OFT warns on issue underwriting

The Office of Fair Trading yesterday called for more competition in the underwriting of equity issues, saying it had found strong evidence of overcharging.

Describing underwriting as an "opaque area of City practice", Sir Bryan Carsberg, the director general of the OFT, said there was no justification for the fixed fees traditionally charged for issue underwriting, and the lack of variation in discounts on new equity.

The City was relieved by Sir Bryan's decision not to refer the matter to the Monopolies and Mergers Commission, but recognised the need for changes to a business that one top corporate financier described as "a nice little earner".

The OFT report found "strong evidence of overcharging for underwriting and little evidence that issue prices are adjusted to bring the fixed fee into line with the risks of particular issues".Underwriting fees have been generally set at 2 per cent of the value of the issue for more than 15 years, according to the report.

Although the OFT found no evidence of a fee-fixing cartel, as some complaints from issueing companies had suggested, it identified a clear competition problem.

"I am concerned by the generally fixed level and structure of fees, the limitations which current arrangements are said to impose on the scope for competition in fees and innovations in underwriting methods, and the potential for conflicts of interest between advisers, underwriters and sub-underwriters," the OFT said.

In not referring the matter to the MMC, Sir Bryan said he is giving the industry a chance to sort out its affairs. He said he will keep underwriting under scrutiny, publishing a review in 1997.

John Rogers of the National Association of Pension Funds, whose members are traditionally active underwriters, said: "Issue underwriting is an area where things have just jogged along without ripples for too long. The City must seize this opportunity to sort things out."

Richard Regan, head of the investment office of the Association of British Insurers, said: "We welcome the fact that, instead of disrupting the system with a referral, the OFT will let the market look at matters in a practical and sensible way."

In calling for changes to underwriting, the OFT said issueing companies should take the initiative by being more demanding of their advisers. "They might consider appointing separate merchant banking advisers and lead underwriters and might more fully explore variants, such as deep discounting, to the traditional underwritten issue typically recommended to them," the OFT stated.

"They could also find ways of avoiding some of the constraints, such as those arising from rigid timetables, on the scope for competition between sub-underwriters. These and other options should all be reviewed before a company settles the terms on which it wished to make an issue," the report said.

This latest call for reform is part of a broad review of financial market practices, focusing on areas left unfinished by the radical upheavals of "Big Bang" in the Eighties. The OFT recently proposed cutting back some of the privileges given to market makers, and ending the unfair advantages given to the Stock Exchange over competitors wanting to introduce an order- driven system of dealing.

The Stock Exchange will propose to its consulting members next week a new rule which would remove the privilege allowing market makers to hide stakes of 3 per cent or more in big companies. This is in reaction to criticism of Swiss Bank Corporation, whose market makers hid a big stake in an electricity company at the time of a takeover in the sector.

Start your day with The Independent, sign up for daily news emails
Voices
Homeless Veterans charity auction: Cook with Angela Hartnett and Neil Borthwick at Merchants Tavern
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm tomorrow
Arts and Entertainment
J Jefferson Farjeon at home in 1953
booksBooksellers say readers are turning away from modern thrillers and back to golden age of crime writing
Sport
Amir Khan is engaged in a broader battle than attempting to win a fight with Floyd Mayweather
boxing Exclusive: Amir Khan reveals plans to travel to Pakistan
News
Stacey Dooley was the only woman to be nominated in last month’s Grierson awards
mediaClare Balding and Davina McCall among those overlooked for Grierson awards
PROMOTED VIDEO
Voices
Joseph Kynaston Reeves arguing with Russell Brand outside the RBS’s London offices on Friday
voicesDJ Taylor: The great tradition of St Paul and Zola reached its nadir with a worker's rant to Russell Brand
News
Twitchers see things differently, depending on their gender
scienceNew study shows that birdwatching men have a lot in common with their feathered friends...
News
i100
Arts and Entertainment
Caroline Flack became the tenth winner of Strictly Come Dancing
tvReview: 'Absolutely phenomenal' Xtra Factor presenter wins Strictly Come Dancing final
Life and Style
A still from the 1939 film version of Margaret Mitchell's 'Gone with the Wind'
life
News
Xander van der Burgt, at the Royal Botanic Gardens, Kew
scienceA Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
film
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

Marian Keyes

The author on her pre-approved Christmas, true love's parking implications and living in the moment
Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

Bill Granger's Christmas Eve fish feast

Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

Rodgers fights for his reputation

Liverpool manager tries to stay on his feet despite waves of criticism
Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

Michael Calvin's Last Word

Sepp Blatter is my man of the year in sport. Bring on 2015, quick