London: Britain’s financial watchdog is launching a broad “exploratory” review of competition in wholesale financial markets to check if they operate effectively to aid the economy and give their institutional, corporate and government customers a good deal.

The Financial Conduct Authority (FCA) was set up just over a year ago as part of Britain’s post-financial crisis shake up of supervision to protect consumers better and increase competition in markets.

Mary Starks, director of competition at the FCA, said on Wednesday the watchdog had launched a review of competition in the market for banking services that are provided between banks and other types of financial institutions, known as wholesale banking.

Starks said it was an exploratory exercise to determine where competition may be weak.

“And why is it important? Because wholesale financial markets play a crucial role in the economy, and the UK plays a key role in the international markets,” Starks told a meeting of the Chartered Institute of Securities on Wednesday.

The review will cover markets, their infrastructure, asset management, and corporate and investment banking, but not credit rating agencies, payment systems and insurance, she said.

While wholesale market players are typically more sophisticated than those in the retail sector, fines for banks that rigged the Libor interest rate benchmark showed that the impact of poor conduct in wholesale markets can be significant, she said.

The review will be separate and wider than the study of trading practices and conduct being conducted jointly by the Bank of England, FCA and the finance ministry following allegations that currency markets have been rigged.

Proactive not reactive

Starks said that the FCA’s remit to promote effective competition meant being proactive in rooting out competition issues rather than waiting for problems to occur.

One area it will look at is cross-selling and bundling of products and services, she said.

“The review describes various areas where this market feature might exist; from investment banking, to asset management, to trading venues and clearing houses that are vertically integrated,” Starks said.

Some big investors have complained about not having choice of clearing house for their derivatives transactions when they trade on a particular exchange, especially as new rules mean that more trades will have to be cleared.

The review will also look at potential conflicts of interest in providing investors with the best share price in the market, and the underwriting of equity and debt.

Barriers to entering or expanding a market will also feature in the review, which could include the availability of co-location, or a broker being able to place its servers next to an exchange in order to benefit from the fastest trading speeds.

Incentives for asset managers to pay the correct price for the correct level of service, such as in relation to dealing commissions, will be looked at.

The FCA is first asking for comment on potential competition issues from industry and the public until Oct. 9 and begin work on any detailed market study in early 2015.

Any studies would coincide with the even stronger competition powers the FCA will get next April to enforce domestic and European competition law and impose fines.

It will also be able to refer any competition issue to UK’s main competition regulator, the Competition and Markets Authority, which has sweeping powers to make extensive changes to markets.