FCA Holds Off Referring Data Providers to Competition Authority
Posted by Colin Lambert. Last updated: September 1, 2023
The UK’s Financial Conduct Authority (FCA) has published an update to its wholesale market data study, which was initiated in March 2023 to investigate concerns over limited competition in the benchmark, market data and credit ratings fields.
In stating it will not, at this stage, refer any of the markets to the UKs Competition and Markets Authority (CMA), the FCA says, “We are continuing to identify any harm in these markets and, where appropriate, potential ways to address it. We consider at this stage that we are likely to be best placed to address any harm and have invited views on this proposed stance.”
The FCA says in the report that it has received 28 responses to its initial study, published in March, and that the concerns expressed in this feedback were along similar lines to those already concerning the regulator. It adds that it has been in contact with other national regulators and heard similar concerns about lack of transparent pricing practices, excessive charging, bundling practices and complex licensing agreements.
On Benchmarks, the UK regulator says that aggregate UK revenues were around £600 million in 2022 and that three providers, out of 36 administrators, account for the “large majority” of this income. Based upon its initial analysis, the FCA adds that competitive dynamics among benchmark administrators are shaped by network effects; strong brand awareness, in particular at the level of end investors; barriers to entry due to input and start‐up costs; and vertical integration. “This may generate market power for some benchmark administrators, reducing their incentives to compete on price, quality and innovation,” the report observes. “Our analysis shows that markets are concentrated and there is limited switching by benchmark users.”
The report adds that this market power might enable administrators to impose commercial practices that result in high costs for benchmark users and further weaken competitive pressures, such as complex, non‐standard and non‐transparent licensing terms, selling of products in packages, termination requirements and liability clauses.
The income of benchmark administrators was dwarfed by that in market data, where the FCA’s analysis showed that market data vendors (MDVs) pulled in over £3 billion in 2022, the market being dominated by Bloomberg and Refinitiv (now LSEG). More pertinently, however, the report observes, “There have been no major entrants in the last five years, and exit has occurred mainly via mergers and acquisitions. However, information from suppliers provides some evidence of existing firms in the market entering new market segments and developing new products and services.
“Most of the buyers in this market are sophisticated users with procurement teams that review licences regularly,” it continues. “However, the majority of our demand‐side respondents reported that they have little or no bargaining power when negotiating with the largest vendors. Well‐established and large MDVs appear to hold market power resulting from switching costs and other frictions in the switching process.”
The FCA says interested parties can feed back to the study until 29 September 2023 and that it plans to publish its final findings by the start of March 2024. “There are a range of potential outcomes at the end of a market study to address the issues that we have identified. As well as making an MIR [Market Investigation Reference] to the CMA, our options include introducing, changing, or removing of rules; issuing guidance; encouraging industry‐led solutions; firm‐specific remedies and recommending action by other authorities, for example, recommending to the Treasury to provide us with new or extended powers.
“Our scope to make and change rules in some cases may be increased as we bring retained European Union (EU) law across a range of different areas into our Handbook through the Future Regulatory Framework (FRF) Review reform process,” it continues. “If we consider that the issues found are most effectively dealt with at the international level, we will consider how to do this effectively.
“Alternatively, we may choose not to take any action,” the FCA adds. “We will set out what action, if any, we plan to take in our market study report.”