On March 30, 2017 the Financial Conduct Authority (FCA) published its Primary Market Bulletin No. 17. The Bulletin covers several different topics.
Feedback on the FCA’s call for views on sponsor conflicts
The FCA notes that it has recently completed discussions with stakeholders focused on the rules and guidance on sponsor conflicts of interest in Chapter 8 of the Listing Rules. In 2014 the FCA published a Call for Views (CFV) in CP14/21 ‘Feedback and Policy Statement on CP14/02, consultation on joint sponsors and call for views on sponsor conflicts’. In this Bulletin the FCA highlights the key themes which emerged from the responses to the CFV and its discussions with stakeholders more generally, and sets out its proposed response to them. The FCA is consulting on a new guidance note – Technical Note (TN) 701.3 – which will replace the existing guidance on sponsor conflicts in TN 701.2.
FCA’s proposed new guidance on sponsor conflicts
The FCA is proposing to provide guidance in TN 701.3 which modifies and updates existing guidance in TN 701.2. Its proposals are summarised below:
- Perceived conflicts – the ‘perception test’ and the reasonable market user – In order to introduce a level of objectivity to the assessment of perceived conflicts, the FCA proposes that sponsors should assess the circumstances from the point of view of a theoretical reasonable market user; a sponsor should consider whether, irrespective of any arrangements it may have in place to manage the conflict, a perception remains that it may not be able to perform its functions properly.
- Identifying conflicts – factors to take into account when a transaction involves the provision of finance – As a basic premise, the FCA accepts that there can be an alignment of interest between the provision of sponsor services and the provision of non-sponsor services (for example, underwriting or financing) to an issuer. However, the FCA considers that the interests of a firm acting as lender and sponsor may be misaligned and conflicts that could adversely affect the ability of a sponsor to perform its functions properly, or market confidence in sponsors, are more likely to arise in a lending scenario. TN 701.3 sets out that, in relation to the provision of finance by a sponsor group, the FCA expects the firm to assess all the circumstances when determining whether a conflict exists and whether it can manage the conflict in a way that does not adversely affect either the sponsor’s ability to perform its functions properly or market confidence in sponsors. In response to sponsors’ request for clarity in relation to ‘materiality’ of loan size, proposed TN 701.3 sets out that, where a sponsor or sponsor’s group is proposing to make a loan to an issuer in connection with a sponsor service (for example, in relation to a merger or acquisition transaction) which is of strategic importance to the sponsor group due to its size, a conflict (or perceived conflict) can arise. Therefore, where the amount of a loan (prior to syndication) is equal to or in excess of 0.5% of the sponsor group’s total assets by reference to its last published consolidated accounts, the sponsor should contact the FCA prior to accepting the sponsor appointment.
- Systems and controls/organisational and administrative arrangements – Proposed TN 701.3 acknowledges that contact between the sponsor team and another part of the sponsor group (e.g. the area of the sponsor or sponsor’s group responsible for a loan) may be appropriate in circumstances where the sponsor team needs factual information about the existence and type of finance being provided by the sponsor’s group. When this is the case, such contact should be carefully managed.
- When to contact the FCA – Sponsors (and their representatives) who responded to the CFV requested more guidance on the circumstances in which they should contact the FCA to discuss conflicts of interest and what to expect when such contact is made. TN 701.2 currently sets out that where a sponsor is reasonably satisfied, either that no conflict exists or that it can manage the conflict, the FCA does not ordinarily expect it to contact the FCA. This position in proposed TN 701.3, but a number of exceptional circumstances are set out where the FCA would ask that a sponsor contact it at the earliest opportunity. These circumstances include where the size of a proposed loan meets the new metric outlined above and where, in the context of a related party transaction, a sponsor firm proposes to provide a fair and reasonable opinion and is also acting in another capacity, such as providing acquisition finance, for the related party or other party to the transaction.
UK Financial Reporting Standards (FRS) 102
FRS 102, which took effect in 2015, exempts investment funds that meet certain conditions from preparing statements of cash flows. However, Annex 1 Part 20.1 of the Prospectus Directive requires that audited financial information in a prospectus prepared according to national accounting standards must include a cash flow statement. The FCA is considering the interaction of these requirements. In the meantime, should specific guidance on this matter be required, a written request for guidance should be submitted detailing the facts of the particular case, in accordance with Chapter 9 of the Supervision manual (SUP).
