs engage in anti-competitive practices?

IFR 2129 16 April to 22 April 2016
6 min read

THE FINANCIAL CONDUCT Authority, the UK regulator, has been busy. It published three linked pieces of work this past week: the interim report of its investment and corporate banking market study (comment deadline May 25); the availability of information in the UK equity IPO process discussion paper (comment deadline July 13); and the “Quid pro quo? What factors influence IPO allocations to investors?” occasional paper.

The broader CIB report landed after almost a year of analysis, having kicked off last May in the wake of the FCA’s wholesale sector competition review feedback statement of February 2015. That statement had thrown out a number of potential competition concerns.

Faced with accusations of bias or anti-competitive behaviour, it’s right and proper that the regulator should have conducted requisite due diligence to allay any concerns sparked by such accusations. But save yourself the hassle of reading the 186-page report. It was an airing of issues that have been out there forever and, with limited exceptions, will likely result in little action being taken.

To get to this stage, the agency perused responses from over 90 stakeholders from across the industry, analysed data from 10,000 ECM, DCM, M&A and corporate loan transactions spanning up to five years, and met with over 100 stakeholders in a series of roundtable and bilateral meetings. My immediate reaction: it took all that work and a year to get here?

Here are the issues (my wording):

  • · Are cross-selling and/or cross-subsidisation anti-competitive in that they erect barriers to entry?
  • · Do investment banks engage in reciprocity/quid pro quo activities that are anti-competitive?
  • · Do syndicate managers unfairly favour buyside clients who pay them fat dealing commissions against the interests of issuers?
  • · Do banks with big balance sheets and open cheque books unfairly dominate DCM?
  • · Is cheap IPO pricing a set-up to benefit friendly buyside clients of lead underwriters?
  • · Are smaller buyside clients shut out of primary debt and equity allocation?
  • · Is the IPO process itself unwittingly rigged?
  • · Does the IB fee structure lack transparency?
  • · Do investment banks brow-beat, bully, strong-arm or contractually require SME clients in particular to award them advisory or primary capital markets business?
  • · Do investment banks game the league tables?

The answer to all of those questions is yes, no or maybe depending on your stance, your frame of reference or your political bias. The bigger question is this: is there anything wrong with it? More to the point, can anything realistically be done about it without undermining the whole industry construct?

A lot of behaviours exhibited by CIBs and/or market processes may have the appearance of being beyond the acceptable if you choose to view them through a purely theoretical lens or through an anti-market fog. But using levers like cross-sell or cross-subsidisation, pushing reciprocity, leveraging your position, gaming – call it what you like – are part and parcel of any industry. Investment banking is no different. You can sum it all up in one word: competition.

SO WHAT DOES the regulator want to do? Well, it wants to remove the practice of banks using contractual clauses in engagement letters that restrict client choice. Fair enough. Further items on its list, though, are woolly: improving the IPO process to ensure more diverse and independent information is available earlier; investigating further with individual banks where analysis raises questions about conflict management in IPO allocations; seeking views on whether there are ways in which it can reduce barriers to entry and/or expansion for non-universal banks and other service providers without undermining the efficiency benefits of cross-selling; improving the credibility of league tables.

Since the FCA has invited comment, you never know what might turn up. But as it stands the report’s authors don’t appear to have found any real cause for anxiety or apprehension. On reciprocity and syndication, the FCA is “not minded to pursue these issues further at this stage …”

It was suggested to the FCA that syndicates had been growing in recent years against clients’ best interests. The agency found no clear evidence to this effect: “clients rather than banks drive syndicate size and composition and the total fees a client pays do not tend to increase with the number of syndicate members,” it said. The FCA does not propose to pursue issues around syndication any further at this stage.

It found “no lack of available suppliers for [CIB] services although larger banks may opt to reduce their engagement with smaller, newer and/or riskier clients in response to market conditions and regulatory change to focus on larger, more attractive clients”.

Cross-subsidies influence the awarding of primary market mandates, particularly in DCM, the FCA found. It said that affects ease of entry and expansion for providers not offering cross-subsidised services, in particular lending. This, it said, appears to make it harder – though not impossible – to offer ECM and DCM services on a stand-alone basis.

“There is sufficient evidence,” the FCA said, “of entry from those already providing corporate lending and broking that we do not attribute the higher returns earned in transactional business to a lack of competition per se. Based on these findings, we do not see grounds for widespread intervention at this time…”

But saving the best for last and in the spirit of the song (“then you go and spoil it all by saying something stupid …”), the FCA says this: “regulation does not seem to be a major barrier to entry and expansion, although capital adequacy requirements mean more capital is required than in the past to provide investment banking services”.

Stunned silence, tumbleweed, open-mouthed bewilderment, total incredulity … I put that down to outgoing acting CEO Tracy McDermott having a little joke at our expense.

Mullin columnist landscape