On 6 August 2010, the UK's Office of Fair Trading ("OFT") launched a market study into equity underwriting and associated services. This review could lead to regulatory reform and/or enforcement action.
The market study was triggered by customer complaints
In 2009, companies raised an estimated £70 billion of equity capital in the UK and paid an estimated £2 billion in underwriting fees. A number of corporate users have expressed their dissatisfaction with the current level of underwriting fees. Therefore, the OFT decided to review the functioning of the UK's equity underwriting market.
The study will focus on equity underwriting services for the different types of share issue used by listed companies to raise capital in the UK (including rights issues, placings and other types of follow-on offer). It will not cover initial public offerings. The OFT will also consider both corporate broking services and corporate lending to the extent that this is necessary to inform its understanding of equity underwriting. Following a consultation in June 2010, the OFT has decided to limit the study to the equity issues by FTSE 350 companies over the last 10 years (since the last competition investigation).
The OFT's publications relating to the market study can be found at www.oft.gov.uk/equity-underwriting .
The OFT will examine the way that the underwriting market works
The OFT will investigate how underwriting services are provided and purchased. It will look at the way that the different services (i.e., advisory, compliance, guaranteeing the proceeds of the share issue) are sold and whether there are conflicts of interest between these roles. It will also examine how and why companies choose to raise equity using follow-on methods. In addition, the OFT will examine the rules that apply to equity underwriting and will determine whether these rules facilitate or hinder competition.
The OFT's market study has several possible outcomes
The OFT's next steps will be to consult relevant industry participants within the coming weeks to gather information, ask questions and meet to discuss the issues. The average length of the OFT's market studies is 12 months. There could be several potential outcomes:
A clean bill of health for the market;
Non-binding recommendations to business or to Government, e.g., the OFT may advise the Government to amend the regulatory framework;
Enforcement action against individual companies: if the OFT finds evidence that certain underwriters were involved in anti-competitive practices (e.g., price-fixing), it would pursue these companies under the Competition Act 1998;
A market investigation reference: if the OFT concludes that certain market features prevent, restrict or distort competition, it may refer the matter to the Competition Commission ("CC") for a more in-depth market investigation. The OFT may also accept undertakings in lieu of a CC reference.
A reference to the CC would lead to an in-depth market investigation
If the OFT refers the matter to the CC, the latter must conduct its investigation and publish a final report within two years. If the CC concludes that there is an adverse effect on competition, it has a duty to impose adequate remedies. In previous cases relating to the financial sector and retail banking, the CC has imposed remedies aimed at increasing market transparency and has banned undesirable commercial practices. CC guidelines state that a market investigation may also lead to "the imposition of a price cap." For example, between 2002 and 2007, the CC capped the interest rates charged by the four largest UK banks on current accounts to small and medium sized enterprises.
Equity underwriting has already been subject to several antitrust inquiries
Equity underwriting has been considered previously by the competition authorities in the UK. The OFT has published three reports on equity underwriting in the mid 1990s. In 1999, the Monopolies and Mergers Commission (now the CC) published a report on underwriting services for share offers. The Commission made several recommendations but did not impose any remedies on the underwriters.
In 1999, the U.S. Department of Justice also launched an investigation into equity underwriting but this investigation was later discontinued. A similar investigation by the Department of Justice today seems less likely in light of a recent Supreme Court decision. In Credit Suisse v. Billing, the Court held that certain underwriting activities were not subject to scrutiny under the antitrust laws based on such conduct being regulated under the securities laws. Billing concerned allegations that investment banks acting as underwriters formed syndicates, which precluded direct purchasers from acquiring stock in IPOs unless they complied with certain conditions or paid excessive commissions. However, the decision has broader application.
The study is conducted in parallel with several other inquiries
In July 2010, the Institutional Investor Council ("IIC"), representing the UK's largest institutional investors, has launched a consultation on its Rights Issues Fees Inquiry. The OFT said that it would liaise with the IIC and that the two inquiries would be complementary.
The OFT's study will also feed into the wider debate about reform of the UK's banking system. Earlier this year, the OFT has launched a review of barriers to entry, expansion and exit in retail banking, to identify any obstacles facing new entrants and small banks. In parallel, the Government has asked the Independent Commission on Banking to make recommendations on increasing competition and stability in the UK banking sector.
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