U.K. Targets Banks Who Game League Tables to Win Clients

  • Regulator also targets banks using restrictive contract terms
  • Proposals in final report follow investment banking review

Britain’s banks face a ban on restrictive contract clauses and misuse of league tables in pitches to clients, in an attempt by the U.K.’s financial regulator to shake-up competition in investment and corporate banking.

In a final report published by the U.K. Financial Conduct Authority Tuesday, the agency said improvements must be made by banks in primary capital market services to better serve smaller clients. The regulator proposed banning contract clauses that restrict clients’ choices over what firms they can use and removing incentives for banks to leverage loss-making trades to climb league tables that are then used to win clients.

The FCA started a review of competition in investment and corporate banking in February 2015 following a wider look at competition in the wholesale financial sector. The regulator was concerned a lack of transparency was making it difficult for clients to know if they were getting good value and was also preventing smaller firms from competing for services. Many of the watchdog’s conclusions Tuesday are similar to those published in its interim report in April.

‘Conflicts of Interest’

The regulator will also carry out a supervisory program for initial public offerings after finding banks sometimes favor more profitable clients when allocating shares. A separate paper on changes to the IPO process is planned for the next few months.

"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," said Christopher Woolard, director of strategy and competition at the FCA. “The universal banking model clearly works well for a wide range of participants, but" not always as well as it could.

The FCA found banks took on loss-making transactions to gain credit in league tables because they wanted to show them to prospective clients. Sometimes this was targeted at particular industries or regions so they could be included in rankings for those areas. The regulator is looking at how league tables can be made more reliable.

On the issue of restrictive contract clauses, the FCA is proposing to ban “right of first refusal” clauses-- a term that forces clients to allow a bank to beat any offer made on a mandate before they go with another firm. “Right to act” clauses-- a blanket restriction on clients using other parties for future transactions -- may also be removed.

The FCA will publish its final rules on the issue of contract clauses in early 2017 after reviewing responses to the report

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