The Financial Conduct Authority (FCA) will investigate the market in initial public offerings over concerns banks are involved in conflicts of interest.
IPOs have come under the regulator’s spotlight following its study into the investment and corporate banking market, published today (13 April).
Analysis in the market study found evidence some banks may seek to reward favoured investor clients when allocating shares in an IPO.
As a result, the FCA will undertake supervisory work with a targeted group of banks to better understand how potential conflicts of interests are managed when shares in IPOs are allocated.
Christopher Woolard, director of strategy and competition at the FCA, said: “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.
“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.”
Investment banks face potential conflicts of interest when conducting IPOs of shares.
They work for issuing firms, and advise them on the pricing and allocation of the shares. They also have long-term relationships with buy-side investors for whom they offer trading, research, and many other services.
IPOs are, on average, underpriced (i.e. the offer price is below the price at which shares trade immediately after the IPO), and investors who are allocated shares benefit from any such underpricing, the FCA said.
The regulator said research to date into the determinants of IPO allocations has been limited by a lack of relevant data, particularly about the revenues from the buy-side clients of the book-running investment bank, and about the subsequent trading activity of investors.