Sponsor competence, conflicts and joint sponsors - FCA statement on CP14/02


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Summary: The FCA has published its key sponsor competence requirements:- at least one sponsor declaration in the last three years;- systems and controls in place to ensure that the five ‘competency sets’ are met; and- the appointment of one key contact for each live sponsor service.The FCA is also taking this opportunity to invite views on related technical notes on competency sets, managing sponsor conflicts and its proposals relating to joint sponsors.

The FCA has published its feedback and policy statement on sponsor competence. Following consultation, the key sponsor competence requirements are:

  • at least one sponsor declaration in the last three years;
  • systems and controls in place that are designed to ensure that the five ‘competency sets’ are met; and
  • the appointment of one key contact for each live sponsor service.

The changes generally come into force on 1 February 2015, except for the more minor changes to LR5 and LR13 regarding reverse takeovers which will have effect from 1 October 2014. The FCA is also taking this opportunity to invite views on managing sponsor conflicts and to set out proposals relating to joint sponsors.

One sponsor declaration in the last three years

This threshold requirement is as originally proposed but guidance has now been included within LR8 to highlight the FCA’s ability to modify it (by using the existing modification rule – LR1.2.1R). So, exceptionally, an aborted transaction could be taken into account. However, given the level of market activity even in challenging times, the FCA considers that this is unlikely to be appropriate. For new applicants, the FCA is proceeding with its proposed ‘look-through’ approach to the experience of the sponsor’s employees. The rules have been amended to clarify that this is the case (LR8.6.7AG) – and that the same approach is available to existing sponsors looking to recruit in order to satisfy the threshold requirement.

Systems and controls to ensure the ‘competency sets’ are met

A high level of support was received for the five competency sets: understanding the rules and guidance relevant to sponsor services; the procedural requirements and processes of the FCA; the due diligence process required in relation to the sponsor services; responsibilities of the sponsor; and specialist industry sector understanding. However, there were significant concerns regarding the proposed competence framework. As a result, the FCA has amended its approach to require instead that systems and controls be in place that are designed to ensure that the ‘competency sets’ are met. At the same, the annual notification form has been expanded to allow sponsors to record compliance by reference to each competency set; the guidance in relation to systems and controls in LR8.6.12G has been converted into a rule; and the FCA invites comments on its revised note, ‘Sponsors: Guidance on the competence requirements set out under LR8.6.7R(2)’ by 7 November 2014.

Key contacts

Despite support for the proposal, there were also a number of concerns – for example as to the required availability of the contact and the competencies required of them. Others wondered whether the proposal amounted to the re-introduction of the ‘suitably experienced employee’ regime - and the FCA has stressed that it is taking a different approach this time round. The central proposal remains: there must be just one key contact for each live sponsor service. However, in light of the feedback, it is acknowledged that a key contact may well need to involve other colleagues with requisite experience: the key contact need only have three of the competency sets – and proficiency in FCA procedural requirements is not required. Also, it is not expected that all communications with the sponsor will be with the key contact – although communications on material or technical matters must be. Overall, sponsors will need to assess how many key contacts are required in the light of their business model and pipeline of work.

Consultation on Sponsor conflicts

Although not part of the original consultation, the FCA is now taking the opportunity to invite views on the broad issue of sponsor conflicts. This follows feedback during the consultation and other discussions with stakeholders. It has highlighted a number of matters that could be considered, such as:

  • requiring sponsors/integrated banks to disclose their transaction fees – and also their relationships with the relevant issuer and their conflicts and how they are being managed; and
  • enhancing rules and guidance to provide greater detail on the analysis the FCA expects sponsors to undertake when assessing their ability to act (perhaps adopting the concept of ‘threats and safeguards’).

This consultation closes on 7 November 2014.

Consultation on Joint Sponsors

The FCA proposes to retain the joint sponsor regime – following overwhelming support for it. It is now consulting on changes to the Listing Rules and a new Technical Note. In particular, the FCA is keen to address issues arising out of the ‘lead sponsor’ role – and the fact that each sponsor remains fully responsible for compliance under LR8, even where they cannot be the primary contact with the FCA. Accordingly, the changes are designed to facilitate access to the FCA for all sponsors - and to ensure that appropriate arrangements are in place between joint sponsors to help them perform their role. This consultation closes on 30 December 2014.

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