FIRST ACTION BY THE FSA FOR A BREACH OF THE LISTING RULES UNDER FSMA 2000

On 12 December 2003 the FSA released a public statement censuring SFI Group plc ("SFI") for a breach of the Listing Rules. This public censure constitutes the first action taken by the FSA since its assumption of statutory powers in December 2001 for a breach of the Listing Rules.

1.1 Powers of the FSA
Under the Financial Services and Markets Act 2000 (FSMA) the FSA has a wide range of discretionary powers and enforcement actions in respect of regulatory and disciplinary matters. It has at its disposal disciplinary sanctions for breaches taking place on/after 1st December 2001, comprising a fine of such amount as it considers appropriate, or a public statement of censure, where it is entitled to impose a penalty. The person or entity who is the subject of the disciplinary matter has the right to a fresh hearing at the Financial Services and Markets Tribunal (FSMT). Otherwise the FSA decision takes effect.

1.2 The Breach
On 30 July 2002 SFI announced its preliminary results which were found by the FSA to be inaccurate and misleading. SFI's accounting systems and controls had failed to reliably determine its financial position. The Company's accounting systems and controls were not appropriate to its business or growth strategies, nor were they sufficiently tough to support forecasts and projections. These failures persisted for at least two years before the Company made an announcement and only in November 2002 did SFI identify the accounting discrepancies.

1.3 Breach of the Listing Rules
Under Paragraph 9.3A of the Listing Rules, "a company must take all reasonable care to ensure that any statement, forecast or any other information it notifies to a Regulatory Information Service or makes available through the UK Listing Authority is not misleading, false or deceptive..."
The FSA decided that the announcement was false and misleading. SFI had contravened Rule 9.3A by a serious failure to take reasonable care. The announcement presented a materially overstated and over-optimistic view of SFI's financial results and future prospects, as at 30 July 2002 also in relation to the results for the two previous financial years.

The FSA considered that the market and the Company's shareholders relied on the accuracy of the announcement and that there would have been a substantial movement in its share price if it had been accurate.

1.4 Public Censure instead of a Fine
For the above reasons the FSA would have considered it appropriate to propose a significant financial penalty, but for the relevant factors of Chapter 8 of the UKLA Guidance Manual.

There was no evidence to suggest the breaches were deliberate or that SFI knowingly failed to have proper regard to its obligations. As soon as the Company became aware of the overstatement, it notified the UKLA, suspended its shares, and announced that solicitors were to undertake a full investigation. SFI implemented a three-year Recovery Plan to rebuild the business, changing the structure of the finance department and appropriate accounting practices. The Company had not previously been subject to formal disciplinary action for breach of the Listing Rules.

The FSA considered the UKLA Guidance Manual and considered the Company's financial position: current and projected trading was insufficient to support its high level of debt and its equity value was likely to be completely eroded. Paragraph 8.11.3 entitles the FSA to issue a public statement instead of imposing a fine in such an exceptional situation of likely serious financial hardship. SFI was co-operative to the investigation and had moved quickly to agree the facts and settle the matter. Under Paragraph 8.11.3(4), this may be a factor in favour of public censure.

1.5 Conclusion
The FSA considered all the circumstances and decided that SFI's case was sufficiently exceptional, bearing in mind the above factors, that it would issue a public statement of censure rather than impose a financial penalty. SFI does not intend to refer the matter to the FSMT.

If a company finds itself in breach of the Listing Rules it should notify the UKLA immediately and follow the course of action adopted by SFI. Companies in this situation should consider the provisions of the UKLA Guidance Manual. Public censure is by far the preferable option. A fine can be considerable and should at all costs be avoided.

If you require further information on any matter covered in this note, please contact your principal contact at Charles Russell or Simon Gilbert, Katy Knight, Clive Hopewell or Alexander Keepin (London), Francis Rundall or Richard Norton (Cheltenham) or Geoff Sparks (Guildford) and on 0207 203 5000.

Please note that the summaries above are a general indicative guide only. They are not exhaustive. This information has been prepared by the firm as a service to our clients. As it is a general guide, we recommend that you seek professional advice before taking action. No liability can be accepted by the firm for any action taken or not taken as a result of this information. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of the Law Society. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide.