OFT launches new probe into big investment banks

This time it's equity underwriting fees under the microscope - but is this just the beginning?

Last Updated: 31 Aug 2010

Another headache for the City's biggest investment banks: the Office of Fair Trading has launched a review of the way they provide equity underwriting services to companies looking to raise fresh capital. The question seems to be whether those concerned are being ripped off, possibly because of a lack of competition in the market. Now admittedly the estimated fees currently being charged don't sound particularly excessive, on paper. And the OFT has had a fairly chequered track record recently, to say the least. But it's another sign of the way the political wind is blowing...

The scope of the OFT's market study actually seems narrower than some had hoped - there had been talk of a probe into competition right across the banking industry. But the OFT has chosen to try and bite off a more digestible chunk: viz., the fees charged by the banks for arranging and underwriting new share issues. Now according to the OFT, companies raised about £70bn in capital last year and paid about £2bn in fees. This equates to about 2.9% of the total - not exactly a ridiculous sum. But the OFT reckons some companies involved have complained about the services they've received.

There's also a suggestion that this average hides the fact that charges were ramped up at the height of the recession. At the time, of course, slumping asset values forced many companies to tap shareholders for cash in a bid to shore up their balance sheets - and arguably, the fallout from the Lehman collapse meant that the remaining banks enjoyed a reduced level of competition. So it makes sense to check that they didn't use this position of power to squeeze higher fees out of their clients (although they'd presumably argue that it was much harder to get rights issues away back then).

The OFT says the study will look at the provision of underwriting services (in particular the level of competition), the purchasing of said services (particularly in terms of the information available to buyers), and the impact of the regulatory environment. It talked grandly about a wish to make the process more efficient - but presumably it will also go after anyone found to have over-stepped the mark.

Whether it will find anything concrete remains to be seen (one City type tells MT that competition is actually pretty healthy for underwriting gigs). But after some high-profile recent embarrassments (notably the collapse of the BA price-fixing trial), the OFT needs a big win - and the unpopular investment banks are an easy target, particularly since there's a lot of hostility towards them in Whitehall. Either way, the titans of the City should expect a lot more scrutiny in the coming months.

In today's bulletin:

Obama's bashing sends BP shares to 13-year low
OFT launches new probe into big investment banks
MT Leadership Visions: Barbara Stocking, CEO of Oxfam GB
Unemployment could hit 3m after Cameron's cuts, says CIPD
One in five of us are miserable at work

Find this article useful?

Get more great articles like this in your inbox every lunchtime

A leadership thought: Treat your colleagues like customers

One minute briefing: Create a platform where others can see their success, says AVEVA CEO...

The ignominious death of Gordon Gekko

Profit at all costs is a defunct philosophy, and purpose a corporate superpower, argues this...

Gender bias is kept alive by those who think it is dead

Research: Greater representation of women does not automatically lead to equal treatment.

What I learned leading a Syrian bank through a civil war

Louai Al Roumani was CFO of Syria's largest private retail bank when the conflict broke...

Martin Sorrell: “There’s something about the unfairness of it that drives me”

EXCLUSIVE: The agency juggernaut on bouncing back, what he would do with WPP and why...

The 10 values that will matter most after COVID-19

According to a survey of Management Today readers.