Chris Potts was head of market making at Evolution Securities when he was slapped with a £75,000 penalty by the Financial Services Authority in 2004. The charge, meted out for Potts’ role in short selling AIM-listed Room Service, was accompanied by a £500,000 fine for Evolution. He left the brokerage shortly after.
Potts re-emerged in the Square Mile yesterday as a controlling shareholder in XCAP Securities, a fresh project with former London Stock Exchange regional director Daron Lee as chief executive. Ex-Eversheds lawyer Mark Holleran is legal director.
The firm is looking to muscle into the small and mid-cap space occupied by the likes of Numis Securities by offering corporate broking, market making and advisory services.
Last night Lee said Potts was acting as a consultant to the company on its market making business and was not a director. He said: “We have done a lot of due diligence on Chris, both for the FSA and for ourselves. We have taken numerous references from people within the industry and from outside. He was one of the most popular market makers in the City for years and I am more than comfortable with having him on board.”
XCAP has raised £3m in startup funding and plans to raise a further £10m through an initial public offering on AIM in the summer. The core trading and market making parts of the bank will be run from Cornhill in London, while back-office functions and asset management will be based in Cheshire.
The firm has hired 54 staff, including around 20 retail brokers and five corporate brokers. It is likely to bolster its large cap market making team before the end of the year and could also add a proprietary trading desk.
Lee said XCAP had already signed up two clients and was in talks with a third, although he could not disclose their names for regulatory reasons.
“In our view the small to mid-cap sector has been served very poorly in the past few years,” he said. “There has been poor liquidity and it’s been difficult for companies to raise the funds they need. We plan to be pro-active. We think we can add value.”
HOW TO REGISTER A BANK WITH THE CITY WATCHDOG
THE Financial Services Authority has stepped up its game since the financial crisis. Getting clearance for new projects is not easy, and of all the businesses to squeeze through the regulator’s tests an investment bank must rank as one of the toughest.
The FSA tends to have informal chats with prospective applicants before they submit their details. A spokesman says the starting point is a sound business plan – growth forecasts, capital raising and details of the management team are all crucial.
Daron Lee, XCAP’s boss, says he had lengthy discussions with the regulator about the role of Chris Potts, who was fined but not banned from operating in the City while head of market making at Evolution Securities.
Lee says he did not propose Potts as a director. The FSA was eventually happy to sign off Potts’ position as a consultant to the business after constructive chats and references from people who knew him inside and beyond the Square Mile.
The more formal phase of the application process follows. A firm has to submit its staff organisation chart, compliance procedures, advisers’ details, monthly profit and loss forecast for the first year’s trading and monthly cashflow forecast. Also demanded by the watchdog are a monthly balance sheet forecast and a monthly forecast of the company’s regulatory capital compared with the FSA’s requirements. The regulator aims to give applicants a decision within six months.
Lee says: “It’s an arduous process, but it does have a benefit in that we are a strongly regulated business, which gives clients confidence.”