Primary Market Bulletin 53: reform of the Knowledge Base continues

The Financial Conduct Authority has published Primary Market Bulletin 53. In this edition the FCA finalises the amended and new technical notes on the sponsor regime that it published for consultation in PMB 50 and updates further technical notes in the Knowledge Base.

Guidance for sponsors

In PMB 50, the FCA proposed two new technical notes for sponsors (on specialist due diligence and FCA supervisory reviews) and substantial amendments to an existing technical note (on record keeping requirements). Despite feedback received, that the technical notes would not support any change in sponsor practice, all three notes will be finalised without further amendment. However, the FCA provides some useful further commentary, in the Bulletin, on its approach in relation to specialist due diligence and its intention to add to the record keeping technical note, over time.

FCA/TN/722.1 – Responsibilities of a sponsor: specialist due diligence

This technical note states that the FCA does not expect sponsors to be experts in everything. However, it also highlights that the official list is open to a wide range of issuers, including specialist issuers and that a sponsor must understand the issuer, its business and operations, including specialist technical information. In addition, the content of the sponsor declarations are left unamended, so sponsors are not relieved of any liability in relation to technical  areas such as ESG or AI.

In PMB 53 the FCA acknowledged that it had received feedback that  the content of the sponsor’s declaration limits the usefulness of the guidance in the technical note but confirmed that it was finalising the note without further amendment. This decision was based on the FCA’s position that it feels it is clear that:

• there are inherent limitations in the assurance a sponsor can give in specialist technical areas outside of their core competence;
• if a sponsor relies on a highly specialised form of expert reporting, they may be less competent to give detailed challenge; and
• that where a specialist report provides a sponsor with the assurance it is seeking and where the sponsor has no concerns or questions about the report, it is reasonable for the sponsor to simply record this judgement.

FCA/TN/717.2 – Sponsors: Record Keeping Requirements

The key amendment to this existing technical note is the addition of a Q&A section which (among other things) sets out examples of both best and inadequate practice in relation to record keeping.

The FCA received feedback that the amendments were unlikely to lead to significant changes in practice but it highlighted that it anticipates adding to the Q&A section of the technical note over time and hopes this will lead to changes of approach where appropriate.

FCA/TN/723.1 – FCA reviews of sponsor services 

This new technical note sets out how the FCA will conduct reviews and consider a sponsor’s performance. 

The FCA referred to feedback received in relation to sponsor supervisory visits more generally: requesting better notice of reviews and shorter, more thematic reviews. The FCA states that it is considering this feedback.

Technical notes subject to further consultation

PMB 53 sets out two draft technical notes that have been further amended by the FCA and are republished for consultation:

• UKLR/TN/307.1 - Aggregating transactions: under UKLR 7 in certain circumstances transactions carried out in a 12 month period must be aggregated for the purposes of the class tests. Amendments to reflect the final rules have been made in this technical note.
• UKLA/TN710.1 - Principles for sponsors: the FCA has added practical examples to help describe the proper extent of sponsor services, particularly where preparatory work may be done for a matter that subsequently falls within the definition of sponsor services. For example, if a sponsor provides initial advice on a transaction which is not a reverse takeover or an initial transaction by a shell company, but subsequently becomes such a transaction, work undertaken at an earlier stage may be regarded as a sponsor service. The FCA states that this is only “likely in circumstances where it was, or should have been, reasonably foreseeable that the transaction would become a reverse takeover or initial transaction.” Where a firm has provided advice on class tests on a transaction and, later on, needs to approach the FCA under either UKLR 4.2.3R (modify, waive or substitute UKLRs 7, 8 or 11) or UKLR 4.2.4R (individual guidance) the initial work will not constitute a sponsor service, provided that it was not foreseeable at the time that a request for modification or guidance would be necessary. Both these examples demonstrate the need for careful consideration at the beginning of a transaction, that does not start as one requiring sponsor services, to assess the likelihood that a sponsor service will need to be provided further down the line.

Further changes to the Knowledge Base

The FCA is taking a phased approach to updating the Knowledge Base following the reform of the UK listing regime. Those technical notes considered more essential or frequently used have already been amended (in PMBs 48 and 51 – see our alerts here and here). In PMB 53, the FCA proposes amendments to more technical notes.

Material amendments

UKLA/TN/209.3 - Listing Principle 2, Dealing with the FCA in an open and cooperative manner 

The FCA proposes to add further guidance clarifying that Listing Principle 2 also applies where an issuer becomes aware that they are no longer able to comply with a continuing obligation in the UKLR.

UKLA/TN/401.1 - Acquiring assets during investment trust roll-overs 

Further detail has been added to this draft note on common types of transaction structures where closed-ended investment funds are acquiring assets by a scheme of reconstruction. The FCA states that these additions are not intended to change the substance of the note’s guidance. 

Primary Market/TN/423.2 – Open-ended investment companies and UKLA/TN/425.1 - Open-ended investment management agreements and transfer restrictions

The FCA proposes combining these two technical notes so there is one technical note for all OEIC related topics. The draft also proposes some amendments to the section on transfer restrictions to align guidance for both UK and non-UK OIECs.

Consequential changes and updates

The FCA proposes changes to a large number of remaining technical and procedural notes which are either updates or consequential on the introduction of the new UK Listing Rules. The FCA states that the amendments do not affect the substance of the guidance in these notes.