A new UK competition probe into investment banking is further bad news for broker-dealers that lend as well as trade. After an enormous fishing exercise last year to scope out the prevalence of anti-competitive behaviour in wholesale markets, Britain’s Financial Conduct Authority (FCA) resolved on Feb. 19 to delve into one of the less racy aspects of universal lenders’ business: corporate banking.
The new area of focus is nonetheless big for banks: the FCA reckons UK companies generated 10 billion pounds ($15 billion) of corporate and investment banking revenue in 2013. The concern is that firms with big corporate banking businesses – typically, cash management, lending and treasury operations – could be using their scale to offer these services at discounted prices, in order to win more lucrative investment banking work.
The probe may be more about the FCA being seen to act than a major problem. Corporate clients rarely, if ever, express concern about being forced to accept whizz-bang investment banking advice as a precondition of using more prosaic services. Other competition probes into the asset management industry scheduled for later this year, as well as into UK retail banking, may yield more in ultimate savings for end-users.
Still, a lack of gripes is no guarantee that all is well. In UK retail banking, for instance, it took years for the Payment Protection Insurance scandal to come to light. And greater transparency around potential oligopolies in investment banking practices is welcome.
The biggest UK banks will be concerned. Royal Bank of Scotland, Barclays and HSBC had the largest market shares of UK corporate banking business in 2014, a Greenwich Associates ranking shows. Active transatlantic peers JPMorgan, Bank of America Merrill Lynch and Citigroup could also come under pressure – at a time when universal banks’ investment banking divisions are also struggling.
More broadly, the FCA’s action fits with wider UK regulatory efforts that have chipped away at the advantages universal banks previously enjoyed. New rules to ring-fence retail banks will push up their cost of capital. Laws that leave directors facing incarceration if businesses blow up make it less beautiful to be big, and past conduct issues have riled both regulators and public opinion. Investors now have one more reason to be sceptical of long-term profitability targets.