Investors urge extra scrutiny on bank underwriting fees

Britain's largest institutional shareholders today called for greater transparency on fees paid to banks underwriting company share issues, amid concern that firms are rewarding them too much.

A report by the Institutional Investor Council said there was widespread concern among shareholders about the level of underwriting fees banks charge and the lack of transparency around how much, to whom and for what fees are actually paid.

"Companies and their shareholders are not getting a fair deal and that needs to change," said Douglas Ferrans, chairman of the Rights Issue Fees Inquiry. "Companies are paying too much to ensure the deal is a success."

Fees charged by investment banks for taking on the risk in capital raisings should come under at least as much scrutiny as boardroom pay, Ferrans said.

"Whilst remuneration rightly comes under the spotlight, very little light is shone on these larger numbers," he said.

The report also called for a return to competitive tendering for sub-underwriting to improve competition and reduce costs.

British investors set up the IIC this year to boost governance with companies in which they invest and to participate in government policies affecting the sector.

One of the first tasks of the IIC was to examine fees paid during rights issues. The report found banks increased underwriting fees in 2008-09 when a spate of crisis-hit companies sought to rebuild capital cushions. During the period, fees were in a 3-4% range, averaging 3.4%.

Despite more benign market conditions since the middle of last year, fees have not fallen as far as expected, the report said.

"UK-listed companies feel that they are needlessly paying large sums of money to insure against minimal or virtually non-existent risks," it said. "This shareholder cost is ultimately borne by ordinary savers and investors."

The report also said investors should be able to speak to issuers and their advisers "with authority" on matters such as support for a rights issue, pricing and sub-underwriting.

To that end, regulators should ensure there were "no unnecessary impediments" to shareholders' participation in the underwriting of rights issues.

Companies without in-house expertise in equity capital raising should also use non-conflicted, independent advice.

The Office of Fair Trading, which is due to publish its own findings into equity underwriting in the new year, said it would consider the IIC's report.