CONSULTATION PAPER 08/5: SPONSOR REGIME A TARGETED REVIEW

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1 10 September 2008 Our ref: ICAEW Rep 94/08 Helen Butterworth Markets Division Financial Services Authority 25 The North Colonnade Canary Wharf London E14 5HS By and Dear Ms Butterworth CONSULTATION PAPER 08/5: SPONSOR REGIME A TARGETED REVIEW CONSULTATION PAPER 08/12: QUARTERLY CONSULTATION (NO.17) The Institute of Chartered Accountants in England and Wales is pleased to respond to your request for comments on Consultation Paper 08/5: Sponsor regime a targeted review and in Chapter 12 of Consultation Paper 08/12: Quarterly Consultation (No.17). Please contact me should you wish to discuss any of the points raised in the attached response. Yours sincerely Katerina Joannou Manager, Capital Markets Policy Corporate Finance Faculty T +44 (0) F +44 (0) E katerina.joannou@icaew.com Chartered Accountants Hall PO Box 433 Moorgate Place London EC2P 2BJ T +44 (0) F +44 (0) DX DX 877 London/City

2 ICAEW Representation ICAEW REP 94/08 CP 08/5 SPONSOR REGIME A TARGETED REVIEW CP 08/12 QUARTERLY CONSULTATION (NO. 17) Memorandum of comment submitted in September 2008 by The Institute of Chartered Accountants in England and Wales, in response to the Financial Services Authority s consultation papers CP 08/5 Sponsor regime a targeted review, published in March 2008; and CP 08/12 Quarterly Consultation (No.17), published in July 2008 Contents Paragraph Introduction 1 Who we are 2-4 Major points 5-7 Responses to specific questions in CP 08/ Other points on CP 08/ Responses to specific questions in CP 08/12 (Chapter 12) Chartered Accountants Hall PO Box 433 Moorgate Place London EC2P 2BJ T +44 (0) F +44 (0) DX DX 877 London/City

3 INTRODUCTION 1. The Institute of Chartered Accountants in England and Wales (the ICAEW) welcomes the opportunity to comment on the consultation paper Sponsor regime a targeted review and on Chapter 12 of the consultation paper Quarterly Consultation (No.17) published by Financial Services Authority. WHO WE ARE 2. The ICAEW operates under a Royal Charter, working in the public interest. Its regulation of its members, in particular its responsibilities in respect of auditors, is overseen by the Financial Reporting Council. As a world leading professional accountancy body, the ICAEW provides leadership and practical support to over 130,000 members in more than 140 countries, working with governments, regulators and industry in order to ensure the highest standards are maintained. The ICAEW is a founding member of the Global Accounting Alliance with over 700,000 members worldwide. 3. Our members provide financial knowledge and guidance based on the highest technical and ethical standards. They are trained to challenge people and organisations to think and act differently, to provide clarity and rigour, and so help create and sustain prosperity. The ICAEW ensures these skills are constantly developed, recognised and valued. 4. The ICAEW s Corporate Finance Faculty is a network of over 6,000 corporate finance professionals. This response draws on the expertise of Faculty members, including sponsors and reporting accountants. MAJOR POINTS Support for the initiatives 5. We support the FSA s objective to move to a more principles-based sponsor regime and its proposals to clarify the application of the Principles for sponsors set out in LR We agree with the FSA s proposal to supplement the principles with guidance to ensure firms approach the regime properly and responsibly. Guidance will help ensure consistent market practice, reduce the scope for misinterpretation and prevent competitive pressures among sponsor houses. 7. We support the proposal to delete the SEE provisions and replace them with alternative guidance on the basis that it is more consistent with a principles-based approach and not that it is an indication that suitably experienced employees are not required by a sponsor. We believe that sponsor firms, when assessing their collective experience and competence, will continue to drill down to the individual employee level and we assume that the FSA will also continue to need to have reference to employees skills and expertise. We believe that more detailed guidance is needed as to how the expertise of individuals within a sponsor firm is intended to be assessed. 4

