14 April 2016

Financial Times: City rainmakers unfazed by FCA capital markets report

The problem, according to the Financial Conduct Authority, is that bulge bracket investment banks rely on cross-selling more valuable transactional services — such as equity or debt issuance — alongside less profitable lending or broking services.

The FCA said in its interim report on capital markets competition this week that it found 27 out of 60 financial companies were inserting “contractual clauses” into engagement letters to constrain clients from choosing other providers for future business.

“To a large extent this ‘quid pro quo’ is a commercial expectation, but we also found that the majority of the larger banks use or seek to use contractual clauses that restrict a client’s choice in future transactions,” the FCA said.

Calling for this practice to end, the regulator said the most common example of it was in “right of first refusal or right to act clauses” giving a bank priority on future deals. “We were told that these clauses have the intention of morally or legally obliging the client to award future business to the given bank,” it said. “We received no clear evidence that clients were able to negotiate a benefit (such as lower fees) when committing to such clauses.”

Given big banks’ heavy reliance on cross-selling, the FCA’s recommendation — which is still subject to consultation — may appear to threaten the dominant position of the bulge bracket banks in the City’s equity, debt and M&A markets.

If the FCA succeeds in freeing up competition, many bankers think the winners would be smaller boutiques and specialist corporate brokers, but they warn that smaller corporate clients could suffer.

Banning such “quid pro quo” clauses would bring the UK in line with the US, which has long had “anti-tying provisions” preventing banks in many cases from providing products or services on the condition that clients give them future business.

The FCA said its main concern about cross-selling related to its impact on competition between banks for smaller corporate clients, as most large companies have big panels of banking advisers all competing for mandates.

Full article on Financial Times (subscription required)

© Financial Times