×

Probe Launched Into Bank Fees on Share Issues

Britain’s competition regulator is opening a potentially damaging probe into the fees charged by investment banks on corporate share issues, ratcheting up the pressure on an already embattled industry.

St George's Flag & Houses of Parliament
Peter Adams | Photodisc | Getty Images
St George's Flag & Houses of Parliament

The Office of Fair Trading on Thursday launched a so-called “market study” into equity underwriting fees amid increasing investor disquiet about the size of the charges levied on companies for raising cash.

The investigation, which will be formerly launched later this summer, will embroil some of the world’s biggest investment banks, including Goldman Sachs , UBS, Citigroup and Morgan Stanley .

However, the probe is focused on the underwriting market and will not look at broader competition concerns in the investment banking market.

It will focus on three main areas including how underwriting and related services are provided, including the level of competition for the work and how these services are sold.

It will also cover the purchase of underwriting services and the regulatory environment affecting the provision of these services.

The limited scale of the study is likely to disappoint some government figures, who have been calling for a closer look at investment banking fees across the industry.

Clive Maxwell, senior director of services at the OFT, said in a statement on Thursday that the study would scrutinise the market for underwriting services but also feed into the wider debate about reform of the financial services industry. “We plan to study the efficiency of the equity underwriting market and identify any areas for improvement.

Our study will also help us to advise the government in its wider thinking about wholesale financial markets.” Big UK banks such as Royal Bank of Scotland , Barclays and HSBC are already facing a prolonged inquiry into whether they should be broken up and forced to hive off their riskier investment banking activities from their retail banking operations.

While a crackdown on equity underwriting would be less damaging, it is still a lucrative area of business for the top investment banks.

It is understood that the OFT has been examining the issue for the past 18 months, in response to investor complaints that banks have been fattening the margins on share issues as they struggle to bolster fees in the aftermath of the financial crisis.

Several of the UK’s biggest investment groups have been demanding a government crackdown on underwriting fees for months, as the size of the charges has spiralled.

The Association of British Insurers and other big investors complain that while, historically, bankers would have charged companies a 2 per cent fee to insure a successful rights issue, keeping a quarter for themselves and spreading the rest among investors, in the current market their fees now regularly amount to up to 4 per cent.

Banks routinely pre-market issues and most companies offer new shares at large discounts to attract buyers.

The Institutional Shareholders’ Committee has already launched its own review of UK equity underwriting to investigate the sharp increase in fees.