UK agency opens investigation of fees and services for underwriting corporate fundraising

UK agency investigates equity underwriting

LONDON — A British regulator said Thursday it is opening an investigation into the performance of investment banks in the lucrative business of underwriting corporate fundraising.

The Office of Fair Trading said underwriters earned an estimated 2 billion pounds (nearly $3 billion) in supporting companies in raising 70 billion pounds of capital for corporations in 2009.

Underwriters support share offerings — which may be flotations of a privately held company or a rights issue to raise money from existing shareholders — by guaranteeing that they will buy any shares not taken up. Two or more underwriters may club together in syndicates to provide this form of insurance.

Some companies have expressed dissatisfaction with these services, including the reported increase in fees.

The Office of Fair Trading said its review will look at rights issues and other types of fundraising by the 350 largest public companies in the U.K. to consider whether users’ concerns are justified.

Major underwriters in Britain include Barclays, Citigroup, Goldman Sachs and Royal Bank of Scotland.

In April, former Finance Minister Paul Myners had urged the OFT to investigate fees on issues such as mergers and acquisitions.

“Shareholders and companies are losing out. High fees, for underwriting and M&A, mean that companies are losing money which could go back to being paid in dividends,” said Myners, who lost his post at the Treasury when Prime Minister Gordon Brown’s government was ousted in national elections.

The Institutional Shareholders Committee has launched its own examination of fees charged on rights issues.

The OFT investigation could result in recommendations for changes in laws and regulations, voluntary action by underwriters, or a referral to the Competition Commission, which investigates possible monopolies. The OFT could also find that there is no problem.

“Economic growth and productivity rely on companies being able to raise capital efficiently for investment,” said Clive Maxwell, the agency’s director of services.

“We plan to study the efficiency of the equity underwriting market and identify any areas for improvement. Our study will also help us to advise the government in its wider thinking about wholesale financial markets.”