FCA set to eradicate unfair IPO biases

Added 18th October 2016

The Financial Conduct Authority (FCA) is continuing its review of the initial public offering (IPO) process to eradicate unfair share allocations.

FCA set to eradicate unfair IPO biases

The regulator has published the final report of its ‘investment and corporate banking market study’, concluding the interim work published in April.

The study looked at issues around choice, transparency, bundling and cross-subsidies in debt and capital markets and mergers and acquisitions.

Further, it looked into competition and potential conflicts of interest in these primary markets and also other ancillary services, including corporate lending and broking.

The FCA also published in April a separate discussion paper, proposing changes to the IPO process. The consultation period ended in July and the resultant consultation paper should is expected to be published this winter.

A series of solutions has been proposed to address fairer competition, particularly for smaller clients.

Tighter supervision of IPO allocations is required, with the FCA finding evidence of biases towards buy-side investors from whom the banks derive additional revenues from other business interests, such as trading commissions.

Christopher Woolard, director of strategy and competition at the FCA, said: “Wholesale financial services markets play a vital role in the economy and the FCA has an important role to play to ensure these markets work well.

“The universal banking model clearly works well for a wide range of participants but areas such as the use of restrictive contractual clauses, league table credibility and the allocation of shares in IPOs are not always working as well as they could.

“We’ve developed a package of remedies designed to address these problems. This sends a signal that we expect firms to compete on the merits, not by restricting clients’ choice on future transactions, drawing misleading comparisons with competitors’ performance, or exploiting conflicts of interest.

“We are also continuing to look at how we can improve the IPO process.”

In a corresponding ‘occasional paper’ published by Tim Jenkinson and Howard Jones of the Saïd Business School at the University of Oxford, and Felix Suntheim of the FCA, such conflicts of interest around share allocation during IPOs were highlighted, as was the lack of relevant data around all additional revenues generated from the participating clients.

The paper said: “[There is evidence] that syndicate banks make favourable allocations to investors who provide them with information likely to be useful in pricing the IPO, particularly investors who submit price-sensitive bids, and those who attend meetings with the issuer before the IPO.

“At the same time, book-runners make favourable allocations to investors from whom they generate the greatest revenues elsewhere in their business, notably through brokerage commissions.”

Other changes look to ban contractual clauses restricting client choice of future transactions as well as standardising the methodology used to produce banking league tables.   

The final rules should be published in early 2017. 

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