Underwriting costs `too high'

The costs of underwriting rights issues are to be sharply criticised in a report from the Office of Fair Trading, expected today. The OFT argues that the fees charged by underwriters tend to be excessive.

The OFT's investigation was prompted by complaints from companies that had just completed rights issues and felt they had not got value for money.

"We are not seeking to do away with the present system, but we are challenging issuing companies and the City to look for ways to ensure that some imperfections in the markets are overcome," an OFT official said.

The latest call for change forms part of a concerted review of the financial markets, targetting areas that regulators and competition watchdogs felt were left unfinished after Big Bang.

The OFT has recently called for the ending of a number of privileges accorded to market-makers, and for the removal of obstacles to the development of order-driven share dealing systems to rival the Stock Exchange.

These calls for reform are being fed into a broader review of the London equity markets by the Securities and Investments Board.

Today's OFT underwriting report draws largerly on research by Paul Marsh of the London Business School. He found that the fees charged for rights issues tend always to be 2 per cent of the capital raised, and the discount on the share price tends to be between 15 and 20 per cent of current market value.

"Either there must be variable fees, or a much more variable discount, but the present system clearly does not adequately reflect the risk and costs of issueing," Mr Marsh said.

While the OFT appears not to have found evidence of a cartel among underwriters, it does accept that the fee patterns reflect insufficient competition, and suggests issuing companies be more demanding of their advisers.

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