Joint sponsors are here to stay
The FCA has decided to retain the role of joint sponsors following 'overwhelming' market support for the arrangements following its discussion on joint sponsors launched in FCA CP 14/02 earlier this year. For background, click here to read our article on CP 14/02.
New joint sponsor consultation
On 26 September 2014, the Financial Conduct Authority (FCA) published CP 14/21 'Feedback and policy statement on CP 14/02, consultation on joint sponsors and calls for views on sponsor conflicts', which set out the feedback to the joint sponsor discussion.
The FCA noted that respondents were in favour of retaining the ability to appoint joint sponsors for a variety of reasons including the ability for issuers to increase the range of sponsor sector expertise and geographical presence relevant for specific deals, the fact that the practice encourages the sharing of best practice amongst the sponsor community, and the additional sponsor scrutiny and oversight that the practice provides. Click here to read the consultation paper.
Whilst the majority of respondents were in favour of retaining the joint sponsor arrangement, there were some concerns raised with the current regime. In response to these concerns, the FCA is consulting on the following proposals:
Primary contact to have an administrative role
A principal concern raised during consultation related to the Listing Rule requirement that the joint sponsor which had primary responsibility for contact with the FCA during the course of a sponsor service was perceived to be the 'lead' sponsor. Consequently, other firms were reluctant to take on a joint sponsor role where there was no primary contact with the FCA. To address this concern, the FCA is proposing to amend the rules so that the sponsor who takes on the responsibility for contact with the FCA shall do so in connection with administrative matters only – so, that sponsor firm will be responsible for circulating the comments sheet and other correspondence to other sponsors and for submitting draft documents and comments sheets to the FCA. Where non-administrative matters are discussed, all appointed sponsors are able to participate in calls with the FCA, if it is considered appropriate. The FCA is consulting on a proposed Technical Note which contains detailed guidance in relation to communications between the joint sponsors and the FCA. In the draft Technical Note, the FCA notes that where practical, the FCA will give an indication of calls or meetings where it considers it may be desirable for all joint sponsors to participate.
Establishing joint sponsor arrangements
Certain respondents were concerned that there might be little or no formal arrangements regarding how joint sponsors should conduct themselves in a joint sponsor arrangement. Consequently, the FCA is proposing guidance in the Listing Rules which provides that it expects sponsors to co-operate with each other in relation to the sponsor service, including establishing arrangements for the sharing of information as appropriate having regard to the sponsor service.
Sponsor conflicts – call for your views
Whilst sponsor conflicts were not discussed in CP 14/02, certain respondents did comment on the current approach to the identification and management of conflicts of interest relevant to sponsors. Furthermore, the FCA has been in discussions with stakeholders regarding the regulatory approach to identifying and managing sponsor conflicts. Following on from these discussions, the FCA is calling for stakeholders' views on whether the current rules and guidance are sufficient or whether they need specific enhancement to address areas of concern. In particular, the FCA would welcome views in relation to:
- whether sponsors or integrated banks should disclose their transaction fees. Whilst the prospectus regime requires the disclosure of 'aggregated fees' and material contracts, there is no requirement to disclose sponsor fees,
- whether sponsors or integrated banks should disclose their relationships with the relevant issuer and their conflicts and how they are being managed,
- whether rules and guidance should provide greater detail on how firms should assess their ability to act as sponsor, for example, by using the accountancy profession's concept of 'threats and safeguards' when assessing conflicts of interest, and
- providing additional guidance on the 'perception test' in the Listing Rules which requires sponsors to take into account circumstances that could create a perception in the market that it may not be able to perform its functions or fulfil its regulatory obligations properly.
What are the next steps?
The consultation on joint sponsor proposals and call for input on sponsor conflicts closes on 30 December 2014. The FCA expects to publish its feedback on the joint sponsor proposals in the second quarter of 2015. Subject to responses to the discussion on sponsor conflicts, the FCA proposes to issue a further paper for discussion later in 2015.
What do we think?
It is not surprising that the FCA has decided to retain the joint sponsor regime, given that it allows issuers to have access to a greater choice of sponsor expertise for complex transactions, whilst boosting competition amongst, and the demand for services from, the sponsor community. In our view, the FCA has adopted the right approach to providing that joint sponsors must co-operate with each other. Rather than adopting a prescriptive approach, the FCA's guidance encourages joint sponsors to establish arrangements between themselves. Consequently, joint sponsors are free to agree the deal process, information flow and other ground rules privately. Sponsors should be aware, however, that the FCA may review these arrangements, and whether or not they have been implemented effectively, when carrying out its sponsor reviews.
The call for input on sponsor conflicts has been on the FCA's agenda for some time and it will be interesting to see how the market responds. In particular, there has been increasing momentum amongst institutional investors for the greater visibility as to the components of issuers' transaction fees. This call for views may be another opportunity for those investors to put their case forward, particularly in the context of sponsor fees. Additionally, the FCA may need to consider whether the provision of sponsor services together with other services (such as underwriting or brokering) to the same client by larger integrated banks prejudices the bank's ability to act independently as a sponsor. Larger integrated banks with sponsor capacity will need to describe their robust systems and controls to demonstrate that these arrangements work in practice and that they remain independent when providing sponsor services. Furthermore, it will be interesting to see whether the majority of issuers favour these types of arrangements on the basis that one bank providing multiple services leads to costs and time savings for issuers - which ultimately will benefit their investors.