Primary Market Bulletin 50

In response to concerns relating to the sponsor’s role in coordinating due diligence in specialist areas, we have produced a technical note providing guidance on what we regard as our reasonable expectations. We explain that we expect a sponsor to apply the listing rules, prospectus rules and disclosure requirements and transparency rules with skill and expertise in the specific context of an issuer’s business and operations.

However, we acknowledge that we do not expect sponsors to be experts in every specialist discipline. Further, that we expect sponsors to exercise common sense judgement as corporate finance professionals when determining the due diligence proportionate to undertaking the sponsor role with due care and skill and providing opinions after due and careful enquiry.

We emphasise that it is within the judgement of a sponsor to determine when specialist reporting by a third party is appropriate and clarify that the FCA does not expect to see third party reports where a sponsor is able to reach its opinion without such a report.

We also discuss some practical considerations sponsors can consider and records that we expect sponsors to keep when placing reliance on third party reporting.  

Record keeping was an area in which we received a significant body of feedback, both through our consultations and our further engagement. Although the views of firms varied, this is an area where sponsors have asked for better practical guidance, to help them avoid unnecessary cost and friction during transactions.  Whilst we wish to support sponsors in this aim, we are also clear that in order to be able to supervise the sponsor regime appropriately, we must be able to perform sponsor reviews.  Further, by reference to sponsor records, we will need to be able to gain a relatively detailed understanding of the work a sponsor performs, particularly when providing confirmations and declarations to the FCA. 

In response to sponsor concerns in this area, we have updated our existing record keeping technical note TN717 to include an appendix containing a question-and-answer section. Consistent with our overall response to sponsor concerns, we are clear that record keeping remains an area for sponsor judgement and it is not possible to specify the precise records that will be reasonable in all cases. However, this new section of our record keeping guidance includes a selection of questions that we commonly receive from sponsors, or that we understand from our engagement with sponsors, that they regularly have to confront.  In each case, we have attempted to provide a sense of our reasonable expectations, practical considerations or examples that a sponsor can consider when exercising its judgement. We have designed the note in this way as we anticipate supplementing it with further questions and answers, drawing on real life examples, as we complete further sponsor reviews or discuss good and bad practices around record keeping with sponsors. 

As set out in PS24/6[1], we have also amended our Handbook guidance in UKLR24.4.27G. This guidance, formerly in LR8.6.16CG, described matters we take into account when considering the sufficiency of sponsor records. Whereas previously, we considered that records should allow a person 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, we now refer to a person with a basic understanding of the transaction being sufficient. We hope this has the effect of limiting the records required to be kept by a sponsor. For instance, a sponsor need not retain records relating to matters of public record.

Feedback from sponsors and issuers has suggested that the role of the sponsor is not always well understood by issuers, and that there is the potential for additional cost and friction to arise where a sponsor requires additional reporting or documentation as part of its due diligence. We expect that our responses to the sponsor feedback as a whole will assist sponsors in ensuring that their approaches to completing their due diligence are proportionate and in turn, less problematic for issuers.

However, it is important that issuers also understand that the sponsor has important responsibilities to the FCA. Our rules already impose obligations on issuers to cooperate with their sponsor but, we intend to make this clearer at the outset of an IPO, by writing to the Board of an issuer to explain our expectations as regards their interactions with their sponsor. Importantly, we expect to clarify that the sponsor is assisting the FCA in carrying out its functions and that sponsors are closely supervised. We wish to make clear 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. We hope that this supports sponsors in performing their role and makes clear to issuers the distinction between the sponsor and the other advisers on a transaction.

We were particularly concerned to hear that some sponsors felt that our approach to supervisory reviews had led to a disproportionate ratcheting up of the work required of sponsors. Some firms felt this had led to the implementation of overly burdensome controls, particularly in the area of record keeping.

From our engagement with sponsors, we have understood this to result from a combination of factors, including a concern that the FCA may take formal action against a firm where it has not been able to provide a specific evidential record, including in circumstances where subsequent events may have altered the relative importance of the record in question. For example, where an email record that was deleted (or not retained) in the early stages of a transaction becomes highly relevant, due to subsequent events, when reviewing the sponsor’s approach after the closing of the transaction. We are aware of related concerns regarding the individual responsibility felt by sponsor staff members when signing a sponsor declaration, something we acknowledged in CP23/31[7].  

After discussing this with sponsors, we are of the view that this particular area of the sponsors’ feedback can be addressed in a range of ways. As well as updating our record keeping technical note (see above), we have also produced a new technical note explaining our approach to our supervisory reviews of sponsors. This new guidance explains why and how we perform reviews. Importantly, it also sets out how we approach providing feedback and what we expect in response. We hope that this will encourage sponsors to communicate with us where they believe our feedback is inaccurate or unfair and also to make proportionate responses to our feedback, including where changes to procedures or controls are involved.  

We have also made amendments to our sponsor declarations to make clear that the declaration is provided by the sponsor firm and not an individual. We will continue to carefully review the approach we take to our feedback letters, to ensure the tone and content is fair and proportionate.

We expect that our ongoing and routine engagement with sponsors will provide appropriate opportunities to continue discussing these issues and ensuring that our expectations of sponsors are clear. We hope this will also support sponsors in achieving proportionate responses to our review feedback. 

Finally, in response to curiosity from sponsors in relation to the form of the declaration proposed for a modified transfer of listing, we published a draft technical note TN721.1[9] in Primary Market Bulletin 48[3]. In doing so, we aimed to address the curiosity expressed by some sponsors in the potential nature and extent of the work that might be required to support a sponsor declaration where the transitional provisions in TP2, TP3 and TP5 apply.