Our rules require sponsors to identify and manage conflicts of interest that may adversely affect their ability to perform the sponsor role or market confidence in sponsors.
Sponsors should consider their conflicts position before accepting a sponsor mandate or commencing the provision of a sponsor service. This is particularly so where a sponsor acts in more than one role on a transaction.
Our rules reflect a balance of the needs of various stakeholders and are made on the basis that we recognise that there can be benefits to sponsors performing multiple roles on a transaction. Often, a sponsor will already have other advisory or financing relationships with its client and extensive due diligence is already being carried out as a result of these other roles. The due diligence required to meet the sponsor’s obligations to us will often overlap with the due diligence performed for other reasons.
Sponsors are required by our rules to take all reasonable steps to put in place and maintain effective and administrative arrangements which ensure conflicts of interest do not adversely affect their ability to perform its functions properly. Where, in relation to a transaction, a conflict cannot be effectively managed, a sponsor must not act.
A sponsor can also find itself in a situation which could create a perception in the market that the sponsor is conflicted and may not be able to perform its functions properly. A perception of a conflict has the potential to adversely affect the integrity of the sponsor regime and investors’ confidence in the correct functioning of the market.
We consider that the ‘perception test’ is useful because it specifically asks sponsors to consider wider market confidence issues and, in practice, it enables us to intervene in circumstances when, despite a sponsor having in place conflict management arrangements, a perception of conflict remains. When considering whether a perceived conflict of interest exists, we encourage sponsors to assess the circumstances from the point of view of a theoretical market user.
Our involvement in assessing sponsor conflicts of interest
On a regular basis we scrutinise, challenge and intervene in the structuring of the sponsor role on transactions as a specific result of conflicts or perceived conflicts.
We may require sponsors to provide further information for us to ascertain whether a conflict exists and whether the systems and controls the firm has in place to manage the conflict are effective.
Where necessary we hold extensive discussions with senior management responsible for sponsor services at the firm; most usually, the Head of Compliance and the Head of Legal.
Following such intervention, and where we are not reasonably satisfied that a conflict can be effectively managed, we may ask a sponsor to resign from the mandate.
We have issued a Technical Note in this area which outlines our approach to conflicts and contains some practical guidance on how we expect sponsors to assess conflicts of interest and the expectations which the FCA has of sponsors in this area. It also sets out a number of exceptional circumstances where we would ask that a sponsor contact us at the earliest opportunity.
When we conduct onsite visits to our sponsors, we regularly look at how the sponsor approached the identification and (if relevant) management of any conflict of interest.