The FCA has put forward possible remedies for the issues identified and also published a discussion paper on suggested improvements to the way in which information is provided to investors during the Initial Public Offering (IPO) process.
Christopher Woolard, director of strategy and competition at the FCA, said:
“These markets are a cornerstone of the real economy, helping companies raise capital for investment and expansion. Our study shows that many investment and corporate banking clients are getting a service they want, but we have also identified some areas where improvements could be made.
“Overall this is a package of proportionate measures intended to remove potentially anti-competitive practices.
“In addition, we want to start a discussion on changing the sequence of the IPO process to make the market work better by giving investors the right information at the right time.”
Investment and Corporate Banking Market Study
The FCA’s market study focused on choice, transparency, bundling and cross-subsidisation in debt and equity capital markets, and mergers and acquisitions. It also considered links between competition in these primary market services and related activities such as corporate lending and broking, and ancillary services.
Despite most, particularly larger, clients feeling well served by the universal banking model* the FCA found that cross-selling could make it harder for banks that do not offer lending facilities to compete for primary market services. The FCA noted widespread use of contractual clauses that purport to limit clients’ choice of providers on future transactions. The FCA is calling for an end to the use of such clauses.
In addition, the FCA is looking for the industry to address concerns that league tables on investment and corporate banking services may be unreliable, which means they are at best ignored by clients and at worst could distort clients’ decision making.
Analysis in the market study has also found evidence that some banks may seek to reward favoured investor clients when allocating shares in an IPO. As a result, the FCA will undertake supervisory work with a targeted group of banks to better understand how potential conflicts of interests are managed when shares in IPOs are allocated.
Initial Public Offering discussion paper
In a paper also published today, the FCA has opened a discussion with the aim of ensuring market participants have access to the right information at the right time during the IPO process. Currently there is a blackout period, typically of 14 days, between research on the issuer being published by the banks supporting the IPO and circulation of the issuer’s prospectus. This means that investors only have access to an important source of information late in the process. In addition, analysts unconnected with the IPO generally lack access to the management of the issuer, leaving them with little information on which to base their independent research.
The alternative IPO process models put forward for discussion in the FCA’s paper comprise different combinations of two simple ideas: a requirement to delay the release of any research by analysts at banks connected to the IPO until after the prospectus is published, and a requirement to invite analysts from unconnected banks and independent research providers to any meetings with management. These options have been presented to stimulate debate.