Underwriting `has monopolies'

THE Monopolies and Mergers Commission (MMC) has provisionally found there are "complex monopolies" operating in the provision of underwriting services for new share issues on the stock market which "prevent, restrict, or distort competition".

However, the MMC is yet to decide whether these monopolies operate against the public interest. The MMC can only push for change in the industry if the monopolies operate, or are expected to operate, against the public interest.

The MMC's provisional findings are contained in a standard "issues letter" circulated to all interested parties. For the first time, the MMC has published the letter, which also contains "hypothetical" recommendations for change - known as "remedies".

According to Denise Kingsmill, deputy chairman of the MMC and chairman of the underwriting inquiry, the publication of the issues letter was intended to stimulate debate and to shed light on the workings of the MMC. The decision to publish was not sparked by the complexity of the issues under discussion, Ms Kingsmill said.

The MMC has provisionally concluded that there are complex monopolies in both the supply of lead underwriting services and the supply of sub- underwriting services. A complex monopoly exists if there is a group of firms with at least a 25 per cent market share whose actions "prevent, restrict or distort competition".

Most companies are charged a standard 2 per cent fee by lead underwriters, and the MMC is concerned this charging structure reflects a fundamentally uncompetitive market. If the market was fully competitive, the MMC said it "would expect fees to vary with risk" - that is, riskier share issues should be more expensive.

The MMC's issues letter asks members of the underwriting industry whether they believe the charging structure damages "the public interest". Among other things, industry participants have been asked to consider whether the cost of underwriting has been artificially inflated, whether underwriting fees are sufficiently transparent and whether firms wishing to provide underwriting or sub-underwriting services are being denied the opportunity to do so.

The issues letter also sets down 15 potential "remedies" the MMC could employ if it decided the complex monopolies "operate, or could be expected to operate, against the public interest". The remedies, which are "entirely hypothetical", include mandatory tendering for sub-underwriting and the capping of sub-underwriting fees.

The MMC could require financial advisers to inform issuing companies of the alternatives to paying standard fees for share underwriting, or could recommend lead underwriters be appointed by competitive tender. It could also ask the Office of Fair Trading to monitor the sector for a further two years.

The MMC is scheduled to report its findings to the Secretary of State for Trade and Industry on 20 November, exactly a year after the industry was referred for investigation.

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