U.K. FCA Proposes New IPO Process Amid Competition Concern

  • FCA seeks to reduce favoritism, increase transparency
  • Calls for end to contractual clauses, better league tables

The regulator that helps oversee U.K. banks and brokerages proposed changing the process for initial public offerings to reduce favoritism and ensure that investors are better informed.

Analysts at firms not underwriting the IPO should have more access to the company’s management, and the timing of publication of an approved prospectus should be changed to provide more information to investors, the Financial Conduct Authority said in a report Wednesday. The investment banks handling the deals often allocate shares to favored customers from their other businesses, which may not be in the issuer’s best interests and may shut out smaller investors, the FCA said.

The U.K. regulator’s findings form part of a much-anticipated review of competition in investment and corporate banking started in February 2015. The U.K. watchdog decided to investigate practices in equity and debt primary markets after stakeholders raised a number of concerns. These operations make up about 25 percent of revenue earned by universal banks and generated total gross fees for lenders with U.K. operations of about $17 billion in 2014, the FCA said.

“Investment banks have often provided services to companies in their early stages for free in the hope of securing future work,” Rob Moulton, a U.K. regulatory lawyer at Ashurst LLP. “All sorts of businesses do this. Telling investment banks that they cannot have a right of first refusal on more lucrative future work may make them more reluctant to provide free services at the earlier stage, leading to increased costs."

Corporate Pressure

Clients may be under pressure to award debt and equity issuance deals to banks that offer them loans and serve as their corporate brokers, the FCA said. This is “exacerbated” by the widespread use of contractual clauses that restrict client choice, a practice that the FCA said should end. The FCA also said it would explore ways to reduce barriers blocking smaller firms from getting into the business.

“These markets are a cornerstone of the real economy, helping companies raise capital for investment and expansion," Christopher Woolard, director of strategy and competition at the FCA, said in a statement. "This is a package of proportionate measures intended to remove potentially anti-competitive practices."

The FCA also raised concerns that rankings of investment and corporate banking services may be unreliable and could negatively impact clients’ decision-making. The regulator said they should be ignored.

The industry has until May 25 to respond with its views on the interim study, with a full report set to be published in the summer. Responses to proposed changes in the IPO process must be shared with the regulator by mid-July, after which the FCA will decide if new policies are needed.

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