THE Office of Fair Trading (OFT) will today launch an investigation focusing on the prices investment banks charge for services such as advising companies and underwriting share offers heaping pressure onto an already embattled industry.
“We can confirm that we are launching the early stages of a market study into equity underwriting,” an OFT spokesman confirmed to City A.M. last night but refused to give further details.
The OFT has not yet indicated what areas the study will cover, but it is expected to examine whether parts of the work done by investment banks may affect competition or consumers.
Some of the world’s biggest investment banks including Goldman Sachs, Citigroup, UBS and Morgan Stanley will come under scrutiny in the probe set to be officially announced at 7am today.
The announcement has come as a bolt from the blue for many banks, with several confessing last night they had not heard of any plans for an investigation.
But the enquiry comes soon after some of the biggest underwriting and advisory fees ever seen in the City. Prudential was recently left with an underwriting fees bill of roughly £81m after its botched attempt to buy AIA, worth around 3.5 per cent of the total value of the deal – a sum one investor said was “verging on the obscene.”
There has been a steep increase in underwriting fees across the board since September 2008 when the collapse of Lehman Brothers drove market volatility to peak levels. Average UK underwriting fees are now the highest in Europe at around 3.5 per cent, just ahead of Germany and about one per cent higher than those charged in markets like Scandinavia and Switzerland.
The chorus of dissatisfaction over the size of rights issue underwriting fees and the high proportion collected by the banks is now reaching fever pitch. The Institutional Shareholders Committee trade body, representing a third of UK?investors, has launched its own probe into the issue and the likes of business secretary Vince Cable and former Treasury minister Lord Myners have condemned the status-quo. “Most bankers tell me they can’t understand why companies are continuing to pay the level of fees that they are,” said Lord Myners.
“The problem with investment banking fees is that investment bankers are paid for doing deals rather than for doing successful deals.”