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FCA final notice for breaches by sponsor of Listing Rule 8

Print publication

21/10/2016

The rules underlying the sponsor regime are set out in chapter 8 of the Listing Rules (LR 8).  A sponsor is obliged by LR 8.6.6R, at all times, to comply with the criteria set out in LR 8.6.5.R.  LR 8.6.5R(3) stipulates that the FCA will approve a person as a sponsor only if it is satisfied that it “has appropriate systems and controls in place to ensure that it can carry out its role as a sponsor in accordance with this chapter”.

The “systems and controls” are then given some colour by LR 8.6.12R. For example, LR 8.6.12R(1) requires “clear and effective reporting lines” (including “clear and effective management responsibilities”) while LR 8.6.12R(2) requires “effective systems and controls for the appropriate supervision of employees engaged in the provision of sponsor services”.  LR8.6.12R(6) requires the sponsor to maintain “effective systems and controls to ensure that it has appropriate staffing arrangements for the performance of the sponsor services with due care and skill”.

In a recent case, the Financial Conduct Authority (FCA) found a number of failings by a sponsor:

  • the sponsor had failed to have appropriate systems and controls in place across its sponsor activities. This was a breach of LR 8.6.6.R.  For the majority of the relevant period, the sponsor had had no overarching structure in place for its sponsor services, with no single person, group or committee having been designated with overall responsibility for oversight of sponsor services.  As a consequence, deficiencies in the sponsor’s systems and controls were not addressed, increasing the risk that a serious issue could arise on client mandates
  • there was no obligation on deal teams to report at key milestones, nor were specific procedures in place regarding the escalation of key issues during client mandates. The use of regulatory checklists was not mandatory within the company
  • on one particular transaction, involving the attempted transfer of a particular client from AIM to a premium listing, the sponsor had failed to act as sponsor with the level of diligence and professional care expected by the FCA from sponsors. This was a breach of LR 8.3.3R, which states that “A sponsor must in relation to a sponsor service act with due care and skill”.  In particular, the sponsor had failed to identify that the client in question, being a highly acquisitive and fast-growing company, created a potential risk with regard to satisfying the eligibility requirements for a premium listing.  Additionally, the sponsor had failed to carry out the necessary due diligence to support its submissions to the FCA regarding the client’s eligibility.  Further, it had failed to address the considerable comments that the FCA had made regarding the client’s eligibility for a premium listing
  • the sponsor had failed to keep the timetable for the premium listing under review, and therefore failed to consider whether it continued to be realistic and had also failed to consider the impact of negative claims contained in a research report and to conduct further enquiries into the issues raised on the back of that report.

The size of the fine reflected:

  • that the sponsor had represented to the FCA that the client was eligible for a premium listing without having done the due diligence necessary to support this assertion. The premium listing did not go ahead but, had it done so, there could have been a situation in which an ineligible company had obtained a premium listing, creating a potential risk to investors
  • the serious and systemic weaknesses in the sponsor’s systems and controls in respect of its sponsor services
  • that the sponsor had not acted deliberately and recklessly in respect of its sponsor service. (It should also be noted that two of its business areas that provided sponsor services had practices that were more appropriate to meet the risks entailed by the provision of sponsor services.)
  • that the sponsor had dedicated significant resource to improving its systems and controls since the end of the transaction in question
  • that the sponsor agreed to settle at an early stage of the investigation.

WM comment

The case is a reminder of the importance of sponsors regularly reviewing the effectiveness of their internal systems and controls to ensure continued compliance with their obligations under the Listing Rules.

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