FCA issues third largest fine to date for listing violations
The Financial Conduct Authority (FCA) has fined Asia Resource Minerals plc (ARM) £4,651,200 for breaches of:
- Listing Principle 2 - for failing to have in place adequate systems and controls to comply with its obligations as a listed company;
- Listing Rule 11.1.10R - for failing to identify related party transactions valued at approximately £8 million;
- Listing Rule 8.2.3R (2) - for failing to obtain guidance from a sponsor to assess the application of the relevant rules; and
- Disclosure and Transparency Rule 4.1.3R - for failing to publish an annual financial report within four months of the financial year-end.
Following an internal review, ARM identified three related party transactions involving its subsidiary, PT Berau Coal Energy TbK. These were transactions with companies in which the directors of the subsidiary also held positions, both on the boards and in senior management. It also became apparent that the subsidiary's balance sheet suffered from various financial irregularities, unaccounted expenses, and unverified items and that ARM's annual financial report for the year ending 31 December 2012 would not be published on time, in order to rectify these irregularities. On 22 April 2013, as the company could not publish its annual financial report within four months of the financial year end as required by DTR 4.1.3R, ARM's shares were suspended, eventually returning to trading on 22 July 2013.
ARM admitted breaches of the listing rules relating to the related party transactions. The FCA held that, despite the fact that ARM did have a policy in place in respect of related party transactions and had established a Conflicts Committee whose duties included establishing a process tor dealing with them, this was inadequate. The company had failed:
- to take reasonable steps to manage the increased risk of related party transactions given its structure and its subsidiary director relationships;
- to establish adequate management oversights and control over its subsidiary in a timely manner, which may have contributed to its inability to identify related party transactions; and
- to implement its policy at both company and subsidiary level, for example by ensuring that members of the subsidiary's board and other employees attended training on the policy and ensuring that lists of related parties were accurately maintained.
The FCA commented that: "it is not sufficient to have well drafted policies and committees with detailed terms of reference at the holding company level if those policies are not effectively communicated, implemented and monitored at the subsidiary level where the group's underlying business is conducted".
The FCA noted that it had published a Final Notice in relation to Exillon Energy plc in April 2012, highlighting concerns in relation to related party transactions. Although ARM had taken some steps to improve its procedures in light of this notice, these were not taken sufficiently quickly and effectively. The FCA therefore considered this to be an aggravating factor, warranting an upward adjustment of 10%.
Although ARM co-operated fully with the investigation and took remedial steps, the FCA did not consider these to be mitigating factors. ARM agreed to settle at an early stage of the investigation qualifying for a 30% discount, without which the FCA would have imposed a financial penalty of £6,644,641.
This substantial fine demonstrates that the FCA will take strong action when listed companies fail to meet the required standards. Not only do companies need to ensure they have well drafted policies and procedures in place to ensure compliance with their obligations as a listed company, they need to ensure that these are properly implemented throughout the group. Guidance from the company's sponsor should be sought whenever there is any doubt about the application of the rules, and companies should be ready to learn the lessons from action taken against other companies for breaches of the requirements.