On February 1, 2015, revised rules relating to Sponsor competence came into effect. These changes are designed to enhance the Sponsor regime by making it more robust and transparent.
The three key elements of the revised regime are:
- Sponsors must have submitted at least one Sponsor declaration to the Financial Conduct Authority (FCA) in the previous three years to demonstrate Sponsor competence.
- Sponsors must staff Sponsor functions with a sufficient number of employees meeting prescribed key competencies.
- Sponsors must satisfy new “key contact” requirements in relation to liaising with the FCA.
The revised rules also reflect the fact that the FCA can restrict or limit the approval of Sponsors wanting to specialise in certain areas only, such as advising premium listed investment companies.
The FCA first proposed changes to the rules relating to Sponsor competence in Consultation Paper 14/2 published in January 2014 (CP14/2) with the feedback and final rules changes being published in September 2014 as part of Consultation Paper 14/21 (CP 14/21).1
The FCA has also provided further guidance in the form of two new Technical Notes published at the same time as the revised rules came into effect (Sponsors: Guidance on the competence requirements set out under LR 8.6.7R(2)(b) and Sponsors: Practical implications of competence requirements for sponsors and applicants).
What was the position under the old rules?
Under the previous rules, in order to be approved as a Sponsor, a firm was required to be “competent to perform Sponsor services” and, once approved, had to continue to satisfy this requirement on an ongoing basis.
A firm was considered competent to provide Sponsor services if it had a broad range of relevant experience and expertise in providing advice to listed companies and on the Listing Rules. In assessing competence, the FCA applied a principles-based, firm-focused approach requiring demonstration of (a) prior relevant experience of providing Sponsor services, (b) the skills, knowledge and expertise necessary for the proper performance of Sponsor services and (c) prior corporate finance experience.
What has changed?
The revised rules have retained the basic requirement that, in order to be approved as a Sponsor, a firm must be competent to provide Sponsor services and, once approved, must satisfy this requirement on an ongoing basis. However, the FCA’s approach to assessing Sponsor competence has been revised as summarised below.
Requirement for Sponsor declaration to have been submitted in the previous three years
Under the revised rules, a Sponsor must have submitted a specified Sponsor declaration within the previous three years. Only declarations that cover confirmations concerning compliance with the Listing Rules and Disclosure and Transparency Rules (DTRs), the effect of the transaction on the issuer and the sufficiency of working capital will count towards satisfying this requirement. This will include Sponsor declarations submitted to the FCA in connection with an application (or further application) for listing, production of a circular or transfer of listing category, but does not include a declaration given on announcement of a reverse takeover under LR 8.4.17R or in relation to LR 8.2.1R(5) (Sponsor appointment where there has been, or may be, a breach of the Listing Rules or DTRs).
Where a firm is applying for Sponsor approval or where an existing Sponsor, due to low activity, finds itself in a position where it has not submitted a declaration in almost three years, the FCA acknowledges that the Sponsor can recruit to satisfy this competency requirement. The revised rules allow the FCA to “look through” to the employees to consider whether they have had material involvement in the provision of Sponsor services requiring the submission of a Sponsor declaration in the previous three years.
The FCA expects to derive a similar level of comfort from “looking through” to individuals as it would from a Sponsor having submitted a declaration. By this it means that the new applicant (or existing Sponsor) should retain relevant employees who understand (a) the process behind a Sponsor declaration, (b) the FCA’s expectations in terms of reaching a reasonable opinion after due and careful enquiry and (c) the obligations that apply to a Sponsor before submitting a declaration. This should be evidenced at least through an employee’s appropriate level of involvement in submitting a Sponsor declaration at their previous employer (being an approved Sponsor) – merely signing a Sponsor declaration or submitting documents to the UK Listing Authority will not of themselves demonstrate an appropriate level of involvement.
In exceptional circumstances, the FCA may consider dispensing with or modifying this requirement. In CP 14/21, the FCA notes that (given the level of activity of most Sponsors in recent years, even during difficult market conditions) it anticipates that it would rarely consider it appropriate to do so, however in exceptional circumstances it is possible it may use this approach in order to consider aborted transactions when determining a Sponsor’s ability to comply with this requirement. These transactions would need to have resulted in a Sponsor declaration had they completed and to have been sufficiently far advanced as to give the FCA a similar level of comfort as it would derive from a Sponsor declaration.
Prescribed key competencies - the “competency sets”
Under the revised rules a Sponsor must have a sufficient number of employees with the skills, knowledge and expertise necessary for it to understand certain “competency sets” as set out in the Listing Rules. These are:
- The rules, guidance and ESMA publications directly relevant to Sponsor services.
- The procedural requirements and processes of the FCA.
- The due diligence process required in order to provide Sponsor services in accordance with LRs 8.3 and 8.4.
