On 26 September 2014, the Financial Conduct Authority (FCA) published CP 14/21 which sets out its feedback to CP 14/02 'Proposed amendments to the Listing Rules in relation to sponsor competence and other amendments to the Listing Rules and Prospectus Rules', together with its final rules in relation to sponsor competence. For background, click here to read our article on CP 14/02.
Feedback to CP14/02 – sponsor competence and other changes to the Listing Rules and the Prospectus Rules
Since the consultation earlier this year, the FCA has met with various groups of stakeholders to explore areas of concern raised in their responses. Having considered the points raised, the FCA sets out its feedback in CP 14/21 and includes certain amendments to the consultation version of the new rules.
Click here to read the consultation paper. Otherwise, read on for a summary of the key points.
- Sponsor declaration. The FCA is proceeding with its proposal to require sponsors to have submitted at least one specified sponsor declaration in the last three years in order to demonstrate their competence. In response to concerns raised by respondents that aborted transactions should also be considered as relevant experience, the FCA has amended the rules to clarify that it may consider modifying, or dispensing with, this requirement in accordance with its general power to do so (under LR 1.2.1R). In particular, the FCA notes in CP 14/21 that it may use this power to consider experience gained in aborted transactions when determining a sponsor's competence, but indicates that transactions would need to have progressed to a sufficiently advanced stage that they would have resulted in a sponsor declaration had they been completed. Given the level of market activity in recent years, the FCA anticipates that it will be rare for it to have to modify or dispense with the requirement to provide a specified sponsor declaration.
- Competency sets but no competence framework. The FCA is proceeding with its proposal, to require sponsors to comply with its competency sets (subject to some minor changes), given that the proposals received a 'high level of support' from respondents. It will not, however, be proceeding with the requirement for sponsors to embed a 'competence framework' containing the required competency sets into their systems and controls, in order that they can assess the competence of their employees. Concerns were raised by respondents that implementing a competence framework would impose a considerable time and costs burden on sponsors. Consequently, the FCA has deleted the concept of a competence framework. Instead, the FCA is requiring sponsors to have effective systems and controls for compliance with each of the competency requirements, so that sponsors are given sufficient flexibility to tailor their approach to the competency requirements which are best suited to their needs.
- Annual notification. Some concerns were raised by sponsors regarding the record keeping requirements for the purpose of demonstrating their ongoing compliance with eligibility requirements. In order to assist sponsors with their record keeping obligations, the Annual Notification form has been expanded for sponsors to record their compliance with each competency set, detailing the relevant skills, knowledge and experience within the firm. The new Annual Notification form will be available on the UKLA website from 1 February 2015, to coincide with the new rules coming into effect. Similar changes have been made to the New Applicant form.
- Systems and controls. The FCA is proceeding with its proposal to make the 'systems and controls' provision in LR 8.6.12G into a rule, given the importance of a sponsor's systems and controls to the effective performance of sponsor services.
- Key contacts. The FCA has retained the requirement for sponsors to notify the FCA of its key contact for a particular matter but clarifies that it does not expect that all communications will have to be made through a key contact. Rather, the key contact should conduct all discussions of technical or material matters in connection with a sponsor service with the FCA. Additionally, the FCA has removed the requirement for a key contact to be proficient in its procedural requirements and processes, recognising that this knowledge may be held elsewhere in the sponsor service team. The rules have also been amended in the context of joint sponsor arrangements to clarify that each sponsor is responsible for providing details of its key contact.
- Limitation/restriction on approval. The FCA is proceeding with its proposal to allow sponsors to apply for a limitation or restriction on their approval, if they wish to provide sponsor services to premium listed investment companies. Consequently, a new applicant applying for an approval which is restricted to providing sponsor services to premium listed investment companies must comply with the four competency sets in section B of the Technical Note 'Sponsors Guidance on the competence requirements set out under LR 8.6.7R(2)(b)'.
- Procedural and Technical Notes. As a result of deleting the concept of a competence framework from the new rules, the FCA is consulting on a revised Technical Note 'Sponsors Guidance on the competence requirements set out under LR 8.6.7R(2)(b)'. Additionally, the FCA has redrafted a procedural note which was under consultation, and now refers to it as a Technical Note entitled 'Sponsors: Practical implications of competence requirements for sponsors and applicants'.
- Other changes to the Listing Rules. The FCA proposed some other minor changes to the Listing Rules in CP 14/2. As respondents were generally in favour, the proposals will proceed and will come into force on 1 October 2014. The proposals include an amendment to the definition of a class 1 circular so that it covers circulars required in connection with transactions that must comply with class 1 transaction requirements. This captures reverse takeovers where class 1 requirements are applied. Additionally, the FCA had consulted on extending the current requirement for premium listed companies to appoint a sponsor when they submit a class 1 circular to the FCA to also applying where any supplementary circular is to be submitted to the FCA. Since the publication of CP 14/2, the FCA has consulted on narrowing the scope of the UKLA's vetting of circulars in its CP 14/18 Quarterly Consultation paper No.6. Consequently, the FCA has stated that it will not make any amendments to the rules in relation to supplementary circulars until the outcome of the Quarterly Consultation.
- Changes to the Prospectus Rules. The FCA will proceed with its proposal to introduce new Prospectus Rules which impose separate obligations on an applicant to submit a compliant and factually accurate prospectus but has relaxed the requirement so that an applicant must take 'all reasonable care' to ensure that any prospectus contains the required information.
What are the next steps?
The final rules are effective from 1 October 2014, except those contained in LR 8, LR 11 and the definitions which will become effective on 1 February 2015. The consultation on the Technical Notes on sponsor competence will close on 7 November 2014. The FCA expects to have the final Technical Notes published on the UKLA Knowledge Base on 1 February 2015.
FCA hears views of sponsors
Since the CP 14/02 consultation, the FCA has met with various stakeholders to ensure that their views are considered before finalising the new rules. The new rules do appear to address some of the concerns which had been expressed. Sponsors should welcome the deletion of the concept of a competence framework so that they are free to comply with the competency requirements using their own established systems and controls in the most cost-effective manner. Helpfully, the FCA has also clarified the role of the key contacts at sponsor firms, recognising that it is not necessary for them to be proficient in its procedures and processes, given that those contacts will be responsible for holding technical and material discussions with the FCA. Finally, it should be reassuring for sponsors and sponsor applicants to note that deal experience on transactions which have been aborted at a late stage may be taken into account by the FCA when considering sponsor competence. Aborted transactions may still occur in a buoyant market and the level of experience in aborted yet complex transactions should not be discounted.