The Financial Conduct Authority has proposed a shakeup in the market for initial public offerings (IPOs) as part of a clampdown on anti-competitive practices in investment banking.
The City regulator said investors should have timely, high-quality information when a private company sells shares for the first time.
It highlighted the current blackout period, usually two weeks, in which analysts from banks working on an IPO do not publish research before the sale prospectus is released. Those analysts get favoured access to the issuing company’s management.
This means investors receive important information late in the process and other analysts do not get vital contact with the company’s bosses, stifling independent research, the FCA said.
It proposed delaying the release of research by banks working on the IPO until after the prospectus is published and ensuring analysts not linked to the offer are invited to meet management.
The FCA published its proposals on IPOs with the interim conclusions of a study of competition in investment banking, announced more than a year ago. Advising on share and debt issues made up about a quarter of revenue earned by so-called universal banks and generated gross fees for lenders of about $17bn (£12bn) in 2014, the FCA said.
Its report painted a picture of an uncompetitive market dominated by big operators and beset by potential conflicts of interest. In particular, providing cheap lending and broking services in return for big fees for selling securities makes it hard for smaller underwriters to compete for that work.
The regulator’s concerns included:
- Investment banks with big balance sheets to lend from gained an advantage over other advisers in getting work from companies issuing shares or debt
- The problem is made worse by banks including clauses in contracts tying companies to them for future deals and this should end, the FCA said
- League tables supposedly showing which banks work on the most deals may be unreliable or manipulated to distort clients’ decisions about whether to hire a particular bank
- Some banks may reward favoured investors when allocating shares in an IPO, creating conflicts of interest
Christopher Woolard, the FCA’s director of strategy and competition, said investment banking should serve the economy by helping companies raise money efficiently for investment and expansion.
Woolard said: “Overall this is a package of proportionate measures intended to remove potentially anti-competitive practices. In addition, we want to start a discussion on changing the sequence of the IPO process to make the market work better by giving investors the right information at the right time.”
Peter Hahn, professor of banking at IFS University College, said stopping banks locking companies in to services and removing the blackout period were good ideas but that the proposals would only have a limited effect on the market.
“The issue of tying is probably the most important part of it because that fundamentally seems to create a conflict of interest and the blackout period certainly should be addressed because we’re in a world of instant information. I think it’s supportive of smaller equity underwriters but the reality is you need these multiple products to make money in a capital markets bank.”
IPOs boomed in 2014 and 2015 as companies rushed to tap renewed investor appetite as the economy picked up but some high-profile offerings, such as AO World and Boohoo.com, have fallen below their flotation prices. Investors have complained on and off about aspects of the IPO process, including unrealistic prices for shares and too many banks working on an offer.
The industry has until 25 May to respond with views on the interim study, with a full report due in the summer. Responses to proposed changes in the IPO process must be sent to the FCA by mid-July, for it to decide if rule changes are needed.
