For years, investors in the UK and US have been perplexed as to why the large number of banks and advisers that compete for equity market business do not differentiate on price. So they will be pleased that the UK's Office of Fair Trading plans an official investigation on the topic. The probe will not target specific banks but rather study the market for equity underwriting on initial public offerings, rights issues and other equity-related services.
In contrast with many Asian countries, where discounting is common, in the UK and US, underwriting fees hover respectively at about 3.5 and 7 per cent of the deal's size. In spite of increases during the financial downturn they remain relatively stable given the market's extreme swings. But just because banks generally charge an accepted fee does not mean prices are fixed. During boom years, when flogging stock was all but assured, clients moaned when paying the fees. But now that volatility permeates equity markets, some banks feel the risk is not worth it. Underwriters of Bank of Ireland's €1.7bn rights issue narrowly averted disaster when its share price dipped dangerously close to the issue price.
Different pricing structures have been tested. The banks involved in the €1.4bn IPO of PagesJaunes the French publisher, in 2004 received payment upon completion of set milestones throughout the process. The infighting that resulted meant this arrangement has been seldom repeated. Bankers also argue that fees based on time worked – similar to lawyers and consultants – would not work due to the number of different departments involved in most deals. As with past investigations, any OFT study will find it difficult to prove price fixing. With proof and international co-ordination absent, imminent change to fees seems unlikely.