FCA publishes Primary Market Bulletin 50 – Sponsor regime: FCA response to feedback

Overview

Alongside FCA Policy Statement 24/6, which includes the final form UK Listing Rules (UKLRs), the FCA has published PMB 50. Further information on the UKLRs can be found in our client update here.

PMB 50 focuses on the sponsor regime and contains a package of initial measures designed to address concerns voiced by the sponsor community during the FCA's Primary Markets Effectiveness Review and its ongoing engagement with the sponsor community, including in relation to:

• The sponsor’s role in coordinating a due diligence package in specialist areas;
• An imbalance between the FCA's expectations regarding record keeping and market practice; and
• The extent to which the sponsor role is understood by companies seeking to IPO.

PMB 48

PMB 50 builds on PMB 48, published in April 2024, in which the FCA launched its consultation on proposed changes to guidance in its Knowledge Base flowing from the listing regime reforms, including rules for sponsors. Amongst proposed amendments to a number of existing technical notes relating to the sponsor regime, in PMB 48 the FCA also sought feedback on a proposed new technical note on the sponsor's confirmation on a modified transfer of listing under the UKLRs – a process which applies to transfers from the transition category to the commercial companies category, as well as other scenarios. In addition, the FCA finalised three technical notes relating to sponsor competence following consultation in FCA Consultation Paper 23/31. Further information on FCA CP 23/31 can be found in our client update here.

PMB 50

Specialist due diligence

In PMB 50, the FCA proposes to introduce a new technical note – Responsibilities of a sponsor: specialist due diligence - to clarify its expectations of sponsors in relation to the work they undertake to support their assurances and confirmations to the FCA, particularly in areas of technical specialism. The FCA reiterates that, whilst it expects a sponsor to apply the listing rules, prospectus rules, disclosure requirements and transparency rules (as defined in the UKLRs) with skill and expertise in the specific context of an issuer's business and operations, it does not expect sponsors to be experts in every specialist discipline. In this context, the FCA highlights the breadth and evolution of its rules, which now include requirements relating to disclosure and transparency on environmental, social and governance matters. The FCA notes that it is increasingly seeing the involvement of other experts, including environment and climate reporting specialists.

The FCA expects sponsors to apply common sense judgement when determining the correct level of expertise and enquiry required to ensure the rules are applied appropriately and that assurances provided to the FCA by sponsors are reasonable and reliable. For the FCA, common sense in this regard translates as applying the judgement of a reasonable professional with skill and experience in corporate finance, after assessing information carefully, with curiosity and a sceptical mindset. The FCA goes on to provide some examples of relevant considerations for sponsors in ensuring due and careful enquiry in relation to the specialist or technical information they review in the course of their due diligence, including whether sufficient appropriate evidence has been obtained to support key technical statements in a prospectus and whether independent sources of evidence or assurance are required where it would not be appropriate to rely exclusively on management representations.

The FCA recognises the importance of drawing on subject matter expertise and experience, both from within the sponsor’s wider organisation and through the use of other third party experts where more in-depth technical expertise and/or independent reporting is required. In terms of third party reports, the FCA stresses that, whilst an expert report can provide a form of ‘back-to-back’ comfort, giving assurance on terms similar to those the sponsor is required to provide to the FCA, the sponsor cannot simply delegate its obligations as sponsor to a third party or rely on the assurances of an expert without due care and enquiry. Maintaining an adequate level of oversight, review and, where appropriate, challenge, of third party work is a recurrent theme for the FCA and was recently highlighted in PMB 46 in relation to third party work concerning TCFD-aligned disclosure systems and controls. Further, the FCA notes that a third party report is not necessarily required in all cases.

In the case where a sponsor relies on reporting by a third party expert, the FCA outlines some considerations that are relevant to determining whether the sponsor has formed a reasonable opinion after due and careful enquiry and whether the approach of the sponsor is consistent with the principle of due care and skill. These include: considering the capacity and capability of the expert; reviewing and approving the scope of the expert’s work to make sure it is sufficient for the sponsor’s purposes; reviewing and commenting on or challenging, where relevant, draft and final reports; discussing the expert’s report with the issuer’s board and ensuring that the board is in agreement with the assumptions and conclusions; and considering if any bring down process is necessary where there is a gap between the date of the expert’s report and the date of the sponsor's declaration.

