OFT leaves underwriting fees alone

THE Office of Fair Trading has backed away from banning fixed underwriting commissions in the City, following an informal investigation, writes Clare Dobie.

The decision, which has yet to be made public, means merchant banks will continue to be able to charge 2 per cent of the value of a share issue for underwriting it.

Of the commission they receive - an estimated pounds 140m so far this year on rights issues - they pass 0.25 per cent to brokers and 1.25 per cent to large investors, including pension funds, insurance companies and others.

The OFT was concerned that commissions are nearly always set at 2 per cent of the value of the issue. But the Institutional Fund Managers Association and other City bodies argued that the fixed price did not mean there was a cartel; firms could still choose the price at which they would underwrite an issue.

The news will come as a relief to the City as it is enjoying a busy year for rights and other share issues. Companies have raised pounds 7bn so far this year through rights issues or calls on existing shareholders, including Zeneca's pounds 1.3bn.

In return for commission, underwriters promise to take shares not wanted by other investors. With some notable exceptions, such as the BP issue in 1987, they are rarely called on to take up shares.

The OFT has commissioned work from Paul Marsh at the London Business School on the pricing of underwriters' risk. This has not yet been completed.

Meanwhile, the OFT, which started its investigation more than a year ago, is drawing up a report. It is expected that it will write to finance directors and others outlining the findings.