8 August 2016
The FCA has issued a Final Notice to Cenkos Securities Plc. The AIM listed company was fined £530,000 (reduced from £757,000 because of a stage 1 settlement discount) in relation to its sponsor services role.
Cenkos is an Approved Sponsor under the FCA Sponsor Regime and a Nominated Advisor for the purpose of AIM. As a Sponsor, it advises clients on obtaining a Premium Listing, as set out in the Listing Rules. From around December 2013 to 11 June 2014, Cenkos acted as Sponsor to Quindell Plc, which intended to change from an AIM to Premium Listing ("the Transaction"). Ultimately, the Transaction was abandoned before the FCA could be satisfied that Quindell was eligible for Premium Listing. The FCA's findings relate both to Cenkos' specific conduct in connection with the Transaction, but also more generally to the systems and controls it had in place for the provision of sponsor services throughout the Relevant Period (1 April 2012 – 19 August 2015).
Systems and Controls Failures
The Listing Rules provide that a Sponsor must have in place appropriate systems and controls (LR 8.6.12R). For most of the Relevant Period, the FCA determined that "no one person, group or committee was designated with overall responsibility for oversight of Sponsor Services", and considered that Cenkos had acted in breach of requirements of LR8.6.12 for various reasons, including:
- Reporting lines and management responsibilities in relation to the provision of Sponsor Services were not clear and effective.
- There were not adequate procedures in place for the supervision and support of employees engaged in Sponsor Services. At various points in the Relevant Period, the policies and procedures in place failed to provide sufficiently clear guidance as to the regulatory financial requirements and key risks involved in obtaining a Premium Listing.
- The composition of teams contributing to the Sponsor Services was ad hoc and not sufficiently assessed (and such assessment recorded) to ensure that the staffing arrangements were appropriate.
Failures in due skill and care, and in accurate and complete communications to the FCA
The FCA also determined that Cenkos had not managed the Transaction with the due care and skill required by LR 8.8.3R or ensured that communications and information were accurate and complete in all material respects to the best of its belief (contrary to LR 8.3.1A R). This was for the following reasons:
- Workstreams that were necessary for Cenkos to undertake the requisite due diligence as to Quindell's eligibility for Premium Listing, and to provide assurances to the Authority, were not adequately progressed in sufficient time to meet the timetable Cenkos had created. Specifically, the "Suite of Reports" (which included the crucial working capital report) required to verify financial information was not properly managed or even completed. Further, Cenkos failed to understand, address and adequately respond to questions from the Authority or independently reassess the position in relation to Quindell's eligibility as the Authority raised concerns. Cenkos continued to assert to the Authority that the eligibility requirements were met without checking the position properly and challenging what Quindell had told it.
- The key risks to the eligibility of Quindell to satisfy the Premium Listing requirements at the initial approval stage were not identified and the timetable was not set with those in mind.
In some respects, the facts of this case speak for themselves. However, given the rarity of Listing cases, the Final Notice represents something of an interesting precedent of sorts.
The thinking in relation to the calculation of penalty has some interest for enforcement watchers:
- This was regarded by the FCA as a serious case, and the penalty was accordingly set by reference to it being a Level 4 case. It was regarded as a Level 41 case because the breaches caused a significant risk of harm to consumers, investors and other market users, and because the breaches revealed serious and systemic weaknesses in relation to Cenkos' Sponsor Services.
- Despite describing the remediation programme already undertaken by Cenkos in order to enhance its systems and controls as "extensive", it did not consider that this was a mitigating factor reducing the level of fine. This somewhat adds to the impression that the FCA had in mind its final figure and reducing it for mitigation was not consistent with that.
- A multiplier of 2.5 was applied to the Level 4 figure, increasing it from £303,144 to £757,860. This was because the lower figure was not considered large enough to be a credible deterrent. This says something of the importance the FCA attached to the matter. The FCA pointed out that the application of the multiplier made the fine slightly higher than the fee that Cenkos would have earned if the Transaction had been successful. This seems an arbitrary measure in circumstances in which the Transaction did not complete.