The Financial Conduct Authority (FCA) has published an update report on the wholesale data market study it launched earlier this year (see our original blog post here for further details).

The market study was launched using the FCA’s competition law powers, which allow it to carry out market studies and to make market investigation references (MIRs) to the CMA where it has reasonable grounds to suspect that features of the market are adversely affecting competition. MIRs involve an in-depth examination into the features of the market referred in order to identify whether there are any adverse effects on competition and, if so, what should be done about them.

Market study progress

In relation to three key markets - benchmarks, credit ratings data and market data vendor services - the FCA noted that there are reasonable grounds for suspecting that some features may prevent, restrict or distort competition. Key themes that emerged included:

• The existence of highly concentrated markets – three providers account for the large majority of benchmarks revenue, and the credit ratings data market is highly concentrated amongst the Big Three (Moody’s, S&P’s and Fitch). The FCA noted that concentration is not inherently harmful, but it can indicate that firms have persistent market power, and therefore less incentive to compete on price, quality and innovation.
• Network effects – benchmarks in particular are more valuable to users if they are widely adopted by other market participants, to the point where certain benchmarks are considered ‘must-haves’. Strong network effects make it harder to displace dominant firms, affecting competition.
• Enhanced barriers to entry – high start-up costs and increasing levels of vertical integration are making it harder to enter the markets, which can affect competition by reinforcing existing market power.
• Lack of transparent pricing practices – non-transparent pricing can make it harder for users to compare providers, which can increase search costs and discourage switching. Opportunity also arises for firms to implement price discrimination, where charges are varied depending on the customer rather than by reference to underlying costs.  
• Bundling practices – bundling core services with other services can make it difficult for users to switch, and can also result in customers paying for products they do not need.
• Complex licensing agreements – licensing terms for benchmarks and market data vendor services in particular are alleged to be overly complex, enabling price discrimination and reducing users’ ability to negotiate and compare products across suppliers.

These findings are based on the 28 responses to the FCA’s initial consultation, the FCA’s engagement with regulators in other jurisdictions, and responses to requests for information from suppliers and users of wholesale data.

Provisional MIR decision

Despite suspecting a number of competition issues, the FCA has provisionally decided not to make a MIR to the CMA on the basis that it would not be the most appropriate way to address the issues identified:

• As sector regulator, the FCA considers itself in a strong position to lead holistic market regulation and to develop remedies that promote effective competition while maintaining market integrity and protecting consumers.
• The FCA has concurrent powers under the Competition Act 1998 and will continue to consider whether it would be appropriate to use them.
• The relevant markets are international by nature and effective remedies will likely require cooperation between international regulators, which the FCA is well placed to engage with.
• To the extent that there are limits to the FCA’s powers to tackle harms identified, it may be appropriate for the Treasury to extend the FCA’s regulatory perimeter. The FCA considers that it could make the case for such an extension as effectively as the CMA, and that it could make this recommendation at an earlier opportunity than the CMA could following a market investigation.

Stakeholder views on the proposed decision, its underlying rationale, and the emerging themes set out in the report are welcomed by the FCA up to 29 September 2023.  

The FCA’s detailed findings on competition in these markets, together with its ultimate MIR decision, will be published in its final market study report which is expected by 1 March 2024. The market study forms part of a wider workstream on wholesale data, including a trade data review.

Written by Jasmine Sharp