INVESTORS applauded the fresh inquiry into investment banks’ fees for advising on and underwriting equity issues announced by the Office of Fair Trading yesterday.
Following worries over the spiralling cost of rights issues for companies, the OFT said it would investigate the level of competition in capital markets services and whether corporates were getting value for money.
According to the Association of British Insurers, the average fee levied by banks for running a rights issue has risen from two per cent a decade ago to around 3.5 per cent.
Doug Ferrans of the Institutional Shareholders’ Committee, which is holding its own investigation into rights issue fees, welcomed the OFT probe. He said: “We would have expected fees and discounts to come down [since 2008], given the more normal conditions in financial markets, and that hasn’t happened.”
Fund managers were particularly keen for the competition watchdog to look at the practice of sub-underwriting, whereby investment banks transfer risk to City investors by asking them to buy unwanted rights. While total rights issue fees have jumped in recent years, the slice handed to fund managers for sub-underwriting has risen more modestly from 1.25 per cent to 1.75 per cent.
Tim Steer of Artemis said an examination of the top banks’ “cosy cartel” was overdue. “They never do [cash call underwriting] on their own books. The risk is carried by the funds.”
Andy Brough of Schroders said it was valid to criticise equity capital markets players, but questioned whether a solution would be forthcoming. “We’d like to have it done as quickly as possible, but unless someone else is going to coordinate the underwriting I don’t see how it works,” he said.
Angela Knight, head of the British Bankers’ Association, responded: “The UK is an open market and it’s a competitive market. The banks will continue to cooperate with the OFT.”