- The responsibilities and obligations of a Sponsor in LR 8.
- Specialist industry sectors, if relevant to the Sponsor services it provides or intends to provide.
Sponsors are required to put in place systems and controls designed to comply with each of these competency sets. The FCA has clarified that it does not expect Sponsors or new applicants to perform a detailed assessment of each individual employee’s understanding of the competency sets, although it does expect a Sponsor to document how it reached a view that its Sponsor function, as a whole, is competent to provide Sponsor services with reference to each competency set. To assist Sponsors in meeting their record keeping obligations, the FCA has expanded the previous Annual Notification Form which now sets out the detailed competence requirements.
In its Technical Note on the practical implications of the competence requirements, the FCA has set out the types of skills, knowledge and expertise that it expects Sponsors to consider when assessing their ability to demonstrate an understanding of each competency set, together with a number of questions and answers to assist Sponsors or applicants in considering whether the firm meets, or continues to meet, the requirement for Sponsors to be competent to provide Sponsor services at all times.
Under the revised rules a Sponsor must comply with new key contact requirements set out in the Listing Rules. These require Sponsors to ensure that, when they are performing a Sponsor service that requires the submission of a document or liaison with the FCA, they provide the FCA with the name and contact details of a “key contact”. A key contact must:
- Have sufficient knowledge about the listed company or applicant and the proposed matter to be able to answer queries from the FCA about it.
- Be available to answer queries from the FCA on any business day between 7am and 6pm.
- Be authorised to make representations to the FCA for and on behalf of the Sponsor.
- Possess technical knowledge of rules, guidance and ESMA publications directly relevant to the Sponsor service.
- Understand the responsibilities and obligations of the Sponsor under Listing Rule 8 in relation to the Sponsor service.
The FCA also expects a key contact to have provided a Sponsor service in the previous three years.
The FCA expects Sponsors to have at least two employees who are able to satisfy the key contact requirements, although the Technical Note on the practical implications of the competence requirements (which also includes further detail on the FCA’s expectations in relation to the role of key contacts) clarifies that, despite this minimum, a Sponsor must consider the number of key contacts it needs in the context of its business model and level of activity and that this may require a Sponsor to staff its operations with significantly more than two key contacts. The FCA expects Sponsors to be able to identify employees capable of acting as key contacts on an ongoing basis and provide details of those individuals in each Annual Notification Form.
Approval on a restricted/limited basis
The revised rules clarify that, in certain circumstances, the FCA is able to impose restrictions or limitations on the services that a Sponsor can provide and that it will use this approach where a Sponsor applies for approval on a restricted or limited basis.
The FCA recognises that one area where firms may wish to specialise is by providing Sponsor services to premium listed investment companies only. Although the competence requirements are the same for any new applicant or Sponsor, the Technical Note providing guidance on the competence requirements sets out further information in relation to Sponsors that specialise in advising premium listed investment companies.
What do these changes mean in practice?
We expect that, for most Sponsors, the revised rules will not result in the need for significant changes to be made. However, the revised rules do directly impact on how Sponsors assess their competence and how this is documented on an ongoing basis. Sponsors will need to ensure that they are familiar with, and understand, the revised rules and related guidance and, in particular, the competency sets. Internal compliance manuals and systems and controls (including on communication with the FCA) will also need to be reviewed to ensure that they are fully compliant. By way of example, the FCA has stated that it expects Sponsors to build into their procedures an internal notification requirement that alerts management if the firm has not submitted a specified Sponsor declaration for a certain period of time.
Going forward, we expect the Sponsor regime to remain an area of focus for the FCA and that we will continue to see revised guidance and rule changes being proposed in this area.
What further changes are coming down the tracks?
The FCA is consulting on certain amendments to Listing Rule 8 (and a draft Technical Note) in relation to joint Sponsors. The new Technical Note (as currently drafted) clarifies that all appointed Sponsors are able to participate in calls and meetings with the FCA, except in relation to administrative matters, where the FCA proposes to communicate with only one joint sponsor. This is intended to address a concern that, where multiple Sponsors are appointed, they may all want to be the “lead” Sponsor to ensure they have sufficient access to the UKLA on material matters.
The FCA is expected to publish its feedback on the joint Sponsor proposals in the second quarter of 2015.
CP14/21 launched a new consultation in relation to Sponsor conflicts and the FCA has asked for views, inter alia, on (a) a requirement for Sponsors/integrated banks to disclose their transaction fees, (b) a requirement for Sponsors/integrated banks to disclose their relationships with the relevant issuer, their conflicts and how these are being managed and (c) enhancing the FCA’s rules and guidance to provide greater detail on the analysis it expects a Sponsor to undertake when assessing its ability to act as Sponsor.
The FCA is expected to publish a further paper on Sponsor conflicts for discussion later in 2015.