Corporate finance advisers who liaise between stock-issuing companies and syndicate banks during initial public offering (IPO) procedures have received a clean sheet in a major new report.
Published by the Financial Conduct Authority (FCA) on 18 October, the long-awaited Investment and Corporate Banking Market Study sets out the results of a detailed probe into multiple areas of financial services used by British firms.
The probe was launched in the wake of unease about potential conflicts of interest arising in key parts of the corporate banking sector, and in surrounding professions.
In the case of corporate finance advisers, stakeholders had raised concerns over:
On the first point, one medium-sized bank told the FCA that corporate finance advisers create barriers to entry for smaller investment banks by showing preferences towards larger rivals – and even blocking certain banks from approaching the issuer.
Turning to fees, the same bank said it believed that advisers’ charging structures are often linked to the IPO issue price.
That, the bank suggested, is detrimental to the issuer, as aftermarket performance tends to be poorer when corporate finance advisers play a part in the deal.
On the research question, another bank of the same size wanted the FCA to consider whether advisers interfere in any way with how valuations are presented, or how investment banks select specialists to write up pre-deal analysis.
After reviewing recent examples of advice provided to clients, the FCA did not identify any guidance from advisers that confirmed bias towards certain banks. Indeed, it points out, advisers “appear to have a process that aims to select banks based on their relative merits and appropriateness for the deal”.
It noted: “We saw examples of deals where small and medium-sized banks were recommended for a transaction because they had some of the best research analysts for the sector in which the client operates.
“This evidence demonstrated how corporate finance advisers can help bridge the gap in experience and knowledge between an issuer and an investment bank.”
Neither did the regulator find that advisers’ fee structures misalign incentives between themselves and their clients. Broadly, the FCA found that advisers are pitching their fees in reasonable terms.
“Corporate finance advisers told us that they almost always use a flat fee or monthly retainer structure and a discretionary fee, which depends on the client’s satisfaction with the service they have received,” the report says.
“They do not generally link their fees to the price or valuation of the IPO (although one adviser gave an example of a recent dual-track M&A/IPO exit transaction where a proportion of its fees were linked to the final valuation achieved at IPO).”
Exploring the research concerns, the FCA found that advisers typically operate a series of internal protocols designed to prevent the spread of unethical influence. Some of the most common stipulations in advisers’ protocols are:
The FCA stresses that, in keeping with its COBS 12 regulations, the onus is on investment banks to manage conflicts of interest relating to analysts involved in the production and dissemination of research.