The UK Financial Conduct Authority will work with industry bodies and data providers in a bid to improve the credibility of league tables and reduce incentives for league table trades, it said today (Tuesday), but confirmed it is taking no action on the practice of reciprocity in mandates.

In an interim report published in April following an earlier review into competition in the wholesale banking sector, the Financial Conduct Authority (FCA) expressed concern that two practices distort league tables and hence their usefulness in comparing banks’ capabilities:

• Some banks undertake transactions with the main aim of gaining league table credit, even if they lead to a significant loss to the bank.
• Many banks routinely present league tables to clients in a way that inflates their own position and with a lack of transparency on the criteria used to create league tables.

“As a result,” said the FCA, “unreliable league tables are, at best, ignored by clients and, at worst, distort clients’ choices because they do not accurately signal banks’ capabilities to undertake a comparable transaction.”

Feedback from banks in the regulator’s subsequent consultation disagreed that “league table trades” are a problem for clients or for competition, according to the FCA, which also said many banks suggested that “clients pay little attention to league tables in client pitches as clients are aware that league tables are often manipulated”.

However, the FCA said many banks agreed that the quality of pitch presentations could be improved and that they are at times misleading.

Releasing its final report today, the FCA said it will not publish any guidance or rules on the league table practices.

It will work with the British Bankers’ Association (BBA) and Association for Financial Markets in Europe (AFME) on industry-led guidelines for improving league tables in pitch presentations.

“The guidelines need to be sufficiently detailed so that banks understand what is expected of them when they present league tables to clients,” said the FCA. “At the same time, the guidelines need to be sufficiently high level to ensure that banks can tailor league tables so that they are relevant to the client and the proposed transaction.”

It has proposed that the following are considered:

• using criteria that are directly relevant to the transaction that the client wishes to undertake
• presenting tables with enough clarity and detail to enable clients to, for example, reproduce the table where they have access to the information from a league table data provider
• including contact details for league table providers so clients can seek relevant information if they wish
• if requested by a client, banks should be prepared to explain what transactions underpin their own data in a league table

The regulator will also work with data providers on improving criteria for league tables so that incentives for banks to carry out league table trades are reduced.

“We also note that the main league table data providers have procedures in place whereby market participants can challenge whether specific transactions are truly eligible for league table credit,” the FCA added. “We would encourage market participants to challenge transactions they believe are league table trades in order to further reduce incentives for their occurrence.”

In its interim report, the FCA said it had not identified concerns about a variety of other market practices and in its consultation asked if respondents agreed. Among these was reciprocity, whereby banks award mandates to other banks based on how much business they will receive in return – something the FCA noted was most prevalent in the bank financing market, “particularly covered bonds”.

Consultation respondents agreed that there was no need for regulatory intervention and the FCA plans no further steps on reciprocity.

The investment and corporate banking market study that today’s announcements were included in also touched upon a variety of other wholesale banking market practices.

“The universal banking model clearly works well for a wide range of participants but areas such as the use of restrictive contractual clauses, league table credibility and the allocation of shares in IPOs are not always working as well as they could,” Christopher Woolard, director of strategy and competition at the FCA (pictured). “We’ve developed a package of remedies designed to address these problems.

“This sends a signal that we expect firms to compete on the merits, not by restricting clients’ choice on future transactions, drawing misleading comparisons with competitors’ performance, or exploiting conflicts of interest.”

AFME said it approved of the decision not to publish rules in respect of league tables.

“We welcome the completion of the market study and note that the final report confirms the interim report’s general conclusion about the current provision of capital markets services,” said Simon Lewis, AFME chief executive. “We also note that in the final report the FCA is only proposing specific measures in relation to league table presentation and the prohibition of certain clauses in engagement letters.”

Photo credit: FCA