FCA Market Study on how competition is working between Benchmarks

General Background

The FCA intends to undertake a market study looking at how competition is working between benchmarks. The study will look at issues such as how benchmarks are priced, contractual terms and barriers to switching.

In March 2020, FCA issued a Call for Input (CFI) to better understand how data and advanced analytics are being accessed and used in wholesale markets, the value offered to wholesale market participants and whether data are being competitively sold and priced. In January 2022 FCA published its feedback on accessing and using wholesale data, a brief summary of which is found below and should be considered as context prior to the forthcoming survey.

Benchmarks

Benchmarks are used by a wide range of market participants, including investment managers, banks and clearing houses, typically:

• As a reference for index tracking funds
• to evaluate an active manager’s performance (where the fund performance is measured against a selected index), or
• In structured products, in which case the pay out of the product is directly linked to the performance of the index.

Aim of the Feedback Statement

To ascertain from benchmark administrators and their customers how benchmark markets operate and if the competitive dynamics are driving potential harm to users, and ultimately consumers in the UK.

Conclusion

The FCA concluded that the market for benchmark and indices provision may not be working well for a variety of reasons:

• Complexity and transparency of contracts
• Barriers to switching e.g., willingness, admin costs

This is leading to an increase in prices that are not commensurate with increasing costs or improved quality of services . However, the FCA noted that prices may have increased due to innovations that led to higher quality products that are worth more to customers (for example, innovation in improving methodologies and developing ESG-related benchmarks).

FCA overall conclusion and the initial generic scope for the market study for firms’ consideration:

• The issues raised by users of benchmarks suggest that competition may not be working well in the provision of benchmarks.
• Benchmark prices have been increasing, multiple barriers to switching exist, and complexity of licensing terms and T&Cs makes it difficult to compare different providers’ offers.
• This indicates that competition problems may be causing users to pay prices above the competitive level, which potentially can translate into higher costs for end investors.
• There may be a lack of competitive pressure on benchmark administrators, which allows them to offer products of low quality or that do not meet users’ needs, such as offering a bundle of benchmarks when the user needs only one or a few benchmarks.
• As part of its programme of work on wholesale market data, the FCA will launch a market study on competition between benchmarks in Summer 2022 to understand and, where appropriate, address the potential harms that have been identified. Notably, this study will look at how benchmarks are priced, contractual terms relating to the benchmarks and barriers to switching between benchmarks
• On the launch of the market study, the FCA will publish full details as to scope and timetable.

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