The Investment Management Association (IMA) has slammed the Office of Fair Trading (OFT) study into Equity Underwriting, by expressing its disappointment that the OFT stopped short of encouraging greater transparency and disclosure of the fees paid by companies to banks for underwriting rights issues.
While we agree with the OFTs overall conclusion that institutional shareholders and issuers could do more to encourage a competitive market in equity underwriting it is disappointing that the OFT has not taken this to its natural conclusion and recommended that equity underwriting fees are disclosed, says Richard Saunders, Chief Executive at IMA. This is at odds with the OFTs finding that companies cannot effectively assess the value of the services they receive from investment banks due to the fact that banks do not provide a breakdown of the fees they charge.
IMA is the trade body for the UK’s 3 trillion asset management industry. The money its members manage is in a wide variety of investment vehicles including authorised investment funds, pension funds and stocks and shares ISAs.
The OFT’s equity underwriting market study, published today, found there had been a significant increase in the fees paid to investment banks since the onset of the financial crisis.
FTSE 350 companies raised an estimated 50 billion of equity capital in the UK in 2009, paying around 1.4 billion in fees, with average fees rising to more than three per cent from around two to 2.5 per cent in the period from 2003 to 2007.
While such increases can be explained, in part, by stock market volatility during 2008 and early 2009, the OFT’s report says fees and discounts have been slow to fall in line with subsequent reductions in risk, said the OFT in a statement. The OFT considers that concerns around the level of fees can be tackled most effectively and efficiently by companies and institutional shareholders rather than further intervention by the competition authorities.
In light of its findings, the OFT has provisionally decided that a market investigation reference to the Competition Commission would not be appropriate.
An efficient equity capital market is vital for the long-term growth of the UK economy, said Sonya Branch, OFT Senior Director of Services and Public Markets in a statement. Our in-depth study has found that the market is not working well, with little effective competition on underwriting fees. We have identified a number of options which would enable companies and institutional shareholders to drive greater competition for themselves, which we believe is the most effective and efficient way forward.
A recent report into the same issue by the Rights Issue Fees Inquiry, chaired by IMA chairman Douglas Ferrans, concluded that more transparency on fees, including a breakdown of who is being paid for what services, would lead both to companies being better placed to negotiate underwriting fees and a better deal for shareholders who are ultimately bearing these costs.
We would strongly urge the OFT to review the need for transparency to ensure a better deal for both companies and their shareholders, says Saunders.