The Financial Conduct Authority (FCA) has got itself into one of its periodic lathers about the way in which banks secure business from corporate clients.
This time it is bothered about the awarding of equity mandates since the pandemic crisis took hold, and in particular whether they might have been explicitly tied to the provision of liquidity.
It is sufficiently worried to have penned a “Dear CEO” letter in late April that put banks on notice that it was looking into the issue.
It is tempting to assume the industry might see this as another example of a regulator simply describing how business is conducted, much like the derision with which the FCA’s 2016 report into wholesale banking was received in many quarters – with its breathless revelations that banks sometimes favoured some clients over other clients in deal allocations or even (gasp!) used league tables creatively to pitch for business.
Its latest letter certainly has a whiff of this.
The FCA is apparently concerned by “reports” it has heard “that banks may have used their lending relationship to exert pressure on corporate clients to secure roles on equity mandates that the issuer would not otherwise appoint them to”.
It went on: “In some cases, these roles may be ‘in name only’, with few or no additional services being provided in exchange for a share of the fee pool.”
The explicit tying of lending to other services has long been banned in the US, and the widespread understanding elsewhere is that it shouldn’t be done.
But it is perfectly conceivable that a loan and an equity deal would be discussed as part of an overall funding approach with a bank that could help with both, particularly in a crisis.
And if that is so, it does not seem impossible that a corporate might appoint a lender for an equity transaction, even one that it has not previously used. It would be simple common sense to see a benefit in having joined-up conversations at this time.
We will be looking into this further, but want any practice of this nature to cease immediately- Financial Conduct Authority
One also assumes that the FCA’s zeal to promote competition isn’t confined to lobbying for smaller firms who might find their business model more challenged when their corporate clients desperately want loans and are prepared to spread their equity business around – or take it somewhere else entirely – if they think they will get a better deal that way.
And, whisper it quietly, even big banks are allowed to break into new areas of business and work with new clients.
Borrowers are also not stupid. They understand that banks must price the provision of balance sheet to a client with a consideration for the total return of that balance sheet.
The FCA will have its work cut out assessing whether a mandate has been awarded because of unacceptable pressure by a lender or because a corporate understands basic economics.
If it turns out that loans have been made explicitly conditional on appointments for other business, then banks will clearly have a case to answer and should be made to do so. In its letter, the FCA told banks to conduct internal checks to see if they had strayed the wrong side of a line.
That won’t be easy, neither will it be easy for a regulator to counter whatever conclusions they might reach. Absent a trail of smoking-gun emails and transcripts, the FCA will find it difficult to show that anything untoward has happened.
Does all of this at least mean that there is perhaps some problematic grey area? One senior banker at a UK institution doesn’t think so at all, particularly since corporates must now consider their overall position more than ever.
“There’s a clear difference between saying I will give you a loan but only if you let us lead your equity deal, and on the other hand saying that if you want to raise equity you are going to need liquidity from banks to be successful. And the regulator gets that.”
The FCA has not named any institutions and has presented no evidence of any wrongdoing by any particular bank. But the FCA clearly felt an admonishment to the whole market was in order.
“We will be looking into this further, but want any practice of this nature to cease immediately,” it wrote.
Whether anything more comes of this is still to be seen. What is beyond doubt, however, is that some firms have notched up notable successes in UK equity capital markets (ECM) since March 1.
And while none sits in what one might call the traditional ECM bulge bracket, they do have established ECM businesses and big UK operations. None looks especially odd for its inclusion on an ECM transaction.
Of the four capital raises where Barclays has been bookrunner, three are for companies that it has previously not led ECM deals for before. It’s a similar story at HSBC, where its five deals include four first-time ECM mandates. And at BNP Paribas, which has for a few years now been consciously trying to build out its UK franchise across more products, all four of its capital increases are for new ECM clients.
It’s a relatively small sample size, but for the period since March 1 Barclays ranks fifth for all UK ECM, the same position it held for the full year 2019. But HSBC ranks fourth, compared with 13th in 2019, while BNP Paribas has jumped to eighth from 14th.
It may be less exciting than the conspiracy theorists might like, but the prosaic conclusion to draw from mandate wins might just be that crises present excellent opportunities for banks to make a mark with a new client.
More interesting will be whether they can hold on to them when the dust settles.