4 RESPONSES TO SPECIFIC QUESTIONS IN CP 08/5 Q1: Subject to the exceptions set out above, do you agree that the Principles for sponsors should only apply when a sponsor is required by LR8.2? 8. We agree that clarity is needed on when the sponsor regime applies given the FSA s experience that the application of the Principles for sponsors in LR8.3 has been the subject of differing interpretation. We agree with the proposal that the Principles for sponsors should only apply when a sponsor is required to be appointed or to provide guidance to a listed company. 9. We support the FSA s proposed plan to take into account the quality of other advice given by sponsors, where such advice is relevant to a sponsor s competence. However a sponsor firm s practice is not determined purely by specific points of transaction but about how the firm acts on an ongoing basis and we are concerned that the emphasis appears to be on using poor or inappropriate advice as evidence of lack of competence, rather than providing an opportunity for sponsors to demonstrate competence. By its nature, poor advice is much more likely to leave evidence behind than cases where timely and apposite advice to a company averted a compliance disaster. Accordingly, we would only wish to see other advice taken into account if it were taken in context and if examples of good advice are taken into account to support an argument for a sponsor s competence. Sponsor competence Q2: Do you agree that the demonstration of a firm s competence is key to retaining the integrity of the sponsor regime? If not, how do you believe the integrity of the regime should be maintained? 10. We agree. Q3: Do you agree that LR8.6.7 should be retained in substance? If not what amendments do you think are required and why? 11. We agree. Q4: Do you agree that the matters set out in LR8.6.8 (as revised) can be used by firms to demonstrate their competence? If not, what other factors do you think are relevant? 12. We agree that the two specific factors referred to in LR8.6.8 (as revised) are relevant for the FSA in assessing competence. We note that the rule implies the FSA may have regard for other things as well in assessing competence. It would be helpful for guidance to be given as to other such factors. We consider that these could include: a. General experience of corporate finance transactions b. Knowledge of other UK regulations eg the Takeover Code and the AIM Rules c. The professionalism of the organisation the FSA has to be able to rely on high standards of work and the integrity of individuals within the organisation 5

5 d. The depth of resource in practice advising a client as sponsor involves a team rather than an individual and therefore the capabilities of the team responsible for sponsor services are important In our view these factors are important to enable a person to provide complete advice to a listed company. Q5: Do you agree that the experience of firms in advising Listed companies or new applicants on the LRs and DTRs, in circumstances other than in providing sponsor services, should, where relevant, be taken into account when assessing sponsor competence? If so do you agree that we should, where relevant also take into account the quality of the advice if it is detrimental to sponsors or sponsor applicants? 13. We agree that assessing competence may take into account experience of advising listed companies or new applicants on the LRs and the DTRs even where such work does not fall into the sponsor role. In addition we agree the FSA should take into account the quality of the work performed by the adviser, to the extent it falls within the remit of the FSA (ie for sponsor work and for non-sponsor work that relates to the LRs and the DTRs). 14. Furthermore we believe that other corporate finance experience is also relevant in demonstrating appropriate competence. In this respect we consider that the illustrations provided in the amended sponsor application form could result in narrowing the type of work that is perceived to be relevant to competence. 15. In addition to the illustrations provided we consider that experience of lead advisory roles on other complex transactions, such as AIM admission documents and reverse takeovers and public takeovers, and on-going advisory work such as acting as nomad should contribute to demonstrating competence for acting as sponsor. In acting as nomad, responsibility for regulatory guidance generally rests with the nomad rather than the regulator and therefore in this respect the nomad role can be considered more onerous than the sponsor role. In gaining experience of such complex transactions and in providing day-to-day advice to companies as nomad, advisers will be required to be adept at advising companies on detailed regulations, to be familiar with the burden of preparing documents to the highest standards and to be capable of dealing with regulators in a reliable manner. Q6: Do you agree that expertise in advising companies on the matters set out in LR8.2 is critical to demonstrating sponsor competence? If not, how would you demonstrate a firm s ability to provide robust sponsor declarations and provide expert advice to issuers? 16. We agree. However consistent with our response to Question 5 above we believe that other corporate finance expertise is also relevant. Q7: Do you agree that the SEE provisions should be deleted and that the responsibility for appropriate staffing and supervision of sponsor activity should be placed on a sponsor firm s management? 17. We agree that a sponsor firm s management should be responsible for appropriate staffing and supervision of sponsor activity. 6

6 18. We agree that there are certain shortcomings with the SEE regime. The two main issues we perceive with this are: a. The SEE requirements are set very prescriptively with specific transaction requirements during a three year period. There is little flexibility to reflect the fact an individual s professional or personal circumstances may make it difficult to fit these precise requirements from one year to the next. However, an individual having gained the competence to act as sponsor should not automatically lose that due to a temporary break in the provision of sponsor services. b. The SEE regime seeks to allocate relevant transactions to one person in a sponsor firm whereas the work will typically have been conducted by a team of people and more than one senior person in that team may gain relevant experience from that transaction. 19. There needs to be a modification to the SEE regime to allow more flexibility in assessing sponsor competence as raised above. This could be achieved by modifying the SEE rules to permit some relaxation or, as proposed, by deletion of the SEE regime altogether and replacement of it with alternative guidance. We consider the latter is more consistent with the FSA s intention of moving towards a more principles-based approach and assume that the proposal does not indicate that suitably experienced employees are not required by a sponsor. 20. In our view a firm-wide approach to sponsor competence cannot be meaningfully applied without reference at some point, both by the sponsor and by the FSA, to employees skills and expertise. We assume that sponsor firms, when assessing their collective experience and competence, will continue to drill down to the individual employee level and that the FSA will also continue to need to have reference to employees skills and expertise. We believe that more detailed guidance is needed as to how the expertise of individuals within a sponsor firm is intended to be assessed. For example is it the FSA s view that if all or too many of those employees leave the firm, the firm would no longer be compliant with the competence requirements? We would be interested to know whether the FSA plans to consult further on how it proposes to assess individual expertise. Q8: Do you agree that we should retain the annual requirement for a sponsor to confirm that it continues to meet the approval criteria? If not, what sort of comfort do you believe should be sufficient to retain sponsor approval? 21. We agree that the annual requirement for confirming that appropriate systems and controls are in place should be retained. Sponsor systems and controls Q9: Do you agree with the proposal to move from adequate to appropriate systems and controls as a requirement for sponsor approval? 22. We agree. 7

7 Q10: Do you agree that appropriate controls to ensure employees receive proper guidance and training in carrying out sponsor services will help sponsors comply with LR8.6.5(3)? 23. We agree and we are interested in what the FSA regards as proper training. In addition to formal training relating to the LRs and the DTRs, we consider that highly relevant training for the provision of sponsor services will be gained from working in a junior position on a transaction which requires a sponsor or nonsponsor role involving the LRs or the DTR or another complex transaction as described in our response to Q5. In addition other corporate finance training is important eg AML training. Q11: Do you agree that appropriate staffing to ensure proper performance of sponsor services will assist sponsors in complying with LR8.6.5(3)? 24. We agree. Q12: Do you agree that we should retain the other factors in LR and LR with the suggested amendments? 25. We agree. Q13: Do you agree that we should give more specific guidance on identifying and managing conflicts given the proposals for the introduction of a new LR8.3.6ff? If so, do you agree that the proposals set out in LR8.6.12A provide useful guidance to sponsor firms? 26. We agree. In the absence of specific guidance there may be a trend towards sponsor firms concluding that all conflicts can be managed. Q14: In order to perform sponsor services in a competent manner are there any other systems and controls which you believe are important? 27. We consider that all operational aspects of running a sponsor/corporate finance business (eg as would be described in the firm s SYSC manual) could have a material relevance to the competence of the firm. There is a range of factors which could be important, such as: a. Senior management b. Strategy c. How the firm recruits, retains, trains and rewards staff d. How client relationships are managed e. How conflicts are handled, transaction risks managed and the compliance environment Sponsor independence and conflicts management Q15: Do you agree that the proposed requirements for sponsors to identify and manage conflicts are an appropriate method of ensuring that sponsors perform their role in a proper manner? 28. We believe that the new rules ( ) on their own will not ensure that all conflicts are handled in the correct manner. Guidance will be needed on how the FSA will assess the conflicts management arrangements or what it will take into account (as suggested in Q13). 8

8 Q16: Do you agree that appropriate conflict management arrangements should be sufficient in most cases to enable a sponsor to act where its group has more than one interest in a transaction? 29. We agree that appropriate conflict management arrangements will be sufficient in many cases to enable a sponsor to act where its group has more that one interest in a transaction. Uniformity of approach among sponsor firms is desirable and it would be helpful if the FSA identified the conflicts that it considers are not capable of being managed. Q17: Do you agree that the detailed thresholds contained in LR8.3.6 should be removed and replaced with a high level principle and guidance? 30. We agree but we consider that uniformity of approach among sponsor firms is desirable. This could be achieved by having adequate guidance and illustrations of how the high level principle can be applied (and assessed). There is a risk that, without a way of benchmarking a sponsor s approach, consistency in the market will be lost. Q18: Do you agree that not all conflicts can be managed and that providing sponsor services in those cases could have an adverse impact on market confidence in the sponsor regime? 31. We agree and refer to our answer to Q16. Q19: Do you agree that when identifying conflicts of interest a sponsor should consider those conflicts that could create a perception in the market that it may not be able to perform its functions properly? 32. We agree. Market reputation is of utmost importance to a sponsor and identifying circumstances that could influence market perception is an effective safeguard of reputation. Moreover the market is likely to continue to look to the FSA to determine whether a sponsor is suitably independent in discharging its responsibilities and guidance from the FSA, as mentioned in our response to Q17, would be helpful. Q20: Do you agree that disclosure in general is not an appropriate method of conflicts management for sponsors given a sponsor s regulatory obligations set out in LR8.3.1(1) and (2)? If you consider that disclosure may be an appropriate method of conflicts management, given the different objectives of the sponsor conflict provisions, please provide details of how disclosure would be used in this way? 33. We agree that, while it may be a helpful incentive to consider potential conflicts, disclosure of the existence of a conflict does not per se constitute management of the conflict. Marketing of new applicants Q21: Should LR be deleted in their entirety? 34. It is not clear from the analysis whether the change in market practice means that the need to protect investors no longer arises. We agree with the proposal on the assumption that investor protection is not at risk. Otherwise the risk of conflict 9

9 through placing shares with connected clients of the sponsor could usefully be one of the risks that the FSA considers including in the guidance proposed in Q13. Q22: Alternatively, do you believe that the disclosure requirements in LR8.4.5(2) and (3) provide useful investor protection? 35. No as per our response to Q21. Record keeping Q23: Do you agree that sponsor firms should retain records in relation to their compliance with LR ? Should this be subject to any time limit? 36. We recognise that some firms may not currently retain records, and for those firms the proposal may be more onerous than for others. We do, however, agree with the proposed requirement. We also consider that it is reasonable to apply a time limit to such record retention and for consistency with other record retention the FSA could consider a time limit of 6 years. We believe that any time limit should be no longer than that which the FSA considers necessary for its sponsor monitoring purposes. Q24: Do you agree that an annual confirmation should be retained? If so, do you agree that those confirmations should include details of the considerations the sponsor undertakes to reach its conclusions? 37. We agree that the requirement for an annual confirmation should be retained and that a record of it should be kept for a specific period (see response to Q23). We also agree that the annual confirmation should include details of the considerations undertaken by the sponsor prior to reaching a conclusion that appropriate systems and controls are in place but it would be helpful if the FSA provided guidance on the level of detail it considers reasonable. OTHER POINTS ON CP 08/5 Sponsor s Declaration on an Application for Listing (Appendix 2) 38. Page 1, item 3, the reference should be to LR not LR Page 2, second paragraph. The word reasonable should be inserted between in our and opinion reflecting the wording of eg LR8.4.3(3). 40. Page 2. In our view there should be reference to equivalent document as well as to prospectus or listing particulars. 10

10 RESPONSES TO SPECIFIC QUESTIONS IN CP 08/12 (Chapter 12) Sponsor independence Q17: Do you agree that in circumstances where a sponsor is not independent, the UKLA should be able to deny approval of a circular or the admission of securities to the Official List? 41. We agree but, consistent with our response above to Q17 of CP 08/5, we believe that the FSA should provide guidance on how it will assess the proposed high level principle on independence. It would be helpful for the FSA to indicate what would happen if a sponsor s independence were found to be lacking postadmission. Q18: If not, how do you consider that the UKLA will be able to provide an appropriate level of investor protection on transactions that require the appointment of a sponsor? 42. See our response to Q17. Q19: Do you agree that the UKLA should be able to require a sponsor to disclose information to it enable the UKLA to monitor sponsor firms? 43. We agree that the UKLA should be able to require a sponsor to disclose to it documents or information which the UKLA needs in order to carry out its functions in relation to a sponsor. Q20: If not, how do you believe that the UKLA can maintain an appropriate standard across the sponsor community? 44. See our response to Q19. katerina.joannou@icaew.com The Institute of Chartered Accountants in England and Wales 2008 All rights reserved. This document may be reproduced without specific permission, in whole or part, free of charge and in any format or medium, subject to the conditions that: it is reproduced accurately and not used in a misleading context; the source of the extract or document, and the copyright of The Institute of Chartered Accountants in England and Wales, is acknowledged; and the title of the document and the reference number (ICAEW Rep 94/08) are quoted. Where third-party copyright material has been identified application for permission must be made to the copyright holder. 11