FCA confirms ban on choice restrictions in investment banking

FCA has published its policy statement  and new rules banning firms from including within their customer documentation contractual clauses restricting competition without clear benefit to their clients. In particular, it bans the use of clauses that restrict a client’s choice of future providers of primary market services (DCM, ECM and M&A services).

From 3 January 2018 firms that provide primary market services will not be able to enter into contracts that give them a right to provide future primary market services to their clients, with the exception of future service restrictions relating to bridging loans. Examples of clauses that will not be acceptable include:

  • ‘Right to act’ clauses which give the right to provide future primary market services to the client, and
  • ‘Right of first refusal’ clauses which give the right to provide future primary market services to the client before the client is able to accept any offer from a third party to provide those services.

FCA’s decision was driven by its market study of Investment and Corporate Banking which concluded in October 2016. This revealed that most market service providers use the universal banking model to provide corporate broking and corporate lending services, and this involves cross-selling further services such as ECM, DCM and M&A services, which firms then expect their clients to get from them. While large corporate clients are happy with this model, FCA found that this was a particular concern for smaller clients who felt pressure to reward their relationship/lending bank or corporate broker with future primary market services even where they might be better off with an alternative supplier.

FCA noted that some clients had not been aware they had signed agreements including these clauses and had as a result been penalised for taking services from other firms. It also says it will monitor the market and will consider extending the ban to other wholesale market services if it sees this type of clause being used elsewhere to the detriment of clients.