On 29 March 2017, the FCA published Primary Market Bulletin (PMB) No. 17, its regulatory bulletin for primary market participants.
What is covered?
The edition outlines the key developments affecting listed companies and provides feedback on several consultations launched in previous PMB editions. In particular, the FCA addresses the feedback received during its review of the regime concerning sponsor conflicts and publishes new and amended guidance in its Knowledge Base.
Sponsor conflicts – regime works well
In PMB No. 17, the FCA sets out the feedback received in response to its 'Call for Views in CP 14/21 (September 2014)' in which, amongst other things, it invited views on the current rules and guidance on identifying and managing sponsor conflicts. For background on the consultation, click here to read our article on CP 14/21.
What was the feedback?
In general, sponsors and their representatives considered that:
- the current rules and guidance are operating effectively and are largely fit for purpose;
- there is usually an 'alignment of interest' between a firm's obligations as sponsor and its other roles on a transaction which arise from the relevant legal and regulatory framework;
- the reputational and regulatory risks associated with the sponsor role are a strong incentive for sponsors to comply with their obligations – consequently, these risks outweigh any financial gain which could be made from fees for other roles on a transaction;
- established relationships with issuers allow deals to be executed efficiently and banks are able to conduct quality due diligence reviews; and
- there should not be any greater disclosure of information about fees or relationships than the disclosure of issuer's aggregate adviser fees and material contacts which is currently required under the EU prospectus regime.
Investors and a minority of sponsors, however, were concerned that:
- fees and commissions earned by banks in their non-sponsor roles (such as acting as the underwriter or lender) could create a conflict of interest that might compromise their ability to comply with their sponsor obligations; and
- banks are often appointed as advisers (and sponsors) on the basis of an existing relationship, regardless of whether they are the most appropriate person for the role.
Consequently, investor stakeholders called for greater disclosure of fees and the relationships between advisers and issuers in order to be able to assess accurately the conflict position of the relevant firm. It was also asserted that more extensive disclosure would enable investors to determine whether fees are structured in a way that is aligned with the issuer's long term performance.
What is the FCA's position?
Having considered stakeholder feedback, the FCA concludes that, overall, the current rules and guidance around sponsor conflicts are 'operating effectively and are fit for purpose' - although it will continue to monitor sponsor fee structures. In particular, it notes that investors were more concerned about the quantum and structure of fees and their consequential impact on incentivising inappropriate behaviour, rather than the relevant component of fees which relates specifically to sponsor services. The FCA also notes that its proposed guidance on sponsor conflicts (outlined in more detail below) seeks to address investors' concerns by providing that fee quantum and arrangements and the nature of the sponsor's relationship with the issuer should be considered when the parties concerned identify whether there is a conflict.
New guidance on sponsor conflicts
The FCA is proposing to modify its existing guidance on sponsor conflicts in an amended technical note: Sponsor conflicts (UKLA/TN 701.3). The new guidance makes the following key amendments:
Perception test and the reasonable market user
The guidance introduces an objective assessment by proposing that sponsors should consider whether a reasonable market user would perceive that a sponsor may not be able to perform its functions properly, irrespective of any arrangements that the sponsor may have in place to manage the conflict. The guidance provides that this could include listings, capital raisings or disposals which may be perceived as facilitating an exit or material realisation for the sponsor's group. The assessment of the reasonable market user is likely to vary depending on the circumstances of the transaction.
Factors to take into account when a transaction involves the provision of finance
A new metric is introduced so that, where a sponsor is proposing to make a loan to an issuer in connection with a sponsor service (for example, in relation to a merger or an acquisition) which also has strategic importance for the sponsor group due to its size, a conflict or perceived conflict could arise. So, where the amount (prior to syndication) of a proposed loan is equal to, or in excess of, 0.5% of the sponsor group's total assets by reference to its last published consolidated accounts, the firm must contact the FCA before it accepts its appointment as sponsor. The existence of the proposed loan and its size does not automatically mean that a sponsor's ability to carry out its role will be adversely affected. Rather, the size of the financing is only one of the factors to be considered by sponsors. The guidance lists a number of other factors to consider in the context of the provision of loan finance including whether the terms of the loan are on normal commercial terms and whether there are any other exposures that the sponsor has to the issuer.
Systems and controls
The FCA helpfully acknowledges that contact between the sponsor team and another part of the sponsor group (for example, the team which is responsible for a loan) may be appropriate in circumstances where the team needs to ascertain information about the type of finance being provided by the sponsor's group. Additionally, the guidance sets out a list of exceptional circumstances where the FCA would expect a sponsor to contact it at the earliest opportunity to discuss whether there is a potential conflict.
New guidance for market participants
The FCA has published new and amended guidance in its Knowledge Base further to its consultations proposed in PMB No.13, PMB No.14 and PMB No.15. The new guidance consists of six amended existing procedural notes; 12 amended existing technical notes and seven new technical notes. Click here to access the published guidance and to read the background of the consultations which proposed the changes.
The FCA is consulting on the following proposed guidance:
- a new procedural note 'Debt Securities – Issuer Substitution (UKLA/PN/911.1) which explains the procedural mechanics of replacing a debt issuer on the Official List through a substitution;
- an amended technical note 'Sponsors: conflicts of interest' (UKLA/TN/701.3) which sets out the amended guidance on identifying and managing sponsor conflicts (as outlined above); and
- an amended technical note 'Shareholder obligations' (UKLA/TN/543.3) which reflects guidance in relation to the new standard TR-1 form which was published by ESMA for the notification of major holdings. The new form will come into force on 30 June 2017.
Comments on the proposed guidance must be submitted to the FCA (email@example.com) by 10 May 2017.