U.K. Investigates Reciprocity Among Banks

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 [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires