FCA sets out new universal banking competition rules

"This sends a signal that we expect firms to compete on the merits, not by restricting clients’ choice on future transactions, drawing misleading comparisons with competitors’ performance, or exploiting conflicts of interest."

In its study into the sector, the FCA found that "while many clients, particularly large corporate clients, feel the universal banking model of cross-selling and cross-subsidisation from lending and corporate broking services to primary market services works well for them, there are some practices that could have a negative impact on competition, particularly for smaller clients".

In response, the regulator will ban banks from using contractual clauses that seek to limit clients’ choice on future transactions.

It will also seek to end league table misrepresentation in banks' pitches to clients, arguing that "banks routinely present league tables to clients in a way that inflates their own position". The FCA is working with the BBA and AFME so that they can develop and adopt industry guidelines to improve the way such information is presented.

In addition, the FCA will remove incentives for loss-making trades to climb league tables. It says league tables that rank investment banks "can be misleading because some banks carry out loss-making transactions purely to generate a higher position in such tables".

A supervisory programme for initial public offering allocations will also be introduced, after the FCA previously found evidence that some banks may seek to reward favoured investor clients when allocating shares in an IPO.

In its final report, the FCA said: "Allocations of shares in IPOs are at times skewed towards buy-side investors from whom banks derive greater revenues from other business lines (for example, trading commission). In the run up to the implementation of MIFID II, the FCA will work with those firms where shortcomings in their allocation policies or practices have been identified."

Christopher Woolard, Director of Strategy and Competition at the FCA, commented: “Wholesale financial services markets play a vital role in the economy and the FCA has an important role to play to ensure these markets work well.

“The universal banking model clearly works well for a wide range of participants but areas such as the use of restrictive contractual clauses, league table credibility and the allocation of shares in IPOs are not always working as well as they could. We’ve developed a package of remedies designed to address these problems. This sends a signal that we expect firms to compete on the merits, not by restricting clients’ choice on future transactions, drawing misleading comparisons with competitors’ performance, or exploiting conflicts of interest."

Simon Lewis, Chief Executive of the Association for Financial Markets in Europe, commented: “We welcome the completion of the market study and note that the final report confirms the interim report’s general conclusion about the current provision of capital markets services.
 
"We also note that in the final report the FCA is only proposing specific measures in relation to league table presentation and the prohibition of certain clauses in engagement letters.”