OFT lets banks off the hook on underwriting fees

Companies are being charged too much by investment banks to raise cash through issuing new shares, the Office of Fair Trading said today.

But in a move that left investors fuming, the watchdog said they and companies should sort out the problem between themselves, and decided not to refer the issue to the Competition Commission.

The OFT said that since the onset of the financial crisis in 2008, the fees companies were charged to have share issues underwritten in order to guarantee that they raised the amount they needed had risen sharply.

Between 2000 and 2007, the fees averaged 2%-2.5%. During 2009, when many companies were repairing their balance sheets, fees soared above 3%.

FTSE 350 companies raised £50 billion through share issues in 2009 with underwriting fees to banks such as Goldman Sachs, Barclays and RBS of £1.4 billion.

The OFT said companies concentrated on speed, confidentiality and successful take-up of share issues rather than costs, and some found it difficult to hold investment banks to account on costs.

This is the fifth time the competition authorities have looked at but rejected intervention in the share underwriting market in the past 20 years. It will be seen as another victory for the banks at a time when they are facing huge criticism over bonuses, and the threat of breaking up retail and investment banking.

A spokesman for the Association for Financial Markets in Europe said: "We welcome the OFT's report, which demonstrates the value that the investment banking sector provides and the importance of ensuring that banks can play their part in supporting economic recovery."

An inquiry into rights-issue fees led Investment Management Association chairman Douglas Ferrans, last year called on banks to be more transparent in how they charge, who is paid and what they are paid for.

Sonya Branch, OFT senior director of services and public markets, said: "Our in-depth study has found that the market is not working well, with little effective competition on underwriting fees."