Nothing this year then four public censures come along at once (and an Inside AIM too)

United Kingdom

There has been a flurry of recent public censures from the FCA and AIM Regulation, as well as an Inside AIM publication offering some guidance on staffing of nomads.


The FCA's fine and public censure of Cathay International Holdings Limited (Cathay) and two of its directors reminds listed companies and directors about the importance of establishing adequate procedures, systems and controls to enable them to comply with their regulatory obligations.

Cathay was severely criticised for its defective procedures which prevented it from adequately monitoring its financial performance against market expectations and for providing information to the FCA which was materially different to the actual procedures followed at the relevant time. Unusually, the FCA fined and publicly censured two of Cathay's executive directors for being knowingly concerned in Cathay's breaches. 

Similarly, AIM Regulation's public censure of Real Good Food plc highlights the importance of having robust procedures and controls in place. The company's inadequate corporate governance gave rise to a variety of breaches of the AIM Rules and was blamed for facilitating poor decision-making, an overly dominant former chairman and directors who were allowed to go unchallenged. 

Inside AIM reminds nomad firms about the types of equivalent transactions which can help an applicant Qualified Executive (QE) meet the minimum number of Relevant Transactions. QEs changing firms cannot assume that their QE status will automatically transfer with them, as QE status is a designation not an individual qualification. Finally, it is possible for a QE to work part-time, provided an AIM client has more than one QE on its account, with the requisite knowledge of its business, to ensure it can receive advice in a real-time market environment.

FCA disciplines a Premium Listed company and two of its executive directors for breaches of the Listing Rules and Disclosure and Transparency Rules (DTRs)

The FCA fined and publicly censured Cathay, its CEO and Finance Director for various breaches of the Listing Rules and DTRs.

Cathay is a holding company based in Hong Kong. During 2015, between 70% and 80% of its revenue was generated from Lansen Pharmaceutical Holdings Limited (listed on the Hong Kong Stock Exchange). Cathay's financial performance deteriorated over the course of 2015, leading to an announcement in December 2015 that it expected a material loss before tax for the 2015 financial year due to operating expenses being significantly higher than expected. It also disclosed a significant financial penalty imposed on a subsidiary of Lansen. Cathay's share price dropped 18.2% on the day of the announcement.

Breach of the Listing Rules

The FCA determined that Cathay breached Listing Principle 1, which requires a listed company to take reasonable steps to establish adequate procedures, systems and controls to enable it to comply with its obligations, for the following reasons:

  • Cathay did not have a written process for how it collated and considered results from its subsidiaries. In particular, Cathay would generally accept the financial results from Lansen without any enquiry about the reasoning or assumptions behind the numbers.
  • Cathay did not compare its actual financial performance against market expectations.
  • Cathay had no documented procedures on how it forecast its expected financial performance, including what factors it took into account when determining whether it had inside information.
  • If a subsidiary failed to provide any financial information, Cathay did not have any procedures in place to generate forecasts for its own year-end expectations. This was a particular problem in the case of Lansen, as it meant the board only considered year-end forecasts for the remaining subsidiaries, which represented only 20% to 30% of the business.
  • Cathay assured its broker that it would monitor its performance to determine if a trading update was necessary, but Cathay failed to do so against market expectations, instead choosing to monitor this against its internal budget.

Cathay also breached Listing Principle 2, which requires a listed company to deal with the FCA in an open and co-operative manner. When requested by the FCA to provide information about its forecasting procedures, Cathay knowingly gave information which was materially different to those procedures which were actually undertaken, without any explanation why it was providing non-contemporaneous information.

Breach of the DTRs

As a result of the failings described above, Cathay failed to disclose to the market a material deterioration in its financial performance. Cathay became aware of a 56% deviation from market expectations of its loss after tax on 6 December 2015. However, Cathay did not release a trading update until 29 December 2015. The FCA determined that the company acted recklessly by creating a false market in Cathay's shares, despite receiving advice from its lawyers about the risks of non-disclosure. Cathay was not entitled to delay disclosure as the omission was likely to mislead the public. The FCA also considered that Cathay's decision to delay disclosure was influenced by the fact that it did not want to trigger an announcement obligation for Lansen and the prospect of multiple bad news announcements.

Decision notices

Due to the significance of the breaches, the FCA imposed a fine of £411,000 on Cathay. It also determined that its CEO was knowingly concerned in the all of the above breaches as he was ultimately responsible for the company's procedures and controls, and had repeatedly received advice from Cathay's brokers and lawyers on its disclosure obligations. The FCA fined him £214,300. The FCA also fined its Finance Director £40,200 for being knowingly concerned with the breach of Listing Principle 2, as he was responsible for the information provided to the FCA. 

Cathay and its two directors are currently considering whether to refer the FCA's decision notices to the Upper Tribunal.

The decisions notices are a timely reminder for listed companies and directors of the importance of establishing adequate procedures, systems and controls to enable them to comply with their regulatory obligations. In addition, it is paramount that they deal with the FCA in an open and co-operative manner, providing clear and accurate information when requested. Finally, the public censures of the two directors remind directors that they are personally liable if they fail to comply with the rules.

