UK: FCA publishes some final changes (and further proposals for change) to the Sponsor Regime

On 26 September, the FCA published its response to its January consultation paper in relation to sponsor competence (CP14/2), together with a further consultation on joint sponsors and a call for views on sponsor conflicts.  A summary of the paper is set out below.

1. Sponsor competence

The FCA is taking forward, with some amendments, the three main proposals in CP14/2 in relation to sponsor competence:

  • introducing a requirement that a sponsor must have sufficient prior experience of carrying out sponsor services in order to remain competent to act as sponsor – to demonstrate this, a sponsor must have produced a sponsor declaration within the last three years;
  • requiring sponsors to ensure that they are appropriately resourced, with a sufficient number of suitably qualified employees who meet the FCA’s “key competencies”, however the proposed “competency framework” will not be taken forward; and
  • introducing the concept of “key contacts” to liaise with the FCA (with some modifications).

The final rules in relation to sponsor competence will be effective from 1 February 2015.  The accompanying Technical and Procedural Notes originally consulted on in CP14/2 have been amended to reflect the FCA’s revised approach and are being consulted on as part of CP14/21.  Responses to this consultation are sought by 7 November 2014.

Sponsor eligibility

The FCA is implementing its proposal that a sponsor must produce a sponsor declaration within the last three years so as to be competent for the purposes of LR 8.  In response to concerns raised by some respondents that this test discounts other relevant experience, for example aborted deals and the provision of other sponsor services not requiring a sponsor declaration to be submitted, the FCA is amending the rules to highlight its ability to modify or dispense with this requirement in exceptional circumstances.  The FCA believes that most sponsors should be able to meet the three-year requirement even during a downturn in market activity.  For new applicants, the test adopts a “look-through” approach to staff who meet the three-year test.

Competency sets and competency framework

The five “competency sets” for sponsors proposed by the FCA in CP14/2 will be introduced; these involve an understanding of:

  • the rules, guidance and ESMA publications directly relevant to sponsor services;
  • the procedural requirements and processes of the FCA;
  • the due diligence required in order to provide sponsor services;
  • the responsibilities and obligations of a sponsor set out in LR 8; and
  • specialist industry sectors (if relevant to the sponsor service it provides).

In response to feedback, the FCA has clarified that the “knowledge of specialist industry sectors” competency is intended to ensure that sponsors have access to staff who are knowledgeable about the sectors in which their clients operate so that they are, for example, able to comment on the appropriateness of disclosures in a prospectus or circular.  The requirement is not intended to restrict or limit a sponsor’s approval to perform sponsor services.

The FCA has amended its approach to the “competency framework” proposed in CP14/2 in light of concerns expressed by respondents who suggested that the proposed approach was overly restrictive and burdensome.  The FCA will now require sponsors to put in place systems and controls designed to comply with the five competency sets.  The FCA says that this revised approach achieves the same policy outcome but in a way which will allow sponsors to tailor their approach to compliance.  The FCA also confirms that it was not its intention to require each employee to meet each of the five competency sets, and it was a firm’s sponsor function as a whole that should meet the competency requirements.  As a result of this change in approach, the draft Technical Note appended to CP14/2 has been rewritten and now contains more general guidance as to the FCA’s expectations in relation to sponsor competence.

The FCA notes that responses to CP14/2 suggest that sponsors are unclear on its expectations in relation to record keeping in relation to eligibility requirements.  As a result, the FCA has amended the Annual Notification Form so as to give sponsors the option to record their compliance with their eligibility record keeping obligations there should they wish.  The current form should be used for the 2015 notification and the new form will be available for use for 2016 onwards.

Staff who are key contacts

The concept of “key contacts” proposed in CP14/2 will be introduced with some modifications.  The FCA has clarified that communications discussing technical or material matters in connection with a sponsor service must be made through a key contact.  It has also revised its original proposal such that it expects the key contact to be competent in the technical knowledge of the rules and understanding of LR 8 competency sets, but not the proficiency in FCA procedures competency set as the FCA recognises that this knowledge may sit elsewhere in the sponsor firm (e.g. the legal and compliance function).  The draft Procedural Note provides additional practical guidance on communications with the FCA.

The FCA confirms that a sponsor should have a minimum of two key contacts, but it expects that active sponsors will require considerably more.

In CP14/2, the FCA said that it would review the current nominated caller regime if its key contacts proposals were introduced; this is however not discussed in CP14/21.

 2. Consultation on Joint Sponsors

 The FCA says that the responses it received to the January consultation were overwhelmingly in favour of retaining the joint sponsor regime.

Following this feedback, the FCA proposes to amend the rules so as to allow all joint sponsors to participate directly in non-administrative communications with the FCA.  The FCA believes that this addresses the concern highlighted by some respondents that sponsors are sometimes reluctant to be appointed a joint sponsor if they cannot be the primary point of contact with the FCA.  The FCA considers this approach to be preferable to the introduction of a formal concept of “lead” sponsor and “junior” sponsor.  The FCA also proposes to amend the rules so as to provide guidance that joint sponsors are expected to co-operate with each other and establish arrangements for the sharing of information in relation to the sponsor service.

A new technical note is proposed which would provide guidance on communications with the FCA where joint sponsors have been appointed as the FCA recognises that communications with joint sponsors would necessarily be more difficult for it to manage than the current system.

The consultation period on these proposals is open until 30 December 2014 and the FCA expects to publish its feedback in Q2 2015.

The prohibition on the delegation of sponsor duties proposed in CP14/2 will come into effect on 1 February 2015.

3. Call for views on sponsor conflicts of interest

As respondents to CP14/2 raised issues about whether the current approach to conflicts appropriately protects the interests of investors, the FCA is inviting views on the appropriateness and effectiveness of the current rules and guidance on sponsor conflicts of interest.  The FCA lists some issues that could be considered as part of this review:

  • requiring disclosure of transaction fees by sponsors/integrated banks;
  • requiring disclosure of existing relationships the sponsor/integrated bank has with the issuer and how any conflicts are managed;
  • providing greater detail in the rules on the FCA’s expectations when sponsors assess their ability to act as sponsor; and
  • providing additional guidance on LR8.3.8G(1) which requires sponsors to take into account the perception in the market that a sponsor may be unable to perform its functions.

The call for views closes on 30 December 2014, and subject to responses, the FCA will issue a consultation paper later in 2015.

Firms will be aware that conflicts of interest are also currently the subject of active regulatory consideration in the context of the Wholesale Sector Competition Review (inputs due 9 October), in the FCA’s thematic work, and potentially also in the Fair and Effective Markets Review.

4. Other changes

The paper also confirms that the following miscellaneous changes to the LPDT rules proposed in CP14/2 will come into force on 1 October:

  • Adding new Prospectus Rules (PR 3.1.2AR and 3.1.2BR) making it an explicit requirement that the applicant must take reasonable care to ensure that a prospectus: (i) adheres to the necessary contents requirements; and (ii) is to the best of its knowledge, in accordance with the facts and contains no omissions likely to affect its import. The FCA says this will bring it in line with other EU Member States and clarifies its ability to take enforcement action for defective prospectuses; and
  • Removing the requirement for a premium listed issuer to produce a 28 day circular in the context of a hostile takeover bid which required the issue of a class 1 circular (currently required where the issuer is unable to provide an enlarged working capital statement at the time of publication of the class 1 circular).

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