Regulation  

FCA probes IPO market for conflict of interest

FCA probes IPO market for conflict of interest

The Financial Conduct Authority (FCA) will investigate the market in initial public offerings (IPOs) 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 on13 April.

Analysis in the market study found evidence that some banks may seek to reward favoured investor clients when allocating shares in an IPO.

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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.

The banks 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 (that is, 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.

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.”

Adviser view

But Yvonne Goodwin, managing director at Leeds-based Yvonne Goodwin Wealth Management, questioned the need for a widespread review of the market.

“It seems to me there’s a lack of transparency – surely it doesn’t warrant a full-blown expensive long-drawn-out investigation.

“Why not just summon all the chief executives to a meeting, after sending a letter outlining concerns and ask them to bring all the evidence of how they’re managing their conflicts of interest.”

laura.miller@ft.com