The FCA Decision Notices can be found here: Cathay, CEO and Finance Director

AIM Regulation disciplines an AIM company for severe failings

AIM Regulation fined and publicly censured Real Good Food plc £450,000 (reduced to £300,000 for early settlement) for a variety of breaches of the AIM Rules. AIM Regulation concluded that the breaches reflected inadequate corporate governance which facilitated poor decision making, an overly dominant former chairman and directors who were allowed to go unchallenged. 

The breaches covered the following:

  • The company failed to take reasonable care when releasing a trading update in June 2017. The company announced that (i) its expected EBITDA for the 2017 financial year was between £5m and £5.4m and (ii) trading to date was consistent with meeting the board's expectations for EBITDA for the current 2018 financial year. This was predicated on the company having settled a number of legal claims. Certain members of the board had concerns about the reliability of the EBITDA figure, given its reliance on the successful resolution of the legal claims, but did not raise these concerns with the nomad or check the position prior to approving the notification. Even though the former chairman knew the claims were ongoing, he confirmed to the nomad that the largest claim had been settled. Similarly, the announcement stated that the company's expansion plan was on track, even though the board was aware of funding and operational delays which would have an adverse impact on the budget. One month later, the company released a further update confirming its expected EBITDA for 2017 was in fact £2m and its anticipated EBITDA for 2018 was £2.3m lower than previously expected.
  • The company made a number of consultancy payments to the former chairman, over and above normal remuneration. These payments should have been treated as related party transactions under AIM Rule 13 as they exceeded the 5% threshold, however, the company did not notify the transactions to the market and the independent directors failed to consult with the nomad whether they were fair and reasonable. The company also breached AIM Rule 19 by failing to include these payments, as well as other payments to non-executive directors and a loan to the former chairman, in its annual accounts.
  • The former chairman dealt in the company's shares when the company was in a close period (pre-MAR) and the company failed to notify the market until after its annual results were published. Worse still, when the company eventually notified the market, the announcement had the wrong transaction date, giving a misleading impression that the dealing took place outside a close period.
  • The actions above reflected serious underlying failures, resulting in multiple breaches of AIM Rule 31. The company failed to ensure its directors accepted full responsibility, collectively and individually, for compliance with the AIM Rules, e.g. for failing to adequately challenge the accuracy of the 2017 EBITDA figures. The company also failed to provide timely or accurate information to its nomad, e.g. the settlement status of its legal claims, the status of its expansion plan and the payments to certain directors.

The variety of breaches is more extensive than recent AIM notices which emphasises the importance of robust procedures and controls, overseen by independent non-executive directors who can hold management to account. 

The AIM Notice can be found here

Inside AIM - Staffing of nomads

AIM Regulation's latest Inside AIM publication covers frequently asked questions on staffing of nomads.

Relevant Transactions

AIM Regulation acknowledges that market conditions can have an impact on the number of Relevant Transactions undertaken by employees hoping to apply for QE status. Broadly, a Relevant Transaction is a transaction requiring the publication of a prospectus or admission document, or a transaction involving acting for the bidder on a takeover involving an AIM or Main Market company.

Nomad Rule 5 gives the AIM team discretion to consider equivalent work undertaken in respect of IPOs or other major public transactions where the work performed is similar to that of an AIM admission. Such equivalent transactions may include:

  • A scheme of arrangement, where the nomad has acted for the target and led the drafting of the scheme document;
  • An aborted transaction (that would otherwise be a Relevant Transaction) and which fails due to market conditions and where all relevant due diligence has been completed and the relevant documents are in final form. In practice, this means the transaction will need to have reached the pathfinder stage; and
  • A complex Relevant Transaction. If the Relevant Transaction is sufficiently complex, then AIM Regulation may allow two approved QEs to lead the transaction, instead of just one.

AIM Regulation reminds nomads that QE status is a designation, not an individual qualification. If a QE changes firm, QE status is not automatically transferrable. Instead, QE status for that individual will be assessed in the context of the firm's overall staffing, management controls, senior management supervision, junior support and compliance function.

Whilst the Nomad Rules state that a QE must be a "full-time employee", AIM Regulation explains that the intention behind this is to ensure that QEs give full attention to the role and AIM clients have real-time access to experienced staff when they need it. However, AIM Regulation acknowledges that a QE could work part-time or have some other flexible working arrangement, provided the AIM client has access to QEs that have full knowledge of the company to be able to advise it in a real-time market environment. In practice this means that if a QE works part-time, he or she would need to share that client with another QE. 

AIM Regulation also gives some guidance on what a "good" compliance function looks like. In particular, it should be fully engaged with the nomad team and provide a source of senior input; have a mandate from management and the experience to provide senior input.

Finally, AIM Regulation questions the benefits of firms using external reviews or training to evidence their commitment to their compliance with the Nomad Rules. Instead, AIM Regulation suggests firms are better off relying on sharing knowledge internally, focusing on individual and collection performance and supervision, and having good levels of management engagement along with an embedded compliance culture. Whilst AIM Regulation's suggestion are all good practice, unsurprisingly, we think external training still has a useful role to play if it forms part of an additional layer of helping the nomad team maintain and develop its knowledge of the AIM Rules.

Inside AIM can be found here.