The policing of the Alternative Investment Market (Aim) has long been a source of contention. Of chief concern is the system of nominated advisers, colloquially referred to as 'nomads', which companies pay to regulate them and ensure compliance with market rules. Nomads are also frequently appointed as corporate brokers charged with painting a company's shares in the best light. Many view this as a conflict of interest, leading some investors to petition the London Stock Exchange (LSE) and the government to block any one organisation from acting in both roles.
Given the widespread disquiet over Aim's corporate governance model, one might expect a litany of examples of nomad-brokers being taken to task for poor oversight. Aside from a £250,000 fine to Nabarro Wells in 2007 over failures in its due diligence in relation to fraud at Langbar International, and the odd slap on the wrist, nomads have largely remained out of the firing line.
On Monday 7 December, the market shivered following a Sunday Times report that stockbroker Cenkos Securities (CNKS) had "recently handed over a cache of documents" to the Serious Fraud Office (SFO) as part of a criminal investigation into accounting practices at Quindell (QPP). Cenkos, which previously acted as nomad and broker to the insurance services group, now known as Watchstone Group (WTG), saw its shares fall by up to 19 per cent on Monday in the wake of the story.
On Tuesday, and after initially declining to comment on the story, Cenkos denied it has provided or been asked to provide "any information to the SFO in relation to any investigation being undertaken by the SFO", adding that the company itself was not the subject of any SFO investigation. The shares duly bounced back, recovering most of the ground lost the previous day.
Cenkos' involvement with its erstwhile client was not short of controversy, however. We do know that last November, Quindell and Cenkos were forced into an ignominious climbdown over the wording of the former's opaque share-transfer arrangement, which appeared to disguise a large share sale by Quindell founder and chief executive Rob Terry. Cenkos was also awarded £5.4m in Quindell shares in 2014 for broking services.
Some feel association with the broker-nomad model is rarely good for the wider market.
"We certainly don't like the idea that a company can be both a corporate broker and a nomad," says Roger Lawson, deputy chairman of the UK Individual Shareholders Society (ShareSoc), which represents private UK investors. "There may be Chinese walls, but effectively the LSE delegates regulation to the nomad. Neither this self-regulation regime nor enforcement appears to work, and was abandoned by the main market a long time ago."
Mr Lawson highlighted the issue in a 2012 letter to Professor John Kay, who had been appointed by the coalition government to lead a review of corporate governance in the UK's equity markets. The publication which came out of that review contained no reference to the nomad system. In its defence, the LSE states that brokerages must set up Chinese walls between brokers and nomads, while juggling the line that a light-touch regulation model is a requirement of a growth market.
There may be other reasons for Paternoster Square's aversion to regime change. Mirroring the regulation of the main market and the UK Corporate Governance Code (which is currently only recommended as 'best practice' for Aim companies) would come at a greater financial cost to the LSE, and potentially discourage companies seeking to avoid the extra rules from listing. A ban on nomads acting as brokers now would also call into question the regulatory rigour of Aim's first two decades.
"There is a whole range of things we can do if nomads don't do the due diligence," Marcus Stuttard, the head of Aim, told the IC earlier this year. "At any point, we can go in and request to go through a company's books, and they are underpinned by the same regulatory bodies as the main market, including the Financial Conduct Authority, the Serious Fraud Office and the City of London Police." The market may nonetheless be primed for a test of that regime soon.
