UK: FSA Fines Nestor £175,000 For Failure To Secure Compliance To The Model Code

Last Updated: 6 March 2013
Article by Jonathan Rogers, Alix Prentice, Tim Stocks and Russell Holden

On 14 February 2013, the FSA released a Final Notice against Nestor Healthcare Group Limited ("Nestor") and fined them £175,000 for failure to take all proper and reasonable steps to secure the compliance of persons discharging managerial responsibility ("PDMRs") with the Model Code.

The reason why this will be of such interest to board members and company secretaries is that the FSA did not find any instances of market abuse; a finding of a lax and inconsistent approach to compliance with the Model Code was sufficient for enforcement action.  Furthermore, the FSA's Final Notice recognises that PDMRs at Nestor generally understood that approvals were required and that the steps they did take were in keeping with the purpose of the Model Code.

  • The fine therefore illustrates the importance for a listed company to:
  • Follow the letter of the Model Code as much as its spirit;
  • Periodically refresh practical knowledge and processes;
  • Not rely on a belt and braces written policy as being sufficient in its own right; and
  • Not assume it can discharge its regulatory obligations by passing the burden onto its PDMRs (for example, by requiring PDMRs to declare they have read and understood a written policy).


During the relevant period, Nestor was admitted to trading on the LSE's Main Market and was therefore subject to Chapter 9 of the Listing Rules and an obligation to ensure that its PDMRs complied with the Model Code.

Nestor did in fact have a share dealing policy which complied with the provisions of the Model Code.  This was drafted in October 2005 and circulated to all directors, PDMRs and employee insiders.  All recipients signed an acknowledgement as to its content and the share dealing policy was incorporated into their employment contracts.

Despite this, Nestor took no additional steps to remind or train such persons as to its content and neither did it undertake any review as to the adequacy of the processes in place to support it.  The FSA also suggest that over time the policy became forgotten.  As a consequence, over a two year period from April 2008 the FSA found seven breaches of the Model Code.  These included:

  • A person who is both chairman and CEO receiving permission to deal from single board members only (and not the entire board as required);
  • Dealings not being transacted within two days from receiving clearance;
  • A complete lack of record keeping for dealing requests and failure to use the internal forms created for this purpose; and
  • An overreliance on the experience and general know how of directors to see them through.

The decision

Although the FSA accepted there was no suggestion of insider dealing and that most PDMRs were broadly aware that some clearance was required, it was nevertheless apparent that the PDMRs did not fully understand their obligations under the Model Code.  The FSA found that the failure to take active steps to educate and re-educate directors and senior executives as to the provisions of Nestor's share dealing policy, and the lack of any evaluative review of the policy's adequacy were failures by Nestor to maintain adequate procedures, systems and controls.  Accordingly, there had been breaches of both Listing Principles 1 and 2.


Listed firms cannot rely on written policies and the experience of their PDMRs to satisfy their regulatory obligations under the Listing Rules.  Instead, the FSA expects firms to actively engage with PDMRs as to their obligations under the Model Code, including:

  • Full training and not just providing a copy of the share dealing policy;
  • At least bi-annual reminders to PDMRs of their obligations under the Model Code;
  • Periodic reviews of the adequacy of the firm's share dealing arrangements; and
  • Maintenance of formal records – if the firm's policy includes template forms they should be used.

This enforcement action is particularly pertinent given there was no suggestion of bad intent or insider dealing from the PDMRs dealing in the shares.  This was purely an assessment by the FSA of how robust Nestor's policies and procedures were and it was found wanting.  The outcome of this case tracks the regulatory shift to a more judgment led conduct regulator.  The FSA (soon to split into the PRA and FCA) is increasingly expecting firms to ensure that regulatory compliance permeates throughout the organisation's culture instead of relying on isolated legal policies and procedures which risk being ignored in practice.  The decision is therefore not just relevant to listed companies, but also to FSA regulated firms who are under obligations to implement systems and controls to counter the risk of financial crime.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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