Change in control: a cautionary tale

Change in control: a cautionary tale

A recent supervisory notice highlighted the importance of getting the ‘change in control’ process correct when acquiring a UK financial services firm. It is also a timely reminder for investment firms, authorised payment institutions and E-money firms of the requirements for a change in control[1]. In this article, we highlight the rules and the severe consequences of failing to comply with them.

On 10 March 2023, the Financial Conduct Authority (“FCA”) issued a supervisory notice to Roark Holding Ltd[2] (“the Firm”), varying its authorisations under the Payment Services Regulations 2017 (“PSRs”). The action was due to the Firm’s failure to inform the FCA of a major change in circumstances.

 

An overview of the change in control process

Part XII of the Financial Services and Markets Act 2000 (“FSMA”), requires controllers to seek approval from the FCA before gaining (or in some circumstances increasing) control over a firm that is authorised by the FCA. It is a criminal offence if a person fails to both seek and obtain such approval before making the acquisition in question.

The FCA sets out the relevant control thresholds or bands for determining a change in control here[3].

There is also an obligation on authorised firms to inform the FCA of any proposed or effected changes in control as set out in the FCA Handbook SUP 11.

 

The consequences of a change in control failure

The FCA has imposed severe restrictions through the supervisory notice. The Firm has been instructed to:

  • immediately cease authorised activities under the PSRs;
  • stop onboarding new customers;
  • pay positive client cash balances held by UK clients into a bank or payment account held in the client’s name;
  • write to clients informing them of the notice and restrictions placed upon the Firm; and
  • secure all books and records ensuring they can be provided to the FCA promptly upon request.

 

Timeline of events

The FCA obtained Whatsapp messages between three individuals in which they discussed collectively acquiring the Firm between 21 April 2020 and 14 December 2020.

  • 3 June 2020 – Individual 3 suggested he had reached an agreement to acquire 33% of an FCA regulated firm and offered Individual 2 and Individual 1 the opportunity to partner with him;
  • 4 June 2020 – Individual 2 suggested that they jointly offer $200,000 to take over 100% of Roark and split it 3 ways. Individual 3 and Individual 1 agreed to this proposal;
  • 19 August 2020 – Individual 3 suggested that “we keep it simple” and include just Individual 1’s name on the Notification and that “we just have an agreement in the backend” as regards the shareholding and management of the Firm;
  • 25 August 2020 – the trio agreed to remove Individual 3’s name from a “contract” if the FCA asked for it;
  • 21 September 2020 – Individual 1 completed a Change in Control Notification in relation to the Firm. No further parties were declared as proposed controllers.
  • 24 September 2020 – the Change in Control Notification was submitted to the FCA;
  • 27 September 2020 – the FCA approved the Change in Control Notification;
  • 30 December 2020 – according to Companies House records, Individual 1 was appointed the sole director and significant controller of the Firm;
  • 12 January 2022 – Individual 2 made representations as part of a personal mortgage application, that stated he held a 33.33% shareholding in the Firm.

 

Reasons for the FCA action

  • information was withheld from the FCA on the Change in Control Notification creating a serious risk that the regulator would be misled;
  • the FCA was not satisfied that Individual 1 was a fit and proper person;
  • the regulator was unable to assess whether Individual 2 and Individual 3 were fit and proper;
  • the Firm was no longer meeting one or more of the conditions under regulation 6 of the PSRs (conditions for authorisation as a payment institution) and regulation 37 of the PSRs (duty to notify change in circumstance);
  • the action was considered desirable to protect the interests of consumers; and
  • the FCA had very significant concerns that the Firm may have failed to comply with its obligations under Principle 11 and that it constituted a threat to the stability of, or trust in, a payment system.

 

Conclusion

The allegations of withholding information from the regulator are severe in this case, but the change in control process can routinely cause issues for firms. There are two common risks: (i) new or existing controllers being unfamiliar with the requirements under FSMA; and (ii) commercial deals for change in control being agreed without prior approval from the FCA.

 

How can C&G help?

We assist firms with their Change in Control Notifications, ensuring that our clients fully understand the requirements and managing correspondence with the regulator.

Contact us today if you need assistance or advice.

 

References

[1] 2023. Requirements for a change in control. Financial Conduct Authority, available at: https://www.fca.org.uk/firms/change-control/change-control-requirements (last accessed 27 March 2023)

[2] 2023. First supervisory notice to Roark Holdings Ltd. Financial Conduct Authority, available at: https://www.fca.org.uk/publication/supervisory-notices/first-supervisory-notice-roark-holdings-ltd-2023.pdf (last accessed 27 March 2023)

[3] 2023. Control thresholds or bands. Financial Conduct Authority, available at: https://www.fca.org.uk/firms/change-control/control-thresholds-bands (last accessed 27 March 2023)

Lewis Gurry

Lewis Gurry

Lewis Gurry

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