In relation to the records the FCA expects sponsors to keep for third party reporting, the FCA notes that the nature and extent of the record keeping exercise will depend on the circumstances. The points listed above should be considered at a minimum and records kept accordingly – for example, copies of engagement letters, key correspondence with an expert or in relation to an expert’s work, discussions relating to the choice of expert and the scope of its work, draft and final reports and notes of meetings or calls where the sponsor has questioned or discussed the work of the expert. However, the sponsor will need to exercise its judgement in this regard – an overarching theme of the sponsor regime. In line with this, where a sponsor is satisfied with the scope of the expert’s work and receives draft and final reports reflecting the scope and not revealing matters requiring further discussion or interrogation, the FCA confirms that it is not necessary to record any challenge to the report; it is sufficient for a sponsor to make a brief contemporaneous note of these judgements and their basis. This echoes other recent FCA guidance, including PMB 46.

Record keeping

Record keeping requirements have been an ongoing focus area for sponsors. Unsurprisingly, therefore, this topic attracted a substantial amount of feedback and sponsors were consistent in their requests for additional guidance to alleviate some of the challenges created by the record keeping requirements. To ensure appropriate oversight, however, the FCA notes that it needs to be able to perform sponsor reviews - and through sponsor records, the FCA is provided with an insight into the work a sponsor carries out. There is therefore a balance to be struck between enabling the FCA to review a sponsor's actions and avoiding a disproportionate burden being imposed on sponsors.

The FCA has proposed updates to its existing technical note – Sponsors: Record keeping requirements - to provide further guidance on the practical application of its record keeping requirements. The new guidance, which is presented in a Q&A form, includes questions the FCA commonly receives from sponsors and difficulties sponsors are habitually confronted with in respect of record keeping, such as: Do we need to provide specially prepared and/or curated records for a FCA sponsor service review? Are there any common areas where sponsor records are incomplete or lacking sufficient detail? What level of detail is required in file notes or minutes of meetings? The FCA notes that some of the new information may assist sponsors in designing and implementing proportionate controls in relation to sponsor record keeping. The FCA anticipates adding to the Q&A as it completes further sponsor reviews or becomes aware of particular record keeping practices. As with the sponsor regime in general, the FCA reiterates that it expects sponsors to exercise judgement with respect to record keeping.

Further, the FCA notes that the guidance in UKLR 24.4.27G which describes matters the FCA takes into account when considering the sufficiency of sponsor records has been amended with a view to limiting the records required to be kept by a sponsor, thereby enabling a more proportionate approach to be adopted. Previously, the FCA considered that records should allow a person with general knowledge of the sponsor regime but with no specific knowledge of the actual sponsor service undertaken (to which records relate) to understand and verify the basis upon which material judgements have been made throughout the provision of the sponsor service. However, the guidance now refers to a person with a basic understanding of the transaction to which the sponsor service relates being sufficient.

Issuer understanding of the sponsor's role and obligations

The FCA comments that feedback has suggested that the role of the sponsor is not always well understood by issuers and this has the potential to be problematic where a sponsor requires additional reporting or documentation as part of its due diligence.

The FCA notes that it is important that issuers understand that the sponsor has significant responsibilities to the FCA. Whilst the rules already impose obligations on issuers to cooperate with their sponsor, the FCA intends to make this clearer at the outset of an IPO by writing to the issuer's board to explain its expectations for the board's interactions with the sponsor. In this respect, the FCA expects to clarify that the sponsor is assisting the FCA in carrying out its functions, that sponsors are closely supervised and that a sponsor must be able to demonstrate, through its own records, that it has exercised due care and skill and provided opinions after due and careful enquiry. The intention is to support sponsors in performing their role and to clarify to issuers the distinction between the sponsor and other advisers on a transaction.

FCA supervisory reviews of sponsor services

Some sponsors linked the FCA's approach to supervisory reviews with a disproportionate increase in the amount of work expected of sponsors, notably in respect of record keeping. In addition to proposed updates to its technical note on record keeping, the FCA has responded to this concern by publishing a new draft technical note – FCA reviews of sponsor services - setting out its approach to sponsor reviews. The technical note explains why and how the FCA performs its reviews, how it makes its assessments and its expectations in response to reviews, amongst other things. The FCA's intention here is to encourage discussion with sponsors, including with respect to the proportionality of a firm's response to FCA feedback, such as remediation actions in the context of procedures and controls.

Amended sponsor declaration

In response to feedback that some sponsor employees feel uncomfortable signing declarations on behalf of the sponsor, the FCA has amended the declarations such that they are signed by the sponsor firm. These forms will be available on the FCA website from 29 July 2024, when the UKLRs come into force.

Next steps

The FCA is looking to continue its engagement with sponsors, particularly in light of the extensive reforms to the listing regime, and intends to meet with all sponsors over the course of the coming months.

Comments on the FCA's proposals set out in PMB 50 should be shared with the FCA by 5 September 2024.