The Financial Conduct Authority has launched a year-long investigation into whether there is enough competition in the investment and corporate banking sector.
The regulator said on Thursday there were also “unanswered questions” about possible conflicts of interest and whether clients were getting value for money.
The bundling of services by investment banks could make it difficult for new entrants to come into the market or for smaller players to challenge larger institutions, the FCA said.
Its director of strategy and competition, Christopher Woolard, added: “We have chosen this particular area because the benefits of effective competition in the market could be significant. The UK is a global hub for investment banking, and this sector plays a crucial role in our economy, helping companies raise capital for investment, expansion and funding ongoing operations.
“What was clear from the discussions we had with stakeholders and firms was that there are unanswered questions about potential conflicts of interest and value for money in this market.”
The FCA inquiry adds to government pressure for more competition in banking. Personal accounts and small business banking is already the subject to a full investigation by Britain’s main antitrust watchdog, the Competition and Markets Authority (CMA).
The FCA said concerns had been raised with the body about transparency in the sector and the effect of bundling different services. “Investment banking was one of the areas where a number of stakeholders raised concerns or raised questions. At this point, it is too early to say whether these stack up but they certainly seem to us worthy of further investigation,” said Mary Starks, director of competition.
The terms of reference for the FCA study are expected in the coming weeks and a final report to be published in a year. Starks said the FCA would be talking to four large investment banks, 14 smaller bodies and a large number of other players that the watchdog regulates as part of the inquiry which will use a range of investigative and analytical techniques. A study into asset management and the surrounding services is also being considered.
“It is a market which is big of itself but is pretty important for the real economy. This is a market that enables businesses to raise finance, to fund investment and growth and expansion so if the market is not working well, the knock-on effects to the real economy are quite important,” she said.
From April, the FCA will have new competition powers to take enforcement action against financial firms that breach UK competition law, and refer a market to the CMA for an in-depth investigation.
“I don’t think this is a surprise and it’s fairly clear it’s a reasonably concentrated market,” said Jonathan Herbst, global head of financial services at law firm Norton Rose Fulbright.
“Clearly people should take the new competition powers seriously. It’s going to be a lot of work for the banks.”
