Navigating the FCA change in control process can be challenging. Many find it difficult, especially those looking to acquire an FCA-authorised firm who may need to familiarise themselves with the requirements.

The FCA recently published new guidance on “the assessment of acquisitions and increases of qualifying holdings in the financial sector”. FG24/5 provides detailed instructions for UK authorised firms. It is essential reading for anyone looking to acquire or increase their control over an FCA-authorised firm. Below, we summarise key points and practical takeaways to navigate this complex process.

How to Identify a Controller

Identifying controllers is critical under the Financial Services and Markets Act (“FSMA”). Controllers are categorised by their degree of influence or ownership, including direct controllers, those with significant influence, indirect controllers, and those acting in concert.

  • Direct Controllers: Individuals or entities directly holding 10% or more of shares or voting rights in an authorised firm are considered controllers.
  • Significant Influence: A person’s ability to influence management decisions, such as through board appointments or veto rights, also qualifies them as a controller.
  • Indirect Controllers: These include entities indirectly controlling the firm through voting power aggregation or other ownership structures, such as complex fund or partnership arrangements. All parent undertakings in the ownership chain of a minority controller are captured as controllers of the UK authorised person.
  • Acting in Concert: When acting in concert, shares or voting power must be aggregated to determine whether the change in control notification thresholds have been met. In other words, individuals or groups with shares and/or voting power act with a “common policy” toward the firm’s management. This often involves each party exercising their rights in accordance with an agreement (in writing or otherwise).

 

Identifying different categories of controllers is essential, as each scenario will dictate the type of information and regulatory engagement needed for a successful application.

Notices of Proposed Acquisitions and Increases in Control

For firms undergoing a change in control, the notice of proposed acquisition or increase in control is crucial. Prospective controllers must submit this notification to the FCA under Section 178 of FSMA before the acquisition or increase in control occurs. Here’s what firms need to consider:

  • Pre-notification Engagement: Engaging with the FCA before submitting a formal notice is recommended for particularly complex or high-risk transactions. The FCA provides the following examples of complex or high-risk indicators:
    • material changes in the firm’s business plan, governance arrangements or capital/liquidity position;
    • complex group structures;
    • cross-border acquisitions;
    • significant debt financing is involved;
    • over 20% private equity or hedge fund ownership;
    • over 20% sovereign wealth fund ownership;
    • the UK authorised firm has FCA or PRA granted waivers that could be impacted; and
    • transactions involving firms falling under newer regimes or business models, e.g. FCA-registered cryptoasset firms/UK authorised firms with cryptoasset permissions.
  • Information Requirements: Firms must provide comprehensive information to initiate an assessment, including details about the proposed business plan, governance, and financial structure. Information requirements vary, particularly for complex group structures, cross-border transactions, or private equity holdings.
  • Forms: The appropriate notification forms can be found on the FCA change in control webpage. The FCA may allow a single notification form for multiple controllers where they are part of the same group. This approach should be discussed with the FCA in advance.
  • Completeness of Notification: Notifications are only deemed complete once all required information is satisfactorily provided, allowing the FCA to commence assessment. Incomplete notifications may delay the process, so thorough preparation is essential.

How the FCA Assesses Applications

The FCA’s assessment of a proposed acquisition covers several critical factors:

  • Reputation of the Proposed Controller: This includes an evaluation of integrity and professional competence, looking at past conduct, criminal records, regulatory sanctions, and previous dealings with supervisory bodies.
  • Professional Competence: Controllers are assessed on both management and technical competencies, especially if they will influence the acquired firm’s strategy. Key criteria include relevant experience in financial services and a demonstrated understanding of industry standards.
  • Competence of Proposed Senior Management Appointments: Where the proposed controller intends to appoint new persons to direct the business after the proposed acquisition, such persons will need to meet fitness and propriety requirements under the Senior Managers and Certification Regime (“SMCR”).
  • Financial Soundness: The FCA evaluates the controller’s financial viability and ability to sustain a sound financial structure for the foreseeable future. This includes assessing any debt financing and the controller’s capacity to support the firm in times of financial stress.
  • Compliance with Prudential Requirements: The proposed controller’s business plan is examined to ensure it supports the firm’s ability to meet capital and liquidity requirements and other regulatory obligations. Controllers must demonstrate how they intend to help the firm comply with governance and risk management requirements.
  • Money Laundering or Terrorist Financing Risks: The FCA change in control assessment considers whether the proposed acquisition poses money laundering or terrorist financing risks. Background checks extend to all individuals linked to the controller, including close associates and beneficial owners, with attention to any adverse media or sanctions records.

Common Pitfalls in the FCA Change in Control Process

Firms often face challenges in the FCA assessment process. Common issues include:

  • Complex Ownership Structures: In convoluted structures, identifying the true controller may be difficult, and the FCA will scrutinise any setup that could obscure ownership transparency.
  • Undeclared Influence: Situations where individuals exert influence without being declared as controllers can raise red flags.
  • Incomplete Business Plans: For acquisitions, underdeveloped business plans or inadequate regulatory due diligence can be a stumbling block. Controllers need a well-considered, viable plan to pass FCA scrutiny.
  • Poorly Drafted Change in Control Forms: Inaccurate or incomplete forms can lead to delays or rejections. Ensuring these forms are comprehensive and accurate is crucial for a smoother process.

Expert Guidance and Change in Control Support

Navigating a change in control involves considerable regulatory engagement and preparation. Firms often wonder if a controller’s nationality or jurisdiction might impact an acquisition approval. However, in our experience, the most common obstacles are opaque ownership structures, undeclared influence from third parties, or inadequate supporting information.

At C&G, we have extensive experience helping firms and buyers of authorised entities manage these challenges. Our team supports clients at every stage, from crafting robust business plans to undertaking thorough regulatory due diligence. Whether you’re an established firm considering expansion or a new entrant into the UK market, understanding the FCA’s requirements is essential for a successful change in control application.

Contact us here if you need support in this area.