The veil of secrecy that covers stock market floats is set to be lifted for thousands of ordinary savers – allowing them to snap up shares alongside investment bankers.
Before a company goes public, advance information is handed to a small pool of favoured analysts who work for the banks running its book.
But new rules proposed by the Financial Conduct Authority (FCA) would force businesses to share more information with independent experts who can properly scrutinise their plans.
This research could then be made publicly available rather than being closely guarded and passed only to favoured clients and fund managers.
New rules proposed by the Financial Conduct Authority would force businesses to share more information with independent experts who can properly scrutinise their plans
City experts welcomed the shake-up yesterday, saying it would make flotations fairer and easier to understand, and herald an opportunity for Britain’s millions of small investors.
Laith Khalaf of investment service Hargreaves Lansdown said: ‘Making the whole process more transparent should hopefully reduce the bias towards companies being brought to market and divvied up among City investment giants.’
He added: ‘Advisers often say it’s a complicated process, but it’s not – you just have to get your ducks in a row, and hopefully this announcement is a step in the right direction.’
Under current rules, the first information investors get before a float comes from analysts working at the investment banks involved in making it happen.
This is generally followed by a ‘pathfinder prospectus’ with some official information but limited detail, around two weeks before the business goes public.
And a detailed prospectus is normally released only on the first day of trading. Initial research and the pathfinder document are typically shared with a small group of investors rather than the whole market.
The FCA said traders were heavily reliant on research from banks with a vested interest in the deal going through.
It said this could make the process misleading and might even lead to market abuse. Analysts were likely to come under pressure from their banks to give the floats a favourable write-up as this would then help them win business, according to the watchdog.
In the US, ten banks were fined £353million for doing this on the 2014 float of Toys R Us.
The FCA’s competition director Christopher Woolard said that the aim was to make sure ‘markets remain efficient, effective and open for business’.
David Buik of stockbroker Panmure Gordon argued that the move was a welcome step in the right direction for larger listings where billions of pounds were at stake. ‘I’m surprised it’s taken this long to have this discussion,’ he said.
‘In most cases, you’re better off having a mix of corporate and retail investors.’
Few large initial public offerings are made available to ordinary savers – but in cases where this does happen, there is frequently huge demand.
Investors jumped on the opportunity to buy Royal Mail shares in its 2013 float, which was seven times oversubscribed.
And there was similar excitement in 2011 when Lloyds spun off TSB, with 60,000 retail investors taking part.