New TR-1 form
On October 22, 2015, the European Securities and Markets Authority (ESMA) published a new standard form for the notification of major holdings. On implementation of the Transparency Directive Amending Directive (2013/50/EU) (TDAD), Policy Statement PS15/26 (Implementation of the Transparency Directive Amending Directive (2013/50/EU) and other Disclosure Rule and Transparency Rule changes) referenced this new standard form and the FCA advised it would implement this and discontinue use of the current TR-1 form in the future. The FCA now proposes that the new TR-1 form will come into force on June 30, 2017 which will give vote holders time to make any necessary amendments to their current notification procedures.
Member States have discretion to make changes to the ESMA standard notification form as they see appropriate. In the UK, the FCA has decided to make some amendments to the content of the form as follows:
- include a new box to identify non-UK issuers;
- include a box to indicate the date on which issuer was notified (to reflect the current TR-1 form requirement); and
- include an email address to which the form and annex should be sent to the FCA (firstname.lastname@example.org).
The FCA encourages issuers to send the TR-1 form to it in Microsoft Word format, as opposed to readable PDF.
Legal Entity Identifiers (LEIs)
In Chapter 6 of Quarterly Consultation Paper No. 15 (QCP) published in December 2016, the FCA consulted on proposed changes to the Disclosure Guidance and Transparency Rules sourcebook following the adoption of the RTS by the European Commission and its publication in the Official Journal. Those proposed changes consisted of adding new rules in DTR 6.2 under the heading ‘Filing of information with FCA’ to require issuers to supply a legal entity identifier (LEI) and classify regulated information according to the RTS Annex when they file regulated information with the FCA.
The consultation period for this chapter of the QCP is now closed and the FCA is currently analysing the feedback received with the aim of publishing feedback in a Handbook Notice shortly. However, the FCA encourages issuers to consider what arrangements they will need to have in place so that, if and when the rule comes into force, they are able to comply, and even though there is no obligation for issuers to provide LEIs or classify regulated information yet, the FCA encourages issuers to do so as it will ensure that regulated information which they file will be searchable through the European electronic access point when it becomes operational.
Consultation feedback and changes to the Knowledge Base
The FCA is consulting on the addition of a new procedural note on the procedural mechanics of replacing a debt issuer on the Official List through a substitution and on amendments to the following two existing technical notes:
- Sponsors: conflicts of interest (UKLA/TN/701.3); and
- Shareholder obligations (UKLA/TN/543.3).
Confirmed changes to the Knowledge Base include the following:
New technical notes
- Reverse takeover and uncapped consideration (UKLA/TN/314.1);
- Financial information on guarantors in debt prospectuses and requests for omission (UKLA/TN/634.1);
- Shareholder votes in relation to hypothetical transactions (UKLA/TN/312.1);
- Removal from the Official List of listed equity shares of individual funds (individual sub-funds) of Open-ended Investment Companies (OEICs) (UKLA/TN/424.1);
- Open-ended investment companies and transfer restrictions (UKLA/TN/425.1);
- Sponsors: Application of principle to deal with the FCA in an open and co-operative manner (UKLA/TN/713.1); and
- Sponsors: Record Keeping Requirements (UKLA/TN/717.1).
Amended technical and procedural notes
- Eligibility process (UKLA/PN/901.3);
- Listing securities via final terms (UKLA/PN/902.2);
- Review and approval of documents (UKLA/PN/903.3);
- Public offer prospectus – drafting and approval (UKLA/PN/904.3);
- Passporting (UKLA/PN/905.2);
- Additional powers to supervise sponsors (UKLA/PN/910.2);
- Compliance with the Listing Principles and Premium Listing Principles (UKLA/TN/203.3);
- Reverse takeovers (UKLA/TN/306.3);
- Related party transactions - Modified requirements for smaller related party transactions (UKLA/TN/308.3);
- Preliminary statement of annual results (UKLA/TN/502.2);
- Assessing and handling inside information (UKLA/TN/521.3);
- Disclosure of lock-up agreements (UKLA/TN/522.2);
- Final Terms (UKLA/TN/629.3);
- Significant change statements (UKLA/TN/628.2);
- Sponsor's role on working capital confirmations (UKLA/TN/704.3); and
- Additional powers to supervise and discipline sponsors (UKLA/TN/712.2).
Deleted technical notes
- Share buyback programmes (UKLA/TN/201.1);
- Close periods (UKLA/TN/505.1); and
- Transactions by persons discharging managerial responsibilities and their connected persons (UKLA/TN/540.2).
(FCA, Primary Market Bulletin No. 17, 30.03.17)