New regulations to help smaller brokers compete in London IPO market

To remedy several issues spied during its study into the investment and corporate banking market, the Financial Conduct Authority (FCA) has suggested a raft of new regulations, including a ban on cross-selling clauses imposed by the larger investment banks and a new effort to prevent conflicts of interest in share placings.

The FCA has also called for feedback on suggested improvements to the way in which information is provided to investors during the IPO process.

Although larger clients may feeling well served by larger investment banks who can offer a universal banking model that combines investment and corporate banking services, the FCA found that cross-selling clauses often made it harder for smaller banks that do not offer lending facilities to compete for IPOs and other primary market services.

Saying it "noted widespread use of contractual clauses that purport to limit clients’ choice of providers on future transactions", the FCA has now called for an end to their use.

The regulator also said it would supervise a "targeted group" of investment banks after found evidence that some of them sought to reward favoured investor clients when allocating shares in an IPO, which is seen as a potential conflict of interests.

Christopher Woolard, director of strategy and competition at the FCA, said: “These markets are a cornerstone of the real economy, helping companies raise capital for investment and expansion. Our study shows that many investment and corporate banking clients are getting a service they want, but we have also identified some areas where improvements could be made.

“Overall this is a package of proportionate measures intended to remove potentially anti-competitive practices."

In addition, the Woolard said the IPO discussion paper was aimed at changing the sequence of the flotation process "to make the market work better by giving investors the right information at the right time”.

Currently, retail investors waiting for a newcomer's prospectus will face a "blackout period", typically of 14 days, after research on the issuer is first published by the banks supporting the IPO.

"This means that investors only have access to an important source of information late in the process. In addition, analysts unconnected with the IPO generally lack access to the management of the issuer, leaving them with little information on which to base their independent research," the regulator said.

Two new models have been put forward: a requirement for bank analysts to delay the release of any research until after the prospectus is published, and a requirement to invite analysts from unconnected banks and independent research providers to any meetings with management.

"These options have been presented to stimulate debate," the FCA said.