FCA concludes its wholesale data market study

On 29 February 2024 the FCA published its final report on its market study into the supply of wholesale financial data in the UK. 

The study was launched on 2 March 2023, responding to persistent user concerns regarding the functioning of the markets for wholesale data. It looked at three separate (albeit linked) markets, namely for the provision of:

1.  financial benchmarks across several asset classes including equities, fixed income, commodities, FX and interest rates;
2.  credit ratings data by credit ratings agencies (CRAs) and their affiliates; and
3.  market data vendor (MDV) services, comprising the redistribution of wholesale data such as trade data, index data, CRA data, reference data, and pricing and valuation data.

Whilst the study took 12 months (given the FCA used its Enterprise Act 2002 powers to enable a broad review of wholesale data markets – compared to other market studies which have been conducted under FSMA and typically lasted upwards of 18 months), the report is the culmination of four years of enquiries by the FCA into the supply and use of wholesale financial data. This began with the issuing of a Call for Input in March 2020 – in response to which many data users raised concerns around complex contracts, limited opportunities for switching, and increasing prices – and was followed in June 2022 by a review into the supply of trade data, which returned similar concerns.

Findings

Overall, the FCA did not identify concerns as to the ability of financial market participants to access the wholesale data they need in connection with their operations. It also found that a large majority of users are satisfied with the quality of the benchmark and CRA data and related services they purchase. However, across all three in-scope markets the FCA identified evidence of, and drivers for, market power, including most notably the following.

• Concentrated markets, usually with no more than three key providers in each market. 
• High profitability, with some benchmark vendors maintaining operating margins of over 60% in the period from 2017 to 2022.
• Essential data being offered by the key providers in each market, with limited or no effective alternatives. This may be because the data is unique, because users (especially of CRA data) have to multi-source, or (often in the case of benchmarks) because it has become an industry standard and its use is demanded by data users’ end-clients.
• Limited competition from challenger firms, with barriers to entry and expansion in each market. These include strong network effects and brand recognition. Further, recent years have seen consolidation amongst benchmark and MDV providers.

The FCA also concluded that data users (principally investment banks and asset managers) may be paying higher prices for data than they would if competition was working more effectively.  Vendors tend to have complex licensing and fee structures, which may make it difficult to predict and compare costs and negotiate fees. Value-pricing (a form of price discrimination) may be used with a view to maximising revenue, based on users’ ability to pay. Further, clauses requiring the purging of historic data upon termination (or purchase of a perpetual licence to continue accessing such data) may deter users from switching vendors.

Conclusions and commentary

The FCA concluded that there are reasonable grounds for suspecting that there are features of all three markets in the UK that prevent, restrict or distort competition. Accordingly, the statutory test for referring the markets to the CMA for an in-depth Market Investigation is met. However, the FCA also confirmed that it is not minded to make such a reference – it considers itself well-placed to address the competition issues it has identified, looking at them holistically and proportionately as part of a wider programme of regulatory reform that is currently in train.

In particular, the FCA points to the Smarter Regulatory Framework Review, through which retained EU financial services legislation will be reviewed by Treasury. The FCA intends to work with Treasury to ensure that the implications of the study’s findings in respect of benchmarks and CRA data can be considered during that process, including through the enhancement of free sources of CRA data. With respect to MDVs, the FCA references the work it is doing to facilitate the launch of consolidated tapes/feeds for bonds and equities, which could increase competitive pressure on the generators of the trade data that MDVs distribute. Depending on the outcome of that work, the FCA also raises the possibility of strengthening the requirement for venue data to be made available on a ‘reasonable commercial basis’ under existing frameworks. 

Nevertheless, despite the user concerns highlighted in the report the FCA has ruled out addressing market power or pricing directly, citing a risk of “unintended consequences” in circumstances where users are generally able to access data of a suitable quality that meets their needs. And unlike other FCA market studies, the final report contains no concrete proposals for rule changes or other remedies, only a commitment to explore how the issues identified might be addressed through upcoming regulatory reform – a process that will take several years.

In addition, the report highlights the FCA’s power to investigate allegations of anticompetitive conduct under the Competition Act 1998 (CA98) where appropriate. There is no indication in the report of this study resulting in similar enforcement activity to the housebuilding market study published by the CMA only a matter of days earlier. However, the FCA currently has three open CA98 investigations against unnamed firms.

Next steps

Interested parties have until 12 April 2024 to submit representations on the FCA’s proposed course of action. Any proposed regulatory changes will be consulted on in due course as part of the Smarter Regulatory Framework Review.