One of the City's most powerful trade bodies, representing billions of pounds of the public's pension fund money, is launching an inquiry into whether investment banks are overcharging companies for their services.
The Institutional Shareholders Committee (ISC), made up of the City's biggest investors, including the Association of British Insurers (ABI) and the National Association of Pension Funds, is to investigate whether investment banks charge too much for their services and whether they operate a "complex and oligopolistic" market.
The move is a victory for Lord Myners, the City minister, who has led a campaign over the last few months arguing that it is the institutional investors who should take action against the high fees being paid to investment banks. Other independent authorities, such as the Office of Fair Trading, have also expressed interest in establishing whether there is fair enough competition in the underwriting market.
Anger over the exorbitant level of fees came to a head a few weeks ago when the Prudential announced its £14bn rights issue and excluded big investors from sub-underwriting the cash call by using a syndicate of more than 30 banks instead.
Fees have also soared since the financial crisis – and the failed HBOS rights issue – with investment banks now charging around 3.5 per cent for any underwriting agreement, rather than the more typical 1.5 per cent. Half the fee goes to the sub-underwriters who, until recently, have been the shareholders. They take the risk by promising to buy the shares if there are no takers in the market. Some institutions have said that if these fees are to stay at this level, then they should take a bigger cut, while in the case of deeply discounted issues they argue that fees are not necessary as there is little risk.
Other senior industry professionals have been so angered by the high charges that they have threatened to cut the banks out of the loop by creating their own underwriting club. The ABI's director general, Peter Montagnon, has already written to the Business Secretary, Lord Mandelson, to express disquiet over the recent inflation in underwriting fees for several months. But this is the first time that the ABI, and the four other groups that make up the ISC, have come together to investigate.
Sources close to the ISC, chaired by Standard Life's chief executive Keith Skeoch, confirmed the decision yesterday. One said: "Lord Myners threw down the gauntlet to us and we have picked up that gauntlet. We will be talking to everybody involved in the industry – institutions and companies – to see what they have to say about underwriting fees. We will then produce our recommendations."
Lord Myners said he is delighted by the ISC's decision and added that the OFT would be doing a "national service" by launching its own full inquiry into all investment banks fees because there is a "complex and oligopolistic market" operating, which means companies pay far too much.
It was only last week that he called publicly on big investors must show they are acting on behalf of their clients: "Investors do have teeth – this is the extraordinary thing about this debate. They both own the business on behalf of their clients and they also generate huge amounts of revenues for the investment banks."
The City minister said any investigations should also look at the enormous fees being charged to companies by investment banks for M&A and takeover advice. "I don't know any other industry which charges so much for its services and I can't understand why the companies don't complain more."
The $100m of fees charged by seven banks involved in the recent Kraft bid for Cadbury was one of the factors that prompted outrage over the takeover. The biggest winners were Cadbury's advisers, Goldman Sachs, Morgan Stanley and UBS, who shared about $50m, while Kraft's bankers, Lazard, Citigroup and Deutsche Bank, split the rest. Typically, advisers charge between 0.1 and 0.3 per cent of deals over $10bn and higher percentages for smaller amounts.Reuse content