The Financial Conduct Authority (FCA) has started the New Year by sending a strong message to the sponsor community. On 6 January 2015, the FCA announced that it has imposed a fine of £231,000 on sponsor firm Execution Noble & Company Limited (ENCL) for breaches of certain Listing Rules in relation to sponsors. This was the first use of its powers to fine sponsors which were introduced in 2013. The FCA's decision sends a stark warning to sponsors to self-monitor their compliance with their Listing Rule obligations and to notify the UK Listing Authority (UKLA) of any matter which may affect their sponsor approval. The decision is a timely prelude to the new sponsor competence regime which comes into force next month.
Click here to read the final notice.
What were the key failings?
ENCL failed to inform the FCA's UK Listing Authority (UKLA) that two thirds of its sponsor service team, including senior individuals responsible for leading and executing sponsor transactions, had left between June and November 2013 (the Relevant Period). During the Relevant Period, ENCL continued to market itself as a competent sponsor, which the FCA considers had posed a risk to both consumers and to market integrity. The UKLA eventually discovered the departures in November 2013 when it identified that one of the key individuals had been appointed by a competitor firm. Following its findings, the UKLA contacted ENCL and was informed of the other departures in the sponsor team.
What rules were breached?
The FCA found that two key Listing Rules were breached by ENCL:
A sponsor must deal with the FCA in an open and co-operative way (LR 8.3.5R)
The UKLA had been in discussions with ENCL between September 2011 and June 2013 in relation to its concerns around the firm's low levels of sponsor activity. Specifically, the discussions concerned the firm's staffing and experience levels and whether it could continue to meet its approval criteria as a sponsor. Due to the nature of these discussions, which took place just prior to the Relevant Period, the FCA held that ENCL's lack of notification to the UKLA concerning the departures meant that it did not deal with the FCA in an open and co-operative manner.
A sponsor must notify the FCA in writing as soon as possible if it ceases to satisfy the sponsor approval criteria (including that it is competent to perform a sponsor service) (LR 8.7.8R(1)(a))
ENCL, as sponsor, should have notified the UKLA in writing of its personnel changes during the Relevant Period, particularly as a significant number of individuals had left, some of whom were key members of the sponsor team. Furthermore, during the Relevant Period, the UKLA published guidance in its UKLA Technical Note 711.1 on 16 July 2013 which reminds sponsors of their notification obligations. In particular, it provides that sponsors must be aware of any matter which may have an effect on their approval and 'that events, such as personnel changes or ad hoc changes to departmental procedures, may trigger a notification requirement.' The FCA considered that the seriousness of ENCL's breach was aggravated given that ENCL should have taken note of the guidance which was published during the Relevant Period.
Key lessons to be learnt
Sponsors must self-monitor and consider any triggers for notification
Sponsors must put systems and controls in place to ensure that they are aware of their ongoing compliance with the Listing Rules. The FCA notes that ENCL's own internal compliance procedures made no reference to a sponsor's ongoing notification obligations to the UKLA, other than in respect of any transaction-dependent notifications. Sponsors may wish to adjust their internal processes for when a member of the sponsor team leaves the firm. For example, an appropriate check should be put in place to ensure that the team considers whether to notify the Sponsor Supervision team at the UKLA. Given the FCA's position on this point, it may be better to be cautious and notify the Sponsor Supervision Team whenever a member leaves.
Contact the UKLA for Listing Rule notifications
A sponsor firm must notify the UKLA in respect of its notification obligations under the Listing Rules – it is not enough to notify any other department of the FCA. Whilst ENCL had notified the FCA that approved persons had left the firm, and consequently, the FCA updated its Financial Services Register, ENCL did not notify the UKLA of the departures. UKLA Technical Note 711.1 emphasises this point by providing that notifications pursuant to the Listing Rules on sponsors must be sent to the Sponsor Supervision Team in the UKLA. Furthermore, the guidance specifically notes that 'it is not enough for a sponsor to contact other FCA personnel about these matters'.
Read the UKLA guidance – now a key competence requirement
The new sponsor competence regime, which comes into force next month, requires sponsors to be 'experts' in applying and interpreting regulation applicable to the Premium Listing Regime. This includes keeping abreast of all technical guidance published in the UKLA's Knowledge Base. The FCA had increased the fine imposed on ENCL by 10% as it considered that the breaches were aggravated as ENCL had not taken note of the guidance which reminded sponsors of their notification obligations. Firms must ensure that their sponsor service teams are aware of all guidance which affects their own obligations, as well as those of their listed issuer clients, in order that they fulfil the FCA's competence criteria.
If you have any queries regarding the sponsor regime, including the new competence regime which comes into force next month, please contact your usual Hogan Lovells contact or one of the listed contacts.