Investment banks mislead clients and suppress competition, says watchdog

Investment banks should do more to encourage competition and fairer treatment of customers, Britain’s financial watchdog said, proposing changes to help firms to make informed choices about the banks they use.

According to an interim market study published on Wednesday, investment banks routinely misbehave when floating companies on the stock market or selling bonds, in ways which benefit the bank and a select group of favoured clients but not necessarily the company which has hired the bank for the deal or the new investors buying the shares.

The Financial Conduct Authority said that overall, investment banks’ customers are happy with the service on offer and that the institutions’ ability to raise funds for companies makes them “a cornerstone of the real economy.”

But regulators also found some examples of behaviour they want to stamp out.

The FCA also wants to put an end the use of contractual clauses that tie clients to using the same bank for a range of services. The watchdog found that cross-subsidies between corporate and investment banking lead to this bundling of services, where customers can end up using the same bank for several products.

“These markets are a cornerstone of the real economy, helping companies raise capital for investment and expansion,” Christopher Woolard, director of strategy and competition at the FCA, said in the statement.

“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.”

In a separate paper put out to public consultation, the watchdog proposed “changing the sequence” of how companies are floated so that investors get the “right information at the right time.”

The FCA also questioned the use of investment banking league tables that are often used by banks to market their abilities to clients. Often these tables are misleading as they include loss-making deals the banks undertake to boost their rankings. The FCA wants the tables to be more reliable. One idea is to make banks declare which deals lost them money.

Banks claim the market is already highly competitive. Investment bank services generated $17 billion in fees in 2014 alone.  A final report is expected this summer.