UK watchdog probes bank competition in bond, share sales

By Huw Jones and John Geddie

LONDON (Reuters) - Britain's financial markets watchdog will for the first time investigate whether banks are offering firms a fair and transparent service for the billions they earn in fees for arranging mergers and bond and share sales.

After four years of scandal over manipulation in the currency market and of Libor interest rates, the Financial Conduct Authority's competition review turns the spotlight on primary markets which are crucial to funding of corporate investment.

The FCA had voiced concern in February that customers may not be getting value for money from wholesale banking services - a 10 billion pound sector in Britain.

"The market study will examine whether there are areas of investment and corporate banking services where competition may not be working well," the FCA said in a statement on Friday.

The review comes at a time of increased emphasis on market-based finance in the European Union as the bloc plans a Capital Markets Union whose aim is to offset the effect of banks reining in lending.

The regulator will look at transparency in how banks manage the sale of debt and equity on behalf of companies, after concerns were raised that they may have incentives to favour certain investors.

Bankers are nervous that new regulation in this area could hamper a business that brought over a third of the $90 billion in fees earned by banks globally last year.

"Were something untoward to be found out by this review, I would be surprised," said Ruari Ewing, a director at banking lobby group ICMA that this week published a new recommendation urging banks to keep firms abreast of bond allocations.

Feedback from fund managers to another review by the FCA, alongside the Bank of England and the UK Treasury, of abuses in fixed income, currencies and commodities markets also raised concerns about the allocation process. That Fair and Effective Markets Review (FEMR) is due to report in June.

ECONOMIC BENEFITS

The competition review will also look at whether companies are getting enough choice and value for money on mergers and acquisition advice, and the impact of syndication, in which a group of banks underwrite the issue and sale of a bond to investors.

The extent of bundling and cross-subsidisation of services will also be scrutinised after customers said these features could make it difficult to see what they are paying for and make switching to a rival bank harder.

The potential benefits of reducing regulatory barriers to firms entering or expanding into primary markets will also be studied.

"It will be interesting to see how they are explored in a context where customers have always been assumed to have an altogether different level of sophistication and understanding," said Jenny Block, competition partner at international law firm Pinsent Masons.

The watchdog expects to publish interim findings and any proposed remedies at the turn of the year before a final report in spring 2016.

"We want to see a sector that benefits the real economy by helping businesses of all sizes access capital," said Christopher Woolard, the FCA's director of strategy and competition.

"That means offering real choice, transparency and good service at every level," Woolard said.

The watchdog said if it finds competition is not working well it could introduce new rules, publish guidance or propose enhanced industry self-regulation.

The study will look at a wide range of banks, from large full-service lenders and investment banks to boutique banks and advisers.

(Additional reporting by John Geddie; Editing by Sinead Cruise and Ruth Pitchford)