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UK FCA Proposes Significant Changes To Anti-Competitive Practices

financial conduct authorityUK’s regulatory body, the Financial Conduct Authority (FCA) is suggesting the introduction of several new rules that will restrict bankers from indulging in misleading behaviour that impacts competition in the industry.

As a part of its final report reviewing the competition in investment and corporate banking as well as the overall financial sector, the FCA has suggested a number of measures to improve transparency and ensure better service for smaller companies. The review was started in February 2015 and an interim report was submitted by the agency in April 2016.

In the final report, the FCA is proposing to ban contract clauses that restrict clients’ choice for future deals, unfair share allocation and elimination of league tables for investment banks that might be encouraging to loss-making deals. According to market experts, such practices have been used over a long period of time to bring in additional business.

In a statement, Christopher Woolard, the FCA’s director of strategy and competition said

We expect firms to compete on the merits, not by restricting clients’ choice on future transactions, drawing misleading comparisons with competitors’ performance, or exploiting conflicts of interest. The universal banking model clearly works well for  a wide range of participants but areas such as the use of restrictive contractual clauses, league table credibility and the allocation of shares in IPOs are not always working as well as they could.

The FCA found that the longstanding practice of investment banks of using league tables to attract clients could be misleading since banks at times take on loss-making deals to boost their ranking. It said that such tables, which rank investment banking firms based on the volume of deals handled, could distort choices made by companies.

The regulator has said that it is working on developing guidelines for publishing league tables with two bank trade authorities which are the British Bankers’ Association and the Association of Financial Markets in Europe.

Regarding restrictive clauses, the FCA wants the removal of the Right of First Refusal clause by which a bank requires the client to consider the bank for subsequent transactions as well or give the bank the right to manage a company’s IPO after arranging a loan. Similarly the Right to Act clause which allows banks to prohibit use of other parties for future transactions might also be removed. The FCA has said that it will consult further on these two clauses and issue guidance on them next year.

Also under consideration are rules to bar banks from favouring their more-profitable clients during stock market issuances or IPOs.

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