U.K. regulator calls for IPO reforms

The regulator also released a discussion paper on the IPO process, which aims to open a debate on improving the way that information is provided to investors.

The FSA study found practices that limit competition in the IPO underwriting business, including cross-selling, which, it says, could make it harder for banks that do not offer lending facilities to compete for IPO mandates. The study also observed widespread use of contracts that attempt to limit clients’ choice of underwriters on future transactions.

The FCA recommends that these sort of clauses be eliminated. It also calls on the industry to “address concerns that league tables on investment and corporate banking services may be unreliable, which means they are at best ignored by clients and at worst could distort clients’ decision making,” the FCA says a statement accompanying the study’s release.

Additionally, it the study found evidence that some banks reward favoured clients when allocating shares in an IPO. The FCA is planning further supervisory work to examine how potential conflicts of interests are managed in IPO allocations.

IPO discussion paper

The FCA discussion paper aims to ensure that market participants “have access to the right information at the right time” during the IPO process. It proposes a couple of alternatives to the current practice: either requiring banks that are involved with an IPO to delay publishing any research on the company until after the prospectus is published; or the introduction of a requirement to invite analysts from banks that aren’t involved with the deal, and independent research providers, to any meetings with management.

“These options have been presented to stimulate debate,” the FCA says.

“These markets are a cornerstone of the real economy, helping companies raise capital for investment and expansion. Our study shows that many investment and corporate banking clients are getting a service they want, but we have also identified some areas where improvements could be made. Overall this is a package of proportionate measures intended to remove potentially anti-competitive practices,” says Christopher Woolard, director of strategy and competition at the FCA.

“In addition, we want to start a discussion on changing the sequence of the IPO process to make the market work better by giving investors the right information at the right time,” he adds.

Comments on the interim report and potential remedies are due by May 25. The FCA expects to publish its final report in the summer, and to consult on any proposed rule changes after that. The deadline for feedback on the discussion paper and potential changes to the IPO process is July 13.