The DPA relates to false accounting by Tesco’s subsidiary, Tesco Stores Ltd, between February 2014 and September 2014.  It is a voluntary agreement under which Tesco Stores Ltd will not be prosecuted provided the business fulfils certain requirements, including paying a financial penalty of £129m.

The proposed DPA was the subject of a preliminary court ruling yesterday, and the SFO and Tesco Stores Ltd will now seek final judicial approval to the DPA from the court on 10 April 2017.

The hearing will take place at 10am on Monday, 10 April before Sir Brian Leveson QC, President of the Queen’s Bench Division, at the Southwark Crown Court, sitting at the Royal Courts of Justice.

The SFO says it will not provide further information until this hearing has concluded, but has confirmed that, if approved, the DPA will result in Tesco Stores Ltd paying both a financial penalty of £128,992,500 and the SFO’s full costs.

The regulator points out that this potential DPA concerns only the potential criminal liability of Tesco Stores Ltd, and does not address whether liability of any sort attaches to Tesco plc or any employee or agent of Tesco or Tesco Stores Ltd.

Revenue recognition

The irregularities in Tesco’s accounts related to revenue recognition issues linked to the way in which income from deals with suppliers was booked by the retailer. A subsequent investigation into the six-month trading update for the period ending 23 August 2014 identified an overstatement of its expected profit for the half year, principally due to the accelerated recognition of commercial income and delayed accrual of costs.

In a regulatory statement, Tesco said: ‘Over the last two and a half years, Tesco has fully cooperated with the investigation and undertaken an extensive programme of change, which the SFO has recognised in offering the DPA. This programme includes extensive changes to leadership, structures, financial controls, partnerships with suppliers, and the way the business buys and sells.’

FCA findings

Tesco has also revealed that it has agreed with the Financial Conduct Authority (FCA) to a finding of market abuse in relation to the trading statement it announced on 29 August 2014, which gave a false or misleading impression about the value of publicly traded Tesco shares and bonds.  This statement overstated the expected profits of the group at that time and arose from the same historic accounting practices. 

In making its finding, the FCA stated that it is not suggesting that the Tesco board of directors knew, or could reasonably be expected to have known, that the information contained in that trading statement was false or misleading.

Compensation scheme

Tesco has agreed with the FCA (under its statutory powers) to establish a compensation scheme which will compensate certain net purchasers of Tesco ordinary shares and listed bonds who purchased those securities for cash between 29 August 2014 and 19 September 2014 (inclusive).

The cost of the compensation payable is estimated by both Tesco and the FCA to be in the region of £85m excluding interest. Tesco has appointed KPMG to administer the scheme, with oversight from the FCA.  A further announcement will be made when KPMG has completed the preparations required to open and operate the scheme, which is expected to be before the end of August 2017.

The FCA has a database of all reported share transactions during the relevant period which indicates there were about 10,000 retail and institutional eligible investors who between them purchased approximately 320m shares during the period and who may be eligible for compensation.

Each net purchaser of shares will be entitled to compensation of 24.5p per share purchased, plus interest at 1.25% per annum if the net purchaser is an institutional investor or 4% per annum if the net purchaser is a retail investor, in each case with such interest running from 19 September 2014 until approximately four months after the opening of the scheme.  

No FCA penalty

The FCA said this is the first time it has used its powers under section 384 of the Financial Services and Markets Act to require a listed company to pay compensation for market abuse.

Andrew Bailey, FCA chief executive, said: ‘Dissemination of information that gives a false or misleading impression as to traded securities harms the integrity of our markets. The FCA is committed to UK markets being fair, transparent and thus competitive.

‘Tesco and its board are doing the right thing here, taking appropriate responsibility and agreeing to rectify the consequences of the misconduct. They have cooperated fully with us and this sets a good example for the market and so is a good outcome for Tesco and investors.’

As a result of Tesco’s conduct, the FCA says it will not impose any additional sanction on them for market abuse.

Tesco’s statement went on to say that, subject to approval by the court and compliance with the terms of the DPA, this concludes the SFO's investigation into Tesco. It also concludes the FCA's proceedings. The group expects to take an exceptional charge of £235m in respect of the penalty, compensation scheme and related costs.  This will be booked as an adjusting post balance sheet event in 2016/17.

Dave Lewis, Tesco group chief executive, said: ‘Over the last two and a half years, we have fully cooperated with this investigation into historic accounting practices, while at the same time fundamentally transforming our business. We sincerely regret the issues which occurred in 2014 and we are committed to doing everything we can to continue to restore trust in our business and brand.’

Tesco will report full year 2016/17 results on 12 April 2017.

Useful links

The FCA final notice for Tesco is here

Further information on the Tesco shareholder compensation scheme is available on KPMG’s website here

 Tesco has published FAQs about the scheme which are available here