The Financial Conduct Authority (FCA) has today fined Cenkos Securities plc (Cenkos) £530,500 for failures in its sponsor services business. Cenkos failed to have appropriate systems and controls in place across its sponsor services business, and, on a particular transaction, failed to act in its sponsor role with the level of diligence and professional care that the FCA expects.
In early 2014, Cenkos represented to the FCA that one of its clients was eligible for a Premium Listing when it had not carried out the requisite due diligence to ensure that this was correct. Ultimately the transaction was abandoned, as Cenkos was unable to satisfy the FCA that its client was eligible for a Premium Listing at that time.
Mark Steward, Director of Enforcement and Market Oversight at the FCA said: “Sponsor firms have key gatekeeper functions to ensure a candidate for listing is eligible and so they must carry out appropriate due diligence to the requisite standards. The FCA will hold sponsor firms strictly accountable whenever these standards are not met given failure places both market integrity and the well-being of the investing public at risk.”
Cenkos is an AIM-quoted company that provides various securities-related services to UK companies. It is an authorised firm which is an approved sponsor under the FCA’s Sponsor Regime and a Nominated Adviser for the purposes of AIM.
Sponsors are critical to the integrity of the Premium Listed equity market in London. They perform a dual role which involves providing expert advice and guidance to current and prospective companies with a Premium Listing and providing key regulatory assurances to the FCA. As such, sponsors have an essential role to play in assisting the FCA in meeting its objectives of maintaining the integrity of the market and ensuring an appropriate degree of consumer protection.
Cenkos failed to put in place adequate systems and controls to ensure appropriate oversight of Sponsor Services, and to ensure that all their Deal Teams were adequately supervised when carrying out Sponsor Services mandates. Certain deal teams were left largely unchallenged and unsupervised which increased the risk that serious issues would occur, undetected, on client mandates.
No adequate due diligence
This risk crystallised during the attempted transfer of a particular client from AIM to a Premium Listing (the ‘Transaction’). Cenkos did not carry out its sponsor role with the level of diligence and professional care that the Authority would expect. Cenkos failed to identify and manage properly the key risks relating to whether the client would be able to demonstrate its eligibility for a Premium Listing. As Cenkos did not undertake adequate due diligence, it was not in a position to ensure that the communications and information it provided to the FCA were accurate and complete.
Further, it failed also to properly understand and address the serious concerns raised by the FCA during the Transaction regarding the client’s ability to demonstrate its eligibility, and it failed to consider the potential impact of a negative research piece published by Gotham City Research LLC on 22 April 2014 regarding the client on the Transaction, the timetable, and any risk of investor detriment.
From 3 March 2014 to 11 June 2014 Cenkos corresponded with the UKLA, the department within the FCA responsible for vetting the client’s application to Premium Listing. This involved Cenkos submitting to the UKLA: letters confirming the client’s eligibility for a Premium Listing; analysis of its acquisitions during the required three year track record period; and drafts of the client’s prospectus.
Despite submitting several drafts of the prospectus and eligibility letters to the UKLA, Cenkos failed to establish how its client met the eligibility criteria for a Premium Listing. Ultimately, the Transaction had to be abandoned, as Cenkos was unable to satisfy the FCA of the client’s eligibility for a Premium Listing. Cenkos agreed to settle at an early stage of the FCA’s investigation and therefore qualified for a 30% (stage 1) discount. Were it not for this discount, the FCA would have imposed a financial penalty of £757,800 on Cenkos.
Cenkos Securities is an independent specialist securities firm focused on UK small and mid-cap companies. Cenkos aims to be entrepreneurial, whilst seeking to establish long-term relationships with corporate and institutional clients. Their directors and senior management have on average more than 25 years’ experience in the UK securities market. They have pioneered and led some of the most successful and innovative transactions in the UK securities market over the last decades.
