Right now, the UK is conducting two bafflingly similar reviews of practices in the wholesale financial services. The Bank of England is running its Fair and Effective Markets Review, an enormous post-Libor scandal project which hopes to establish that fixed income, currency and commodities markets can be fair, open and transparent, and root out abuses such as benchmark rigging. It also takes in the new issue market, and will gather evidence on allocation practices, information flow, and bond standardisation.
But much more disruptive to the industry could be the Financial Conduct Authority’s review of competition in wholesale markets. The authority is only collecting evidence and establishing a scope at this point, but as of last week, now has serious competition-authority teeth.
Competition in banking was already regulated, as it is in every industry, by the Competition and Markets Authority (the old Office for Fair Trading and Competition Commission combined), but as this regulates everything from the price of milk upwards, it largely left wholesale finance alone. Caveat emptor, and all that.
What makes the FCA’s new powers scary is not that wholesale finance is not competitive.
Syndicates may work with their competitors regularly, but there is no suggestion that banks are anything other than ruthless in chasing mandates. Bankers complain privately that there is no fat left, especially in Europe (European capital markets heads often look enviously at what they see as an oligopoly in US underwriting, in both equity and debt).
The problem is that it doesn’t always look like that, especially from the outside. GlobalCapital recently had the pleasure of explaining “fee discipline” to a competition lawyer, whose face gradually took on a look of open-mouthed horror.
No matter that fee discipline may be honoured more in the breach than the observance, or that some deals get done for zero fees. The question is really whether any bank can be confident that none of its employees said anything embarrassing about fee discipline on company email, instant messenger or a recorded line in the last five years.
Protestations that competition on quality of service and client coverage are more important than competition on price will go unheard. Competition authorities are likely to assume that a flattish pricing structure for a given category of issue is already evidence that there is a lack of competition.
Companies or other issuers might be perfectly content with the wholesale financial services, especially the underwriting, they receive. Most have close relationships with their banks, after all, which the banks understandably pour resources into maintaining. Their top coverage bankers are close strategic confidants, their relationship banks are trusted partners.
But even this doesn’t necessarily matter. Competition law in the UK is a toothsome beast, and can “look through” to an ultimate final consumer. No matter whether the treasurer of a UK plc is happy with their bond underwriters; if the FCA or the Competition and Markets Authority can argue that consumers of that company’s product have lost out, they can make trouble.
The culture of capital markets, and competition in capital markets, exists for a reason. There is a world of difference between buying consumer products off the shelf and managing the financing, acquisitions and cashflows of a global company for decades at a time.
But banks will need to prove the nature of this competition. Politicians and the public are in no mood to give investment banks the benefit of the doubt. If any murk does come out of the FCA competition review, banks need to be in a position to demonstrate in detail that they have nothing to hide.