The FCA process

The penalties – a live example (or, how to wipe out the entire value of your share sale!)

In our article dated 7 January we highlighted details of the first case brought by the FCA in respect of article 19(1) of the Market Abuse Regulation.

Full details of the case and explanation of the calculation of the penalty can be found here

The FCA penalties regime can be found here

MAR article 19(1) sets out what a Person Discharging Managerial Responsibilities (a PDMR) must do if he sells shares – he must notify the company and the stock exchange within three days (in our experience the company usually notifies the exchange on the employee’s behalf).

The executive concerned in this case was one of a small group of four PDMRs in the Braemar group; two of the others were main board members (the CEO and FD).

Braemar had a share dealing code requiring PDMRs to ask permission before selling shares. On 22nd July 2016, following the introduction of MAR, Braemar sent a briefing pack to the PDMR which he was meant to read and then sign to formally acknowledge. He failed to respond to confirm he had read the pack. Braemar sent him a reminder on 23 August 2016; again, it seems that he did not reply. Towards the end of November 2016, the Company chased him again and he returned the confirmation documents.

Unfortunately, he sold shares on two occasions during this period (14 August 2016 and 10 November 2016) and then more shares on 18th Jan 2017. At no time did he ask for permission to make the sales and he failed to notify the company. In January 2017 when he received a reminder about his requirements, he then told the company about the last sale but not about the previous two. It wasn’t until October 2017 as a part of the FCA inquiry that he notified Braemar of the two earlier trades.

He received gross proceeds of £71,000 as a result of the three trades.

The penalty levied by the FCA on the PDMR amounted to £45,000. It is likely that his net, after tax proceeds amounted to £38,000 and therefore the penalty was greater than the amount he received.

How did they get to this amount?

The FCA adopt a six-stage assessment covering:

  • Disgorgement
  • Seriousness
  • Mitigating and aggravating factors
  • Adjustment for deterrence
  • Settlement discount
  • Penalty

In this case, the essential driver for the quantification of the penalty was the PDMR’s annual pay. This was £643,684 and the initial level of the penalty was calculated at £64,368. It was then reduced to £45,000 because the PDMR reached an agreement quickly.

We recommend reading the FCA explanation of the calculation here.