FCA fines Reckitt Benckiser £539,800 for listing and disclosure rule failures – consequences for listed companies

The Financial Conduct Authority (“FCA“) has fined Reckitt Benckiser Group plc (“RB“) £539,800 for breaches of the Listing Rules (“LRs”) and Disclosure Rules and Transparency Rules (“DTRs”). The breaches contributed to late and incomplete disclosure to the market of dealings by two of its persons discharging managerial responsibility (“PDMRs”) under DTR 3.

Background: disclosure of dealing by PDMRs under DTR 3 and the Model Code

Back-to-back notification obligations under DTR 3

Under DTR 3 (which applies to companies admitted to trading on a regulated market – in the UK, principally the London Stock Exchange’s Main Market, but not AIM), PDMRs are required to notify the issuer of any transaction conducted “on their own account” within four business days of the transaction. The issuer is then required to notify that dealing via a regulatory information service without delay.

The Model Code

PDMRs’ obligations under DTR 3 overlap with their obligations under the Model Code, the code regulating transactions in shares by PDMRs which is appended to the Listing Rules. The Model Code requires PDMRs to obtain prior clearance before dealing in shares. Listed companies are responsible, under LR 9.2.8R, to take all reasonable steps to ensure their PDMRs comply with the Model Code.

Who is a PDMR?

PDMRs are defined in the Financial Services and Markets Act 2000 as: 

• the directors of the issuer; and

• senior executives of the issuer who are not directors but who have regular access to inside information relating directly or indirectly to the issuer and the power to make managerial decisions affecting the future development and business prospects of the issuer.

This statutory definition is supported by technical guidance issued by the FCA, although ultimately the question is often one of judgement in the circumstances. RB maintained a list of its “Top 40” executives, which it deemed to all be PDMRs by virtue of their seniority. 

The policy basis for the fine

Poor compliance with DTR 3 has been on the FCA’s agenda for some time. In December 2014 the FCA proposed amendments to its technical guidance to reinforce the personal nature of a PDMR’s obligation to notify the issuer of relevant transactions. At the time the FCA noted that a number of companies had been privately censured for non-compliance with DTR 3 but that public censure could follow in appropriate cases, as RB has found out to its cost.

In the FCA’s words: “Late notification of dealing by PDMRs in the shares of their issuers undermines the FCA’s strategic objective of ensuring that the relevant markets function well and its operational objective of protecting and enhancing the integrity of the UK financial system.”

The dealings

The FCA’s fine related to dealings by two of RB’s PDMRs.

The first involved the use of shares by a PDMR (“PDMR A“) as security for a credit facility extended to him. PDMR A was unaware that the use of his shares in this manner amounted to dealing under the Model Code. The FCA publicly clarified that the grant of security over shares constituted “dealing” for these purposes following the high profile 2009 Carphone Warehouse case. This clarification was alluded to by the FCA in its Final Notice to RB.

The second involved a more straightforward sale of RB shares by a PDMR (“PDMR B“), which had been held in the name of a private foundation in an off-shore account. PDMR B believed that he had received oral clearance from RB to proceed with the transactions. RB had no record of this, and so verification was not possible. PDMR B then failed to notify RM of the dealings.

When RB did notify the market of the dealings by PDMR A and PDMR B, the notifications did not contain all of the information required by DTR 3.

