Key takeaways
Judgment led eligibility is critical
Assess compliance history early; evidence nuanced judgments supporting transfer eligibility.
Proportionate due diligence, not one size fits all
Tailor due diligence scope and FPPP approach to issuer context.
Documentation underpins FCA confidence
Clearly record decisions on directors’ readiness and ongoing ESCC obligations.
The Financial Conduct Authority (FCA) recently published the findings of several reviews of sponsors that have supported issuers transferring into the equity shares (commercial companies) (ESCC) category in the Primary Market Bulletin 62 (PMB 62). This feedback provides helpful clarification of the FCA’s expectations of sponsors when they carry out due diligence in connection with their modified transfer declaration.
Whilst it is clear there is no ’one size fits all’ approach, the guidance emphasises that it is important for sponsors to always exercise sound judgment, to make due and careful enquiries and to document their decision making processes throughout the transfer process.
We have outlined practical tips and guidance to help sponsors navigate and comply with the rules when advising on transfers into the ESCC category, drawing on the FCA’s observations from PMB 62 on how sponsors are approaching modified transfers in practice.
1. Getting eligibility right
Eligibility for the modified transfer process should be assessed carefully and at an early stage. An issuer is only eligible for transfer if they have complied with their obligations under the UK Listing Rules, the Disclosure Guidance and Transparency Rules (DTR) and corporate governance rules, as well as the disclosure requirements in the UK Market Abuse Regulation (together the Rules), during the 18-month period ending on the date the FCA is notified of their proposed transfer.
Sponsors must consider the regulatory track record of the issuer and determine whether there have been any historic breaches of these Rules impacting eligibility. PMB 62 acknowledges that this assessment can be complex, particularly where elements of an issuer’s compliance history are not straightforward, and highlights examples where sponsors were required to exercise judgment when analysing historic correspondence with the FCA or technical DTR breaches.
The issuer must also not be undergoing, or have undergone in the previous 18 months, a significant change to its business. In determining this, sponsors should consider the commercial rationale for the transfer. PMB 62 provides helpful context on the purpose of this requirement, emphasising that the modified transfer route is intended for issuers whose investors can reasonably be assumed to have a good understanding of the issuer’s business based on compliant disclosure over time.
If the issuer is carrying out changes to its business that are sufficiently significant to warrant a full eligibility review by the FCA, it is likely that they will not be eligible for the modified transfer process.
The FCA recognises that eligibility assessments can be complex and encourages sponsors to submit guidance requests if they have any doubts.
2. Tailoring due diligence
The FCA recognises that the scope of sponsor due diligence varied significantly in practice, reflecting the specific context of each transaction. In determining the nature and extent of the due diligence exercise, sponsors should consider factors such as:
the complexity of the issuer’s business and operations
the issuer’s recent history, including the timing of its IPO and whether earlier information and due diligence reports remain current and complete
the sponsor’s existing knowledge of the issuer through their advisory and/or broking relationships.
Any reliance on historic information should be clearly reasoned and documented by the sponsor.
3. Rethinking the FPPP
The FCA notes that the preparation by the issuer of a new full form Financial Position and Prospects Procedures (FPPP) report may not always be necessary as part of the transfer process: it depends on the specific context.
Where a sponsor has a deep and longstanding relationship with the issuer, the sponsor could form the view that it would be more appropriate to build on its existing knowledge by a bridging or gap analysis being carried out.
In certain circumstances, a FPPP report limited in scope and focused on confirming that the issuer has appropriate systems, procedures and controls in place to meet the additional ESCC obligations may be sufficient.
It is however likely that the FCA would expect a new FPPP report to be prepared where a significant period has elapsed since the issuer’s IPO or where the issuer has undertaken numerous transactions or experienced material developments since its last formal FPPP review.
4. Adapting director training
Sponsors must take reasonable steps to satisfy themselves that each director of the issuer understands their responsibilities and obligations under the Rules, including the additional responsibilities applicable to ESCC companies as part of the transfer process.
The FCA expects sponsors to begin by assessing each director’s existing level of understanding, having regard to their experience, background and track record. Training should then be tailored to address specific gaps, rather than delivered through standardised or generic sessions.
The FCA also notes that sponsor’s routine interactions with directors are an important part of this assessment. PMB 62 recognises that soft insights gained through day-to-day interactions can be difficult to capture, but encourages sponsors to document these judgments where possible, for example in internal control schedules or governance committee memoranda.
5. Assessing readiness for the ESCC category
Sponsors should reflect on their assessment of the board’s understanding of, and willingness to comply with, the issuer’s ongoing responsibilities and additional obligations following the transfer. The sponsor should specifically address and document the ability of the issuer to meet these, to support its modified transfer declaration.
6. Documenting decisions
The FCA reinforced the need for clear and comprehensive record‑keeping. Sponsors are expected to maintain adequate documentation evidencing the work performed and judgments made. Robust records are critical in demonstrating that decisions were carefully considered, proportionate and reached through a structured and well‑governed process.
How we can help
We are well placed to advise sponsors (and issuers) on transfers into the ESCC category and support them through the full lifecycle of the modified transfer process and beyond. Our focus is on helping sponsors exercise appropriate judgment and demonstrate compliance with the FCA’s rules and regulatory expectations.
If you are a sponsor being engaged to work on a transfer of an issuer into the ESCC category or an issuer proposing to transfer, please contact Jonathan Morris or Emily Rawlins if you’d like to get a better understanding of the process and find out more about how we can help.
