Sponsor competence review under Listing Rules

The Financial Conduct Authority (FCA) published a consultation paper relating to proposed changes to the definition of "competence" under the Listing Rules in the context of sponsor approval.

Market reCap February 2014 edition 

• Primary Market Bulletin No.7
• Sponsor competence review under Listing Rules
• New controls on controlling shareholders
• AIM Notice 38
• Takeover Panel Practice Statement No 27
• ESMA statement
• Success fees
• Service of English legal proceedings on overseas directors

 

On 30 January 2013, the Financial Conduct Authority (FCA) published a consultation paper relating to proposed changes to the definition of "competence" under the Listing Rules in the context of sponsor approval.  The proposals aim to increase the transparency of the sponsor regime, reflect the changes to the FCA's statutory powers and enable appropriate sanctions.

Under the proposals, sponsors will be required to demonstrate that they have recent experience of providing sponsor services, generally by submission of sponsor declarations every three years.  For new applicants, the FCA would look through the applicant firm to the experience of its employees.

Sponsors will be expected to staff sponsor functions with sufficient employees who meet key competencies, which are to be assessed by reference to a competence framework to be adopted by the sponsor.  The FCA has proposed that the competence framework be required to contain, as a minimum, five proposed "competency sets".  Sponsors will therefore be required to:

• demonstrate technical knowledge of the regulatory requirements triggered when providing sponsor services to a premium listed issuer or an applicant for premium listing.  Sponsors will be expected to demonstrate a working knowledge of the Listing Rules, Prospectus Rules, Disclosure Rules and Transparency Rules and any guidance (including guidance from the European Securities and Markets Authority); have an understanding of the wider UK regulatory framework; and keep up to date with market commentary and practice;
• be proficient in FCA procedural requirements and processes;
• undertake appropriate due diligence in order to come to a reasonable opinion on relevant matters after having made due and careful enquiry (under LR 8.4) and comply with sponsors' obligations under LR 8.3 to act with due care and skill, ensure directors understand their obligations and identify and manage potential or perceived conflicts.  Sponsors are therefore required to ensure the scope of diligence is appropriate, review due diligence reports and challenge findings;
• be mindful of the responsibilities and obligations of a sponsor under LR 8 in general when conducting sponsor services and the obligations of issuers when advising clients.  This would for example include an understanding of what the exercise of due care and skill means in relation to the provision of a sponsor service, how to identify, assess and manage conflicts of interest, when the "whistle blowing" provision in LR 8.3.5AR will apply, what constitutes a sponsor service, the point at which a sponsor service is triggered and when the rules in LR 8 will apply.  The FCA is conscious that, individually, employees carrying out sponsor services may not be held to be competent, as a sponsor will often rely on its compliance and/or legal teams on a day-to-day basis as well external advisers on a transactional basis.  Therefore the FCA will asses the sponsor firm as a whole; and
• if relevant to the sponsor service, demonstrate an understanding of the industry sector in which their client operates.  By making this a separate competency set, the FCA considers that sponsors can take into account differing staffing models, for instance when considering the competency of industry or sector teams.

To assist sponsors in complying with the proposed competency requirements, the FCA has included at Annex 1 of the consultation paper a technical note giving examples of competence frameworks based on the five "competency sets".

The FCA is also proposing minimum standards of knowledge and experience which will apply to the named points of contact between a sponsor and the UKLA.  As well as being familiar with the specific transaction, the key contact must be technically and procedurally competent and understand a sponsor's regulatory obligations under LR 8.  The key contact will also be required to be authorised to make representations to the UKLA for and on behalf of the sponsor.  It is proposed that all sponsors have a minimum of at least two key contacts.

New sponsor applicants will be able to apply for a limitation or restriction on their approval, in order to facilitate applications from sponsors that only wish to provide sponsor services for premium listed investment companies.

In addition to sponsor competence, the FCA has also considered the issues arising in more complex or larger transactions where joint sponsors are appointed.  It has recognised that, whilst there are benefits to having joint sponsor arrangements, there are also a number of potential issues.  These include delays in transactions, potential additional costs, lack of certainty as to how the joint sponsor arrangement will work and reluctance, on the part of the largest, most active sponsors to act as joint sponsors, other than in the primary contact role.  The FCA is consulting on joint sponsor appointments and whether such arrangements should be permitted to continue.  Any proposals following this consultation will be subject to further full consultation.

Consultation on these proposals closes on 30 April 2014.

 

Caroline Nicholls is an Associate in the Corporate Group of Field Fisher Waterhouse LLP in London.