The failures identified by the FCA

The FCA highlighted the following failings:

• RB’s processes meant that it was possible for PDMRs to deal in RB shares in certain circumstances without having sought prior clearance, for example when trading through RB’s share plan administrator;

• RB did not take steps to reinforce the importance and necessity of complying with the Model Code and DTRs. RB’s practice of issuing reminders in advance of close periods and conducting an annual self-certification process were found to be insufficient for these purposes;

• RB failed to ensure its PDMRs were aware of the application of the Model Code to different types of share dealing and their ongoing obligations to comply with it and the DTRs. PDMR A had been unaware that pledging shares as security constituted dealing under the Model Code and PDMR B had failed to recognise his obligation to notify RB of his dealings;

• RB placed an over-reliance on the knowledge and experience of its PDMRs generally;

• RB’s processes were inadequate to enable it to identify or monitor trading other than through its share plan administrator. This resulted in its failure to identify the breaches of the Model Code in a timely manner; and

• Although RB’s share dealing policy required PDMRs to seek formal clearance to deal, it appears that an informal practice sometimes took place including oral clearance being given. The Model Code requires that listed companies maintain a record of the response to a request for clearance to deal, and of any clearance given, and both must be provided to the PDMR.

Accordingly, the FCA found that RB had breached the LRs and DTRs, principally:

• LR 9.2.8R, which obliges a listed company to require that its PDMRs comply with the Model Code and take all reasonable steps to ensure compliance;

• Listing Principle 1, by failing to take reasonable steps to enable directors to understand fully their obligations under the Model Code; and

• Listing Principle 2, by failing to maintain adequate procedures, systems and controls to enable it to comply with its obligations under LR 9.2.8R.

The fine

RB was fined £539,800 for these breaches (this amount followed a deduction of 30% for early settlement). In determining the level of the fine, the FCA took into account a number of factors, including:

• the lengthy five year period over which the breaches occurred;

• the fact that the FCA has published a significant volume of guidance on the disclosure regime, including the 2009 guidance on security transactions; and

• the need for strong deterrence with regard to failures to comply with the LRs, DTRs and the Model Code.

In mitigation, the FCA noted that:

• the breaches were neither deliberate nor reckless;

• RB did not benefit financially from any of the breaches; and

• RB cooperated fully with the FCA’s investigations

Best practice for listed companies

The purpose of the Model Code is to ensure that PDMRs do not abuse, and do not place themselves under suspicion of abusing inside information that they may be thought to have, especially in periods leading up to an announcement of a company’s results.

In its Final Notice to RB, the FCA indicated that it considers it “reasonable to expect a listed company to take proactive steps to comply with LR9.2.8R” and to have in place procedures, systems and controls that serve to facilitate and encourage compliance of its PDMRs with the Model Code, which also “enable the company to identify and deal promptly with instances of non-compliance.”

Listed companies should therefore:

• make sure that their directors and other PDMRs receive adequate training on their obligations under DTR 3 and the Model Code. Such training should be refreshed on a regular basis. Companies should not assume they can rely on the knowledge and experience of their PDMRs on such matters. Issuing reminders in advance of close periods and conducting an annual self-certification process will not alone be sufficient for these purposes;

• ensure that the clearance to deal procedures set out in the company’s share dealing policy are followed and formally documented;

• consider putting procedures in place with the company’s registrars so that any movements in the shareholdings of PDMRs can be monitored in real time. It may be appropriate for the company secretary (or the internal administrator of the company’s share dealing policy, if different) to receive weekly reports of any such movements from the registrars so that any potentially unauthorised dealings can be quickly identified; and

• where PDMRs hold shares other than in their own names, ensure that procedures are in place for the company secretary to receive notifications of any changes in shareholdings.

What about AIM companies?

DTR 3 does not apply to AIM companies, who instead need to comply with the equivalent provisions of the AIM Rules for Companies.

AIM Rule 17 requires disclosure of dealings by directors in the company’s shares without delay – “dealing” for these purposes is broadly defined in the AIM Rules, capturing, for example, transfers for nil consideration.

Under AIM Rule 31, the directors of an AIM company have a similar obligation to that set out in Listing Principle 2 to ensure that the company has in place “sufficient procedures, resources and controls” to ensure compliance with the AIM Rules. Accordingly, the best practice set out above for listed companies is equally appropriate for those traded on AIM.

Source: Final Notice to Reckitt Benckiser Group Plc dated 13 January 2015