UK Listing Rules: fine for failing to identify related party transactions

The FCA's recent fine for breaches of the Listing Rules, principally in respect of failures in systems and controls to identify related party transactions, illustrates the regulator's focus on:

• systems and controls around related party transactions;
• the need to implement, as well as draw up, policies; and
• the need for training at board and employee level.

Asia Resource Minerals (ARM), formerly known as Bumi plc, is a company incorporated in the UK with a premium listing of its ordinary shares on the Official List.  It has a majority stake in a key Indonesian subsidiary (listed on the Indonesian Stock Exchange).  Following a review of its internal processes and historic potential related party transactions in 2012, ARM identified three transactions entered into by the subsidiary that were related party transactions (because they were with companies associated with a non-executive director of ARM) but which had not been identified as such at the time they were entered into.  ARM had also not aggregated the transactions as required by LR 1.1.11. Had ARM done so, the rules for smaller related party transactions would have applied.  ARM was also unable to confirm that all other previously unknown related party transactions had been identified.  The FCA found that ARM had breached Listing Principle 2, LR 11 and LR 8.2.3.  The company also failed to publish its annual report within four months of the end of the financial year, in breach of DTR 4.1.3.

Some of the key messages for listed companies from the FCA's final notice are:

• Implementing an RPT policy – Although the company had a detailed policy in relation to identifying and controlling related party transactions (the RPT policy), its implementation of the policy in practice was inadequate, in particular in the Indonesian subsidiary.
• Training on the RPT policy – The board and other senior management of ARM were trained on the listing regime, including related party transactions, shortly prior to listing in June 2011 but certain key members of the subsidiary's board did not attend and there is no record that they ever received the training. As a result, the management of the subsidiary was not sufficiently aware of the related party transaction requirements. This was a part of a wider problem about how the subsidiary was supervised and controlled. The FCA also noted that ARM did not appear to have provided any training for employees of the subsidiary below senior management level.
• Listing Principles – The failure to implement the RPT policy was a breach of what was then Listing Principle 2 (now Listing Principle 1), which requires a listed company to take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations as a listed company. The guidance to the Listing Principles in LR 7.2.2 includes LR 11 as one of the key areas on which the FCA considers companies should place particular emphasis.
• Aggregation of related party transactions – The three transactions were with companies associated with a non-executive director of ARM and accordingly should have been aggregated under LR 11.1.11. Two of the transactions were "smaller related party transactions" and so, after aggregation, the company should have notified all three of the transactions to the FCA, obtained confirmation that the transactions were fair and reasonable and undertaken to include the details in the company's next published accounts (the rules have since been amended so that smaller related party transactions must now be announced at the time they are entered into).
• Consulting a sponsor – The company did not consult its sponsor about the transactions that could have been related party transactions, in breach of LR 8.2.3. The FCA states in the notice that, although a listed company may in some cases be well placed to decide that a transaction is not a related party transaction because it is clearly in the ordinary course of business or falls within the small transaction exemption, if in relation to any particular transaction there is sufficient uncertainty as to whether it is a related party transaction, a sponsor must be consulted. The FCA stresses that the sponsor regime is a "cornerstone" of the UK listing regime in terms of compliance and protection of investors.

The FCA linked the level of the fine to the size of the relevant transactions (up to 100% of the value before mitigation). The fine of £4.65 million would have been £6.6 million if ARM had not agreed to settle at an early stage of the FCA investigation.