LONDON—The U.K.'s financial regulator said Friday it
is investigating a banking-industry practice known as
"reciprocity," where investment banks bring rivals into deals in
exchange for future business.
The Financial Conduct Authority, in a paper detailing the scope
of a wide-ranging review into possibly anticompetitive
investment-banking practices, said it was investigating whether
reciprocity "might restrict the entry or expansion of firms which
are not party to these arrangements."
The investigation into reciprocity comes after The Wall Street
Journal reported in March on the widespread practice in Europe of
investment banks doling out lucrative work to competitors, partly
based on how much business they will receive in return.
The practice can work in several ways. Most often, a bank picks
rivals to work on its own stock or bond offerings with the
understanding that when that rival has such business, it will
return the favor. But it can also come into play when banks do
business with their corporate clients. Banks leading corporate
stock or bond offerings are often in a position to give out
secondary roles to other banks. Bankers say those assignments are
often given out on a reciprocal basis.
The FCA noted that the numbers of banks on deals, especially
equity offerings, have been growing. The agency said it wants to
understand if there is pressure to include multiple banks on deals
and whether "the choice for a client may be reduced and competition
between banks affected."
The Journal reported on several recent instances of reciprocity,
including a Deutsche Bank AG $9 billion capital raise last summer,
which included the hiring of 25 banks. Several of those banks were
chosen because they had given past business to Deutsche Bank and to
coax others to provide future business, bankers involved in the
process said.
"We are a leader in raising equity for financial institutions
because of our knowledge of the markets and our relationships with
issuers and investors, not because of reciprocity agreements," a
Deutsche Bank spokeswoman told the Journal.
Critics have said reciprocity is anticompetitive and rewards
banks not for their effectiveness or ability to execute, but for
their willingness to provide future business to rivals. But many
investment bankers see nothing wrong with reciprocity. It
infrequently involves explicit quid pro quos, they say, and
legitimately allows them to push for more business.
In addition to reciprocity, the Financial Conduct Authority laid
out its plan to investigate a series of corporate and investment
banking practices that could harm competition or provide limited
transparency to clients. It is also looking at practices known as
bundling and cross-subsidization, where banks offer clients better
rates if they buy more products or use fees from one business to
subsidize another. The regulator is concerned these practices might
harm competition or might restrict access to the market.
The FCA said in February it planned to launch a review of such
practices. It said it plans to release an interim report on its
findings around the end of the year, with a final report next
spring.
Write to Shayndi Raice at shayndi.raice@wsj.com
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