FCA to decide on banning rights of first refusal and to act in engagement letters and on mis-representation of league tables in pitches


During 2015 and 2016, the Financial Conduct Authority (FCA) carried out a market study on investment banking and corporate banking services, focusing on primary market and related activities provided in the UK. In particular, the FCA considered issues around choices of banks and advisers for clients, transparency of the services provided by banks, and bundling and cross-subsidisation of services. An interim report was published in April 2016 which has now been confirmed as final.


The FCA's overall findings are that:

  • there is a wide range of banks and advisers active in primary market activities; and
  • while many clients feel that the universal banking model of cross-selling and cross-subsidisation from lending and corporate broking services to primary market services works well for them, there are some practices that could have a negative impact on competition, particularly for smaller clients.


In response, the FCA has developed a "targeted package of remedies" to address concerns and to ensure competition takes place based on merit. Remedies include:

  • a ban on restrictive contractual clauses in investment and corporate banking engagement letters and contracts where these clauses cover future corporate finance services carried out from an establishment in the UK. The prohibition would apply to all agreements entered into after the commencement date and would not apply to existing arrangements. To that end, the FCA has published a consultation paper setting out the proposed scope of the prohibition. Reponses are required by 16 December 2016. Depending on the responses to the consultation, the FCA expect to publish final rules in early 2017. The ban would prohibit the use of two commonly used forms of restriction:
    • "rights of first refusal" clauses which prevent clients from accepting third party offer to provide future services unless they have first offered the mandate to the incumbent bank or broker on the terms proposed by the third party;
    • "rights to act" clauses which prevent clients from sourcing future services from third parties, regardless of any potential third party offers.

Excluded from the prohibition are future service restrictions in bridging loans. The FCA has also clarified that "right to pitch" and "right to match" clauses would not be caught and that the prohibition only applies to the provision of future services, thus excluding "tail-gunner" clauses;

  • ending "league table misrepresentation" in banks' pitches to clients. The FCA is working with the British Banking Association and the Association for Financial Markets in Europe to develop and adopt industry guidelines to improve the way in which banks present this information;
  • removing incentives for loss-making trades which allow banks to manipulate their position in league tables;
  • a supervisory programme for IPO allocations to counter the finding of the FCA that allocations are at times skewed towards buy-side investors from whom banks derive greater revenues from other business lines; and
  • revisions to the IPO process. The FCA expect to publish a consultation on this issue later in 2016 or in early 2017. This is likely to address the issue of information flows in the run up to the issue of pathfinder prospectuses.

We will issue further updates on in due course, in particular when concrete proposals for change take shape.