* Review will look at vertically-integrated exchanges
* Co-location used by high frequency traders also looked at
* Asset management part of review, insurance left out
(Adds more detail, comment)
By Huw Jones
LONDON, July 9 Britain's financial watchdog is
launching a broad "exploratory" review of competition in the
wholesale markets used by banks, fund managers and exchanges to
check if they operate effectively to help the economy and give
their customers a good deal.
The Financial Conduct Authority (FCA) was set up just over a
year ago as part of Britain's post-financial crisis shake-up of
supervision to protect consumers better and increase competition
Mary Starks, director of competition at the FCA, said on
Wednesday the watchdog had launched a review of competition in
wholesale financial markets. These markets are where financial
institutions, big companies and governments go to raise money,
and cover stock exchanges as well as bond and derivative trading
by banks, brokers and asset managers.
The FCA review will include an examination of wholesale
banking - banking services that are provided between banks and
to other types of financial institutions.
Starks said it was an exploratory exercise to determine
where competition may be weak.
"And why is it important? Because wholesale financial
markets play a crucial role in the economy, and the UK plays a
key role in the international markets," Starks told a meeting of
the Chartered Institute of Securities on Wednesday.
The FCA has already begun using its muscle to step up
consumer protection with bigger fines and Wednesday's
announcement signals how it intends to use its clout in the area
of competition as it builds up staff in this area.
"The new competition folk at FCA seem to be on steroids,"
said Paul Edmondson of law firm CMS.
"Competition is the current buzz-word for intervening in
financial services. This is another addition to the regulator's
growing shopping list in areas such as insurance and credit
cards," Edmondson said.
The review will cover markets, their infrastructure, asset
management, and corporate and investment banking, but not credit
rating agencies, payment systems and insurance, Starks said.
While wholesale market players are typically more
sophisticated that those in the retail sector, fines for banks
that rigged the Libor interest rate benchmark showed that the
impact of poor conduct in wholesale markets can be significant,
The review will be separate and wider that the study of
trading practices and conduct being conducted jointly by the
Bank of England, FCA and the finance ministry following
allegations that currency markets have been rigged.
Starks said that the FCA's remit to promote effective
competition meant being proactive in rooting out competition
issues rather than waiting for problems to occur.
One area it will look at is cross-selling and bundling of
products and services to ensure that competition in one service
does not suffer in order to promote another service, she said.
"The review describes various areas where this market
feature might exist; from investment banking, to asset
management, to trading venues and clearing houses that are
vertically integrated," Starks said.
Vertically integrated groups offer the whole transaction
chain for securities, from trading to clearing and settlement.
Some big investors have complained about not having choice
of clearing house for their derivatives transactions when they
trade on a particular exchange, especially as new rules mean
that more trades will have to be cleared.
The review will also look at potential conflicts of interest
in providing investors with the best share price in the market,
and the underwriting of equity and debt.
Barriers to entering or expanding a market will also feature
in the review, which could include the preferential access of
so-called co-location - used by high-frequency traders (HFT) to
place their servers next to an exchange in order to benefit from
the fastest trading speeds.
Critics say such access, for a premium, gives an unfair
advantage over other investors, and U.S. authorities are already
investigating the practice.
The review will examine whether incentives are in place for
asset managers to pay the correct price for the correct level of
service, such as in relation to dealing commissions.
The FCA is first asking for comment on potential competition
issues from industry and the public until Oct. 9 and begin work
on any detailed market study in early 2015.
Any studies would coincide with the even stronger
competition powers the FCA will get next April to enforce
domestic and European competition law and impose fines.
It will also be able to refer any competition issue to UK's
main competition regulator, the Competition and Markets
Authority, which has sweeping powers to make extensive changes
(Reporting by Huw Jones; Editing by Louise Heavens and Pravin