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Equity Capital Markets Update: Financial Conduct Authority - An Activist Regulator?

07 June 2017

The penalties imposed by the Financial Conduct Authority (the “Authority”) following two recent market abuse investigations demonstrate its future approach to regulating market abuse. Notably, the instances of market abuse occurred prior to the introduction of the EU Market Abuse Regulation in July 2016. The instances involved one company with a secondary Irish listing and another incorporated company which was listed on AIM prior to its liquidation in 2012. Irrespective of when the incidences occurred, the offences were still subject to regulation by the Authority.

The sanctions were imposed on:

  • Tesco plc, a UK incorporated company with a listing on the main securities market of the Irish Stock Exchange; and
  • the former Chief Financial Officer ("CFO") and Financial Controller of Worldspreads Limited ("WSL"), a wholly-owned subsidiary of Worldspreads Group plc, which was a non-trading holding company incorporated in Ireland and quoted on AIM and the Irish Enterprise Securities Market prior to its liquidation in 2012.

Tesco plc

In March 2017, Tesco plc and Tesco Stores Limited (“Tesco”) were obliged to compensate investors who suffered loss as a result of market abuse by the company. The offence committed related to a trading update. This was the first time the Authority enforced its powers under section 384 of the UK’s Financial Services and Markets Act 2000 to require a listed company to pay compensation for market abuse.

The trading update in question was published in August 2014 and indicated that the expected trading profit for the first half of the year would be approximately £1.1 billion. Subsequently, in September 2014, Tesco published a further trading update in which it announced that it had overstated its previous profit.

The Authority recognised that the August trading update contained information that gave a false or misleading impression regarding shares of Tesco plc and certain Tesco group bonds. The Authority also concluded that Tesco knew, or ought to have known, that this information was false or misleading.

It has been estimated that the total amount of compensation payable under the scheme will be approximately £85 million, plus interest.

WSL

In April 2017, the Authority fined WSL’s former CFO, an Irish resident, £11,900 and its former Financial Controller £105,000 for engaging in market abuse. Both individuals were also permanently banned from working in any position related to regulated activity.

The CFO was found guilty of providing materially misleading information contained in the formal documentation provided to the London Stock Exchange. The documentation was submitted for the flotation of WSL’s holding company, Worldspreads Group plc, on AIM in 2007. It was also held that the CFO falsified critical financial information and/or omitted relevant information concerning Worldspreads Group plc's profit and loss statement and client liabilities in the period between August 2007 and March 2012.

The Authority also determined that the Financial Controller falsified critical financial information concerning Worldspreads Group plc's client liabilities during an earlier period between June 2010 and March 2012.

Both individuals were able to settle at an early stage of the investigation for 30% less than the specified sum. The CFO also provided evidence of serious financial hardship which strengthened his case. If it were not for this discount and the CFO’s financial circumstances, the CFO and the Financial Controller would have been fined £468,756 and £150,000 respectively.

Conclusion

The Authority’s proactive approach in these recent investigations is a timely reminder of the need for companies to be vigilant and accurate when providing trading and/or financial information to the market, the company’s auditors and its regulator.

While the offences occurred prior to July 2016, the new market abuse regime has greatly strengthened the framework for detecting instances of market abuse and to impose appropriate sanctions. It has extended its scope to include new markets, trading platforms, behaviours and it now applies a broader range of financial instruments.

For more information on the new market abuse regime and how it may affect your company, please contact a member of our Equity Capital Markets team.


The content of this article is provided for information purposes only and does not constitute legal or other advice.

Discuss your equity capital markets queries now with Justin McKenna.

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