The Financial Conduct Authority (FCA) has announced a review of competition in the wholesale financial markets.
Why is the FCA carrying out this review?
The FCA is concerned that there may be areas within the wholesale financial markets where competition is weak or not working properly. One of the FCA's objectives is to promote effective competition in financial markets so it is duty-bound to explore these concerns and try to remedy any problems.
What areas of the wholesale sector will be covered by this review?
- Markets and Market Infrastructure
- Asset Management and Fund Services
- Investment Banking
- Corporate Banking
What areas of the wholesale sector will not be covered by this review?
- Insurance
- Payment services
What issues has the FCA identified?
The FCA has identified a range of different issues across the wholesale sector. Some issues are specific to each sector but two areas of particular focus shine through: access to data and integration of services
Access to data
The FCA is concerned that existing players have the advantage of ready access to timely and accurate data. Trading venues may subsequently sell this data but such sales tend to be on a delayed (and probably aggregated/abridged) basis.
The FCA points to a great deal of concentration in the over-the-counter derivatives segment (suggesting that as much as 80%-90% of all trades by notional volume have one of 14 dealers as the counterparty, and that around a third of all volumes are traded solely between these dealers). The FCA considers that this concentration in trading inevitably leads to a concentration of information.
The FCA says that forthcoming regulatory change will improve this anyway by broadening the scope of pre and post-trade transparency requirements. However, the FCA is also asking for further evidence of instances where those entities producing or disseminating data face limited competition and are able to charge higher prices or create barriers to entry.
Smaller, newer and more niche financial services firms could benefit from reforms that would increase their level of access to high quality information. More broadly, possible reforms in this area would create opportunities for technology firms with experience of capturing, packaging and distributing data in an efficient and secure manner.
Integration/bundling of service
The FCA considers that established sector participants may either be large enough to offer a range of services under one banner (ie banks offering research, advice and execution) or be able to enter into relationships with one another whereby a degree of exclusivity is provided (ie trading venues only dealing with a small number of central counterparties).
The FCA suggests that this could allow firms which provide services in this integrated way to enjoy a number of advantages:
- They can apportion fees across the process, artificially making some stages cheaper than they might otherwise be (and make it harder for standalone competitors to match their prices)
- They can focus on the stages of the process that seem most relevant to the client and be less careful (and therefore more economical) in the way that they provide other aspects of the service
- They can cross-sell effectively based on their existing knowledge of the client
- They can use exclusivity arrangements to keep out other participants (including new entrants).
Again the focus here is on smaller, niche firms. The idea is to seek to ensure that each segment is subject to additional competition, including from new entrants. The nature of breaking the process up, though, is that it would create a need for communication solutions to enable a larger collection of interested parties to co-operate effectively. Reforms in this area could be of interest to a range of technology companies.
Action
In establishing this review, the FCA is calling for input regarding areas in which competition in the wholesale sector is considered not to be working properly. Anyone can reply to this call for input and those wishing to do so should respond to the specific questions posed in the review document by 9 October 2014.
Having received the responses to the review, the FCA will publish a Feedback Statement later in 2014. If the FCA decides to launch a market study in this area, this study would begin early in 2015, with any recommendations to follow.
At every stage of this review those looking for opportunities in the wholesale sector will be able to see the background to the FCA's considerations. They will therefore be able to get an idea of likely reforms and the possibilities they will open up. At present it seems that the capturing and distributing of data and the provision of niche, standalone services are looming large in the FCA's thinking - these are areas to watch.