FCA to restructure IPO process in competition drive

An FCA study has found evidence that some banks may seek to reward favoured investor clients when allocating shares in an IPO.

Related topics:  Finance News
Rozi Jones
13th April 2016
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Its study found that allocations of shares in IPOs are skewed towards buy-side investors from whom banks derive greater revenues from other business lines (e.g. trading commission). The regulator noted that there is a risk that allocations do not align with issuing clients’ best interests and may shut out other investors.

The FCA is also investigating whether market participants have access to the right information at the right time during the IPO process.

The regulator raised concerns that the 14 day ‘blackout’ period in the UK IPO process between research on the issuer being published by the banks and circulation of the issuer’s prospectus means that investors only have access to an important source of information late in the process. In addition, analysts unconnected with the IPO generally lack access to the management of the issuer, leaving them with little information on which to base their independent research.

Alternative IPO process models put forward for discussion include a requirement to delay the release of any research by analysts at banks connected to the IPO until after the prospectus is published, and a requirement to invite analysts from unconnected banks and independent research providers to any meetings with management.

The study was published alongside the interim conclusions of its investment banking market study, which found that while many clients feel well served by primary capital market services there were also some areas where improvements could be made to encourage competition.

Despite most, particularly larger, clients feeling well served by the universal banking model the FCA found that cross-selling could make it harder for banks that do not offer lending facilities to compete for primary market services. The FCA noted widespread use of contractual clauses that purport to limit clients’ choice of providers on future transactions.

In addition, the FCA is looking for the industry to address concerns that league tables on investment and corporate banking services may be unreliable, which means "they are at best ignored by clients and at worst could distort clients’ decision making".

Christopher Woolard, director of strategy and competition at the FCA, said:

“These markets are a cornerstone of the real economy, helping companies raise capital for investment and expansion. Our study shows that many investment and corporate banking clients are getting a service they want, but we have also identified some areas where improvements could be made.

“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.”

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