The first of the Financial Conduct Authority's remedies for the primary capital markets are in. They include banning contractual clauses that restrict companies' ability to choose alternative banks or advisers for subsequent IPO or other market transactions when they are not clearly beneficial to clients. Following a recent study into investment and corporate banking competition, the FCA has proposed to ban contractual clauses, including 'right of first refusal' and 'right to act', which apply to future corporate finance business.
Banks have argued that such clauses are not enforced or enforceable. But the regulator found that around 86 per cent of banks studied do use or seek to use restrictive clauses across equity and debt capital markets, M&A and corporate lending and broking. 'Right of refusal' clauses prevent clients accepting a third-party offer to provide future services unless they have first offered the mandate to the bank or broker on the terms proposed by the third party. 'Right to act' clauses prevent a company sourcing services from third parties regardless of external offers it may receive. The FCA has issued a consultation paper on the scope of its intended ban.
The watchdog argues that medium-sized and smaller companies typically have fewer banking relationships and may feel the need to reward a current lender with transactional business when they would not have otherwise asked the provider to work on the deal. The largest four banks in the market account for 39 per cent of the equity capital market transaction value and half of M&A deals. But competition here still outstrips the retail banking market.
The regulator also plans to address those banks with a "significant skew" towards larger investors when building a book of investors for an equity issuer. There is an obvious conflict between a bank's duty to construct an appropriate book and the long-term relationships they have with buy-side clients. The study found that banks had not been following their own allocation policies: the watchdog will be supervising those banks identified as falling short of existing regulations.
The regulator is also working on guidelines to stop banks misrepresenting themselves in league tables, which are crucial to winning business. It further expects to release this winter a separate consultation paper to allow independent analysts access to company information earlier in the IPO process. Ideally, this would give private investors better-informed unconnected research on which to base purchase decisions.
