Last week, the UK Financial Conduct Authority published an interim report as part of its Market Study into Investment and Corporate Banking, alongside two further documents focused on the IPO process.
The Interim Report reviews market practices such as the cross-subsidisation of banking services and contractual clauses restricting client choice in future transactions; the IPO process and allocation of shares; and corporate finance league tables. It also presents potential remedies aimed at improving competition in the industry. The FCA requests that any comments are provided by 25 May.
The FCA also published an Occasional Paper, “Quid pro quo? What factors influence IPO allocations to investors?” by Tim Jenkinson and Howard Jones (both of Said Business School, University of Oxford) and Felix Suntheim of the FCA. The paper studies all IPOs between January 2010 and May 2015 conducted by banks operating in the UK and finds evidence consistent with book-runners providing favourable allocations to investors who they generate higher brokerage commissions from. It finds that the revenues investment banks earn from institutional investors ($37 billion/year) dwarf the fees paid by IPO issuers ($750 million/year) and notes that this may cause concerns about conflicts of interest. The paper also reviews secondary market trading after IPOs to examine whether long-term investors may be favoured by book-runners, finding no evidence that investors who sell their shares quickly receive lower allocations.
Finally, the FCA issued a Discussion Paper, “Availability of information in the UK Equity IPO process”. This paper notes that the approved prospectus typically is published too late in the IPO process for investors to be able to examine it, and proposes several options to reconfigure the IPO process to make the FCA-approved prospectus a more central document. This paper also discusses whether IPO research by non-syndicate analysts could be desirable and compares UK practices with those in the United States and France. The FCA requests that any comments on this paper are provided by 13 July.