Investigations into investment banking services will benefit investors and savers, industry chief declares

An investigation of investment banking services by the UK Office of Fair Trading amid concerns about the supply of equity underwriting has been welcomed by investment managers.  

In a speech at the Mansion House Douglas Ferrans, chairman of the Investment Management Association, said the aim must be to give investors and savers the best possible outcome and said that the OFT investigation goes hand in hand with one by the new Institutional Investor Council of which he is chairman.

 
‘The OFT’s concerns around the supply of equity underwriting by investment banks underscores investors’ own initial views. As shareholders, and responsible owners, of major UK companies institutional investors are particularly interested in the demand side for investment banking services by listed companies. Our inquiry will therefore overlap, but be complementary to, the OFT's study of their supply,’ he explained.
 
‘Investors’ particular interest in the governance environment within which decisions are taken to use investment banks will provide an important focus for our work.  We shall make a further announcement shortly of how we will take this forward,’ he added.
 
He went on to challenge the financial services industry to deal effectively with the increase in intermediation which ‘delivers little or questionable benefit or value to our customers’ and which ‘often manifests itself in conflicts of interest which clearly act against our customers’ interests’.
 
He told his audience that the world of financial services is full of complex relationships and arrangements between firms and individuals.  There are market practices and understandings about who does what and about fee levels. ‘This has created a new, unbalanced and highly risky form of capitalism in which a disproportionate share of the spoils of capital investment is going in financial intermediation - a dangerous form, agency capitalism, if you like,’ he said.
 
‘Sometimes these intermediaries have unwittingly placed their own interests ahead of those of their clients. And the greater the number of such intermediaries in the chain, the greater the issue becomes for the owners of the capital, that is the pension funds, insurance companies and mutual funds investors, ordinary savers and investors.’
 
He explained that the creation of a new body, the Institutional Investor Council, will lead to a number of initiatives with respect to responsible ownership and stewardship on behalf of the owners of UK equities. It will also engage with relevant official bodies to ensure that customers’ interests are being looked after.
 
‘Our first task is to look into the underwriting fees paid by corporates when they are raising capital through rights issues. This is a classic example of excessive intermediation, conflicts of interest and a share of the spoils going in the wrong direction. There seems to be more than anecdotal evidence that fee levels and discounts have risen significantly, whilst the risk/reward characteristics for owners and responsibilities for intermediaries appear to have changed over the years,’ he said.
 
‘This is not about bashing banks, it’s about ensuring the market is working effectively and efficiently in the interests of our customers. We also need to ensure that there is no failure of governance or stewardship. We, the investment community, have allocated billions in capital to refinance the UK corporate sector in the past 18 months, so we have a legitimate interest in this area.’