The Office of Fair Trading (“OFT”) published its market study into equity underwriting and associated services at the end of January 2011. The OFT’s market study considered the different types of follow-on share issues used by FTSE 350 listed companies to raise capital in the UK, including how such services are purchased, how they are provided and how the regulatory environment affects their provision. In its report on the market study, the OFT sets out its findings as to how the market works, identifies its key concerns and suggests options for achieving more cost-effective outcomes.
The OFT concluded that there had been a significant increase in the fees paid to investment banks since the onset of the financial crisis and that fees have been slow to fall in line with the stabilisation of the equity markets from mid-2009 onwards and subsequent reductions in risk.
Whilst the OFT’s study did not raise any significant concerns in relation to the available choice of providers of equity underwriting services and the concentration of equity underwriters amongst investment banks, the OFT considered that concerns about the level of fees are best tackled by companies and institutional shareholders rather than by further regulatory intervention by the authorities (such as the OFT itself or the Competition Commission).
This OFT study thus complements, and reaches similar conclusions to, the earlier Rights Issue Fees Inquiry (“the RIF Inquiry”) the report of which was published in December 2010—in essence that companies and institutional shareholders are better placed to address concerns than the competition authorities. For this reason, the OFT has also provisionally decided not to make a market investigation reference to the Competition Commission at this stage. (Responses on the OFT’s decision in that regard may be submitted to it until 11 March 2011).
The OFT has thus made less specific and less onerous recommendations even than the RFI Inquiry and, notably, no changes to legislation or regulations are recommended (whereas the RFI Inquiry recommended that changes were made to the Listing Rules, the Transparency Obligations Directive and the Stewardship Code).