In an effort to stem “potentially anti-competitive measures” – and reconsidering the two-week ‘blackout’ period that currently stands ahead of company IPOs – the Financial Conduct Authority (FCA) this week
announced its proposed “proportionate package” of measures.
Hard to get your tongue around maybe, but how have financial commentators fared in getting their heads around the recommended measures, which, if implemented, would bring the UK in line with the US, France and Hong Kong?
Not enough informationEmma Haslett kicks things off with her pleasingly straightforward article for
City AM. Getting straight to the point, she says: “Essentially, investors don't have access to enough information when companies IPO.”
Haslett goes on to use the FCA’s definition of the ‘blackout’ period that currently applies to pre-float IPOs. It is “typically of 14 days, between research on the issues being published by the banks supporting the IPO and circulation of the issuer's prospectus.”
What that means for investors in these IPOs, says Haslett, is: “[They] only get access to important information relatively late on in the process.”
Exploring the ways in which the FCA hopes to combat this, Haslett proceeds to outline two of the regulator’s major reforms: “Firstly, delaying the release of research by analysts at banks connected to the IPO until after the prospectus is published.”
And: “Secondly, forcing companies to invite analysts from banks not connected to the IPO, as well as independent research providers, to attend meetings with management.”
Summing up the study, Haslett says: “Today's report focused mainly on primary market services – 'choice, transparency, bundling and cross-subsidisation in debt and equity capital markets, and mergers and acquisitions' – but also highlighted links between competition in those services and related activities like corporate lending and broking, and ancillary services.”
City AM comment
Simple, clear and transparentIn his article for
Investors Chronicle, Theron Mohamed describes the regulator’s reforms as “a raft of changes … aimed at improving investors' access to corporate information and boosting competition among banks.”
£1.8bn
Proceeds from UK floats in the first three months of 2016Adding to Haslett’s explanation of the FCA’s suggested measures, Mohamed points out another of the agency’s proposals: that companies file a preliminary prospectus “that excludes pricing information, allowing investors to access a key source of information earlier in the listing process. Currently, companies publish a prospectus when trading commences.”
Mohamed then shares the view of Tom Hinton, Head of Capital Markets at crowdfunding platform SyndicateRoom, who is upbeat about the proposed reforms: “The public is vital in improving liquidity for companies, so providing a simple, clear and transparent way to access these offers on the same terms as institutions is clearly beneficial.“
But there could be a downside to the new regulations if they become binding. Estimates by PwC analysts show there has already been a significant reduction in proceeds from UK floats – halving to £1.8bn in the first three months of the year – due to uncertainty around the EU referendum. The proposed changes could spell further reductions, according to Mohamed.
Investors Chronicle article
The right information at the right timeSean Farrell looks more broadly at the report from which the IPO reform proposals spring, in his report for
The Guardian. He summarises the FCA’s study as “paint[ing] a picture of an uncompetitive market dominated by big operators and beset by potential conflicts of interest.”
Farrell lists four of the FCA’s major concerns, which, along with those about IPO processes, include: “Investment banks with big balance sheets to lend from gain[ing] an advantage over other advisers in getting work from companies issuing shares or debt,” and: “League tables supposedly showing which banks work on the most deals … be[ing] unreliable or manipulated to distort clients’ decisions about whether to hire a particular bank.”
He goes on to quote Christopher Woolard, Director of Strategy and Competition at the FCA: “Overall this is a package of proportionate measures intended to remove potentially anti-competitive practices. 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.”
The proposals have been generally welcomed by the industry and academics, such as Peter Hahn, Professor of Banking at London’s IFS University College, who is quoted in the report: “It’s supportive of smaller equity underwriters.” But he expressed one key reservation: “The reality is you need these multiple products to make money in a capital markets bank.”
The Guardian report
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