Susan Fadil, Director of Company Secretarial, reviews whether the 2013 cases brought since the creation of the FCA have resulted in a new approach to enforcement.
Since 2012 there has been a marked increase in the number of cases brought by the FCA (previously the FSA). Fines have increased substantially for those firms who are found to have breached the regulations as the FCA is pressing for tough penalties for infringements of rules which set standards. There are a number of key themes which both listed companies and sponsors should take from these cases.
Fines imposed by the FCA for breaches of the Listing Rules
The FCA imposed the following financial penalties early in 2013:
- a £14million fine against Prudential plc for failing to deal with the FCA in an open and cooperative manner in breach of UKLA Listing Principle 6 and also the censure of Prudential’s Group Chief Executive
- a £2.4million fine against Lamprell plc for breaching the UKLA’s Disclosure Rules by failing to announce the deterioration in its financial position to the market as soon as possible and breaching Listing Principle 2 by not having adequate systems and controls to enable it to comply with its announcement obligations
- a £175,000 fine against Nestor Healthcare Group Ltd for failing to ensure its directors understood their responsibilities under the Model Code in breach of Listing Principle 1 and failing to establish and maintain adequate systems and controls in breach of Listing Principle 2.
What are the key lessons to be learned from these cases?
Robust internal systems and controls are crucial. Management must ensure controls are fit for purpose and updated and reviewed regularly alongside the growth and development of the business.
Nestor had implemented a share dealing policy which was originally Model Code compliant but had not taken steps either to ensure compliance with it or to review and update it. Lamprell’s systems and controls were found not to have developed in line with the company’s growth strategy, meaning that it could not adequately monitor the full impact of operational issues on its financial performance and update the market as necessary.
Breaches of the UKLA’s rules are attracting greater regulatory interest and enforcement action. The FCA’s market integrity objective means that we will continue to see action taken against listed companies for such breaches. In the Nestor case, the directors’ breaches of the Model Code did not have any adverse effect of the market, cause any loss to investors, nor constitute a financial crime. There is a new approach to enforcement with fines for system failings even when there is no detriment to market or investors.
Increased financial penalties for breaches of Listing Rules are set to continue. The new starting point for assessing the seriousness of a breach by a listed company is now a percentage of its market cap. In addition, the FCA seems keen to impose financial penalties that act as a credible deterrent to firms of Prudential’s size. There is a move to compliance through deterrence.
Individual managers are more likely to be pursued by the Regulator. The FCA has stressed that it is committed to holding members of senior management accountable for their actions. Directors need to keep in mind both their collective and individual responsibility for the decisions they make on behalf of their companies.
The importance of the sponsor’s role is now highlighted. Listed companies must seek their sponsors’ advice where necessary and heed it. The UKLA relies on listed companies to be open and cooperative with it and to consult their sponsors on their obligations under the rules. The FCA now has extended powers to impose financial penalties on, and suspend, sponsors and will be increasing the level of resource dedicated to sponsor supervision and its focus on sponsor standards. It is apparent there is an increased need to share information with regulators.
Disclosure Committees – should your organisation have one? The company secretary is in a unique position and plays an important role in ensuring that there is regular review of policies, procedures, systems and controls and that these are embedded throughout the organisation. The establishment of a board disclosure committee could help to ensure appropriate and timely disclosure and that systems are robust, fit for purpose and up to date. We are conducting a survey of which organisations, in light of the FCA’s move to compliance through deterrence, have or will be implementing a separate Disclosure Committee.
Have you changed your approach to compliance with the Listing Rules as a result of the recent enforcement action by the FCA? We would be grateful to receive your opinion/views on this topic. Please email Susan Fadil at email@example.com and we will publish the results in a future newsletter.