There is an obligation when acquiring or increasing “control” over a UK authorised person, e.g. an investment firm, a credit institution, a fund manager or a payment services provider, to notify and obtain prior approval from the appropriate UK regulator(s) before “control” is obtained or increased.
In summary, the key points to consider to avoid delays and issues in a transaction include:
This client alert is intended to serve as a practical guide to the relevant approval obligations and the regulatory application and assessment process and is not designed to be an exhaustive list of the applicable rules and regulations.
Definition of a UK Authorised Person
An “authorised person” for the purpose of the change in control regime discussed herein means (i) any person who has a permission to undertake regulated services from the UK Prudential Conduct Authority and/or the UK Financial Conduct Authority; (ii) a firm authorised to undertake regulated activities in an EEA country operating in the UK on the basis of an EEA passport; (iii) certain firms authorised under the UCITS Directive; (iv) firms authorised under the Open-Ended Investment Companies Regulations 2001 (SI 2001/1228); (v) the Society of Lloyd's; (vi) an “authorised payment institution”.
The relevant regulatory regime is set out in Part XII of the Financial Services and Markets Act 2000 (FSMA), which implements the Acquisition Directive (2007/44/EC). FSMA places an obligation on any person (whether an individual, partnership, a limited company or a trustