Compliance think twice: Sponsor fined £231,000 for failing to tell part of the FCA that key individuals had left

Written on 12 Jan 2015

The
Financial Conduct Authority has fined Execution Noble (EN) for breaches of the
Listing Rules in relation to its sponsor duties.  This is the market regulator’s first exercise
of the power it acquired in 2013 to fine sponsors.

Execution Noble as a sponsor firm – and its interactions with the FCA before the fine

EN is a well-established sponsor firm, although it performed only two document-driven sponsor services between February 2010 and June 2013. As a result of this low level of sponsor activity, the UK Listing Authority (a division of the FCA) applied what it describes as a “greater level of scrutiny” to EN’s activities between September 2011 and June 2013.

That scrutiny from the FCA reverted to a normal supervisory relationship in June 2013. This was as a consequence of EN working on a sponsor transaction in June 2013, and of the UKLA being reassured as to EN’s competency as a sponsor – as the firm confirmed that its sponsor team was led by three key individuals.

However, between June and August 2013 those three key individuals resigned. By October 2013, a further seven individuals who were part of the sponsor team resigned.

The UKLA discovered these departures through “routine monitoring of press coverage”. The UKLA requested that EN cease sponsor activities; EN then itself requested that it be suspended as a sponsor.

The fine

EN had failed to tell the UKLA that two-thirds of its sponsor team – including the individuals responsible for leading and executing sponsor services – had left.  So the FCA fined EN £231,000 for breach of the sponsor rules contained in Listing Rule 8.  The fine would have been £330,000 had it not been for EN agreeing to settle at an early stage of the FCA’s investigation.

The specific rules breached were LR 8.3.5R and LR 8.7.8R (1)(a). As the FCA says in its Final Notice:

LR 8.3.5R (1) requires (among other things) that a sponsor is open and co-operative with the Authority at all times, and this includes notification to the UKLA of any matters which in a firm’s reasonable opinion may impact upon its ongoing obligation to meet the criteria for approval as a sponsor. In view of the number and seniority of the individuals that left the Firm (which included those responsible for leading and executing sponsor services) during the Relevant Period, the Firm should have notified the UKLA of the departures. An open and co-operative relationship is crucial to the UKLA’s overall ability to supervise sponsors. Practically, this includes a positive duty to disclose issues to the UKLA which may impact on a sponsor’s approval.

The FCA regarded EN’s failure to notify the UKLA of the departures as particularly serious due to the scrutiny the firm had been under from the regulator between 2011 and June 2013:

As such, the Firm had heightened awareness of the UKLA’s concerns about its level of activity. It had also been a sponsor for a significant period of time and should have been well aware of the ongoing nature of its obligations under LR 8.

Non-notification meant that the UKLA was unable to assess whether EN continued to satisfy the criteria for approval, including the requirement to remain competent to provide sponsor services at all times.

A slightly peculiar aspect of the affair: EN had told another part of the FCA

EN had in fact told the FCA of the staff departures. It has done so by separately notifying the FCA – as required by the FCA’s Handbook – that approved persons had left the firm, and that these people included the key individuals. The necessary amendments were made to the FCA’s Financial Services Register “prior to the UKLA’s discovery of the departures” (in the FCA’s words).

The FCA imposed the fine anyway. Its justification for doing so is the “independent” nature of the sponsor regime. The FCA pointed specifically to guidance published by the UKLA in July 2013, emphasising that relevant Listing Rule 8 notifications must be made to the UKLA, rather than to other departments of the FCA. From the Final Notice:

Guidance published by the UKLA in July 2013, amongst other things, reminded sponsors of the need to notify the UKLA of significant personnel changes and specifically notes that notification to other FCA personnel is not adequate to discharge a sponsor’s duties in respect of LR 8.7.

Sponsor compliance should think twice

So the case not only illustrates the importance of the sponsor regime, but also the strict interpretation that the FCA has on this occasion given its own guidance.  For compliance teams at sponsor firms, it means thinking twice when dealing with matters such as these: there may be two separate notifications required, to two separate divisions of the FCA.

Sources: FCA press release, FCA Final Notice.