Summary

The FSA issued a Final Notice against Nestor Healthcare Group Limited (“Nestor”) on 14 February 2013 with a fine of £175,000 for failure to take all proper and reasonable steps to ensure that its persons discharging managerial responsibility (“PDMRs”) complied with the Model Code, which lays down minimal procedural standards.

Background

Between October 2006 and June 2010, Nestor was trading on the London Stock Exchange’s Main Market. Under the Listing Rules, Nestor was under an obligation to take all proper and reasonable steps to ensure compliance of its PDMRs with the FSA’s Model Code.

In October 2005, Nestor produced its own share dealing rules (which complied with the Model Rules) which were circulated to all relevant employees, including directors and PDMRs. All recipients of the rules signed an acknowledgement as to its content and it was also incorporated into their contracts of employment.

Since publishing its own share dealing rules, Nestor took no subsequent steps over the next five years to issue any reminders to its recipients, offer training, review the rules for compliance with the Model Code, or review the adequacy of processes in place for compliance with the Model Code. Instead, Nestor adopted an informal approach which largely relied on the experience and knowledge of its directors.

Decision

The FSA found seven occurrences of breach of the Model Code by Nestor between April 2008 and April 2010, largely relating to Nestor’s PDMRs not fully understanding their obligations under the Model Code. Whilst the FSA did not allege that any dealing occurred at Nestor with bad intent or due to inside information, it deemed Nestor’s informal approach largely inadequate.

David Lawton, the FSA’s director of markets commented that “The Model Code is fundamental in helping directors and senior executives protect themselves against suspicion of abusing inside information. Regardless of their size, the FSA expects listed companies to meet their obligations under the Listing Rules and Listing Principles and ensure that the Model Code is complied with at all times. Nestor’s own share dealing policy fell by the wayside, which the FSA regards as unacceptable. Listed companies should ensure their practices in this area are fit for purpose.”

On 14 February 2013, Nestor was fined a penalty of £175,000 (discounted by 30% from £250,000 due to an early settlement) by the FSA. A full text of the Final Notice issued by the FSA can be found here.

Conclusion

The decision by the FSA is a clear indication that despite firms complying with the rules on a basic level, this is not enough to ensure that the regulator’s standards are met. Firms must ensure that compliance is met at a managerial and board level, not just with a simple message, reliance on written policies or senior experience, but also continuous reminders and quality controls through regular process checks.

The fine also illustrates the importance of not simply following the Model Code as a “box ticking” exercise, but ensuring that it is followed in practice by up-to-date compliance reviews being carried out, as well as adequate and frequent training for all employees. Even if the FSA does not find any instances of market abuse, a lax or outdated approach to compliance with relevant regulation is sufficient for enforcement action by the FSA.

This decision by the FSA is not only relevant to listed companies, it also acts as a wider message to the management of FSA regulated companies to ensure that systems and controls adequately comply with regulations and protect against potential financial crime.