FCA Declines to Intervene on Market Data: Sees Room for Improvement

The UK’s Financial Conduct Authority (FCA) has published the findings of its wholesale data market study and says while it has identified areas where competition does not work well, it has ruled out “significant intervention”.

The study looked at data around credit rating, benchmarks and broader market data vendor (MDV) services and the FCA says while it sees room for improvement in competition levels and that users are in some cases paying too much for services, “We are in a strong position to lead on shaping a holistic and proportionate approach to tackle the issues we have identified, taking into account the broader regulatory context and our other work in wholesale financial markets.”

The FCA continues, “Our understanding of these markets provides a strong evidence base that will support us in doing this. We are also well placed to work with stakeholders who can play a role in tackling these issues, including the Treasury and other international regulators. We also have powers under the CA98 to tackle anti-competitive conduct in some wholesale data markets. We think overall this is a more proportionate approach to addressing the issues identified in the market study.”

The report says the evidence collated suggests that firms buy the kind of data they need, and, in most cases, the data they buy is of sufficient quality to meet their needs. For example, it states, around 70% of benchmarks users reported no issues with quality, and 90% of credit ratings users were either positive or neutral when asked about their views on the accuracy or quality of ratings and related services provided by the top three credit rating agencies.

Notwithstanding that, the report also finds that the markets concerned are “concentrated: with usually no more than three key providers in each, most of whom have a “significant” market share and are “highly profitable”. It adds that it finds “barriers to challenger firms entering or expanding” in these markets, mainly due to the network effect and position of the incumbent firms.

The report highlights how the network effect “usually tips in favour of one industry standard benchmark”, adding, “Once a benchmark becomes the industry standard, it is unlikely to be displaced. This happens in many but not all cases we have seen throughout this market study. Where these network effects are strong, there is very limited ongoing competition between benchmarks once an industry standard is established.”

The report finds the market power this creates can lead to higher prices for some users and “complex and opaque” licencing reduces their ability to compare prices, indeed 64% of survey respondents found it difficult to compare prices and/or the suitability of products. Contractual barriers to switching were also noted by the FCA, notably clauses that state users must cease to use, or “purge” historical data if they end their contract.

On market data vendors the picture seems to be a little more positive, although the FCA report does note only two firms account for most of the revenue generated. It found, however, that around 60% of those surveyed believed there are credible alternatives to their current provider and that 40% have switched, or partly switched, in the past five years, while more than 80% multi-source.

That said, the report says that around 70% of respondents suggested switching was “difficult” or they identified a barrier to switching, which suggests, the FCA says, that MDVs are not inter-changeable.

MDVs’ pricing practices were also in the spotlight, with users highlighting products that were unbundled, leading to them having to buy additional services. Equally, the report says, many MDV users have to hold licences from both the generator, the trading platform, for example, and the MDV through whom they actually access the data.

“The quality and availability of wholesale data is integral to well-functioning wholesale financial markets,” says Sheldon Mills, head of consumers and competition at the FCA. “Our market study found that firms can access the data they need to make effective investment decisions.

“We do not believe the case has been made for significant interventions,’ he adds. “However, we will examine ways to help support wholesale data being provided on fair, reasonable and transparent terms.”

The report has been welcomed by the Association of Financial Markets Europe (AFME), for whom April Day, managing director of equities and Victoria Webster, managing director of fixed income say in a statement, “Our members actively use market data for a wide variety of primary and secondary markets purposes. Many of the FCA’s findings that certain features in the three markets may prevent, restrict or distort competition are consistent with AFME’s concerns, as expressed in our previous analyses.

“We note that the FCA has recognised shortcomings in the three markets but has ultimately decided not to make a market investigation reference to the Competition and Markets Authority,” the continue. “We also note that this decision is based on the FCA’s assessment that, as a sector regulator, it is in a strong position to shape remedies and supervise their implementation.

“As the FCA continues to develop its framework for the UK consolidated tapes for bonds and equities, we encourage policymakers to ensure holistic market regulation of wholesale market data,” they add.