FCA proposals for updated sponsor regime as part of UK Listing reforms

The FCA has clearly indicated its view on the necessity of the sponsor regime – a virtually unique feature of London, compared with other international markets – in maintaining transparency and accountability within UK equity capital markets:

“We continue to believe […] the role of sponsors to be important and beneficial to the FCA, issuers and investors, and we see sponsors as an integral component of our reforms. […] The Sponsor regime helps to ensure that a company is supported and receives high-quality expert advice during the preparation and submission of an application to list, or at targeted key points once listed. The role and the service they provide help safeguard market integrity and to protect investors.”

In CP23/31, the FCA is seeking to focus the formal sponsor service regime on circumstances where an issuer is facing fundamental change, and other narrow circumstances where it offers a benefit to the FCA, the company and its shareholders, and so adds value. As a result, a sponsor will be required in fewer circumstances than is currently the case, and the guidance around expectations regarding sponsor compliance and competence will be clarified.

It is helpful to see the FCA’s approach through two main questions:

• What is the role of the sponsor? In other words, in what situations is a sponsor required to be appointed, and what is the nature of the sponsor services in those situations?
• How should sponsors perform that role? These are the detailed requirements a sponsor must follow when performing its role, including the scope of work and the standards it must meet when undertaking that work.

When will a sponsor be required?

Under the FCA’s proposals, the sponsor regime will apply to the proposed commercial companies category, the closed-ended investment fund category, and the shell companies category. It will also apply where companies transfer or transition to one of these categories.

When a sponsor is required to be appointed and its role will be as follows:

At IPO:

The sponsor will continue to be responsible for assessing and providing assurance to the FCA that the issuer has met the listing and prospectus requirements at the point of application for listing, and has established procedures to be able to comply with applicable listing obligations going forward.

• The scope of the proposed sponsor services remains largely unchanged from the current requirements for a premium listing, and the FCA considers that the overall role of the sponsor on an IPO will be similar to that currently performed (although it will apply to all companies in the proposed commercial companies category, whereas it currently applies only to premium listings). 
• While the sponsor will no longer have to assess whether the current financial eligibility criteria for listing are met (i.e. historical financial information, three-year revenue track record and clean working capital statement), as these are to be removed in the UKLR, it will still need to advise on these aspects as part of its assessment of compliance with the prospectus rules.
• In particular, CP23/31 retains the obligation on the sponsor to confirm whether an issuer has a reasonable basis for the working capital statement contained in the prospectus.

Post-IPO:

A sponsor will be required in a more limited set of circumstances than is currently the case, and its role in those situations will be more focused. These are:

• on significant further increases in listed share capital requiring an FCA-approved prospectus, where its role will be similar to that currently performed in such situations;
• in connection with related party transactions ≥5% where it will be required to give a ‘fair and reasonable’ opinion;
• in situations where the issuer is proposing to enter into a reverse takeover, where its role will be similar to that currently performed on such transactions; and
• where an issuer is proposing to seek FCA guidance or seek a modification or waiver of the UKLR in certain circumstances (for example, in the context of a significant or related party transaction).  

Sponsor declarations will be required in fewer circumstances post-IPO, due to the removal of certain existing requirements to seek shareholder consent (requiring preparation of an explanatory circular) and the removal of current obligations to include a working capital statement in certain circulars. However, sponsor declarations will still be required where the FCA is asked to grant a listing application for a further issue of shares in the commercial companies category, or approve certain circulars.

What will a sponsor be required to do?

The FCA has also indicated a desire to “support a proportionate and effective compliance approach” for sponsors, in light of feedback from sponsors around the burden placed on them with regard to recordkeeping, and expectations around risk management and expertise (for example, in accounting or ESG matters). This provides an opportunity for sponsor firms to reset their practices and policies.

In particular, the FCA is proposing to address those issues by:

• providing reassurance to sponsors regarding the FCA’s approach to: (i) the requirement that sponsors retain staff who understand the importance of the sponsor declarations and the reliance placed on them by the FCA; and (ii) its assessment of the performance of individual sponsor staff members;
• updating the Technical Notes which provide guidance to sponsors to reflect the UKLR proposals and support sponsors in making a proper judgement, with a view to broadening the range of potential firms who can perform the sponsor role;
• supporting sponsors in finding an appropriate balance between placing reliance on third‑party experts and using their own knowledge, judgement and expertise in listing matters to review and appropriately challenge third‑party information, including with respect to issuers in specialist industry sectors (for example, scientific research-based, minerals or property companies) or specialist types of companies (for example, investment or shell companies); and
• ensuring that the approach by sponsors to recordkeeping is not required to be overly cautious and disproportionately burdensome in light of the obligations placed on sponsors by the UKLR and the associated risk of regulatory action.

We expect the FCA’s thinking to be developed and refined over the coming months through its engagement with sponsor firms.

Proposed revisions to TN/715.1 (‘Sponsors: Practical implications of competence requirements for sponsors and applicants’, published in February 2015), TN/714.2 (‘Sponsors: Guidance on the competence requirements set out under LR 8.6.7R(2)(b), published in March 2017) and TN/709.2 (‘Sponsor transactions – Adequacy of resourcing’, published in August 2014) are contained in CP23/31.

Sponsor competence

Finally, the FCA is proposing a number of changes to the current sponsor competence rules and related guidance in the Technical Notes, designed to reflect fluctuating levels of market activity and a desire to broaden the range of firms which might seek to provide sponsor services, as follows:

• the current requirement for a sponsor to have submitted a sponsor declaration in the prior three years will be extended to five years, recognising the potential time periods between the provision of sponsor services;
• firms may also be able to demonstrate competence through experience gained through providing other relevant corporate finance advisory services to UK listed issuers in the previous five years (including in advising on the rules and guidance issued by or adhering to the procedural requirements and processes of a regulator or exchange, or undertaking due diligence to support assurances of information delivered to a regulator or exchange and verify public statements made by an issuer);
• prospective sponsor firms will still be required to be sufficiently experienced and to comply with their obligations under the Listing Rules (and in due course, the UKLR), and to have a sufficient number of employees with the requisite skills and knowledge to provide sponsor services (noting that at least two such employees will be necessary to meet the contact requirements under the UKLR, but that significantly more may be required to demonstrate adequacy of resources, depending on sponsor activity levels); and
• the FCA will also consider the type of sponsor service to be performed, given that not all sponsors will provide all types of sponsor services to all types of issuers.

A link to the Consultation Paper (which includes a draft of the first tranche of the new UKLR sourcebook) can be found here: FCA Consultation Paper 23/31. Consultation on the sponsor competence proposals closes on 16 February 2024 to allow for sponsors to manage the transition to the new regime (note that this is earlier than the closing date for consultation on the other proposals, which is 22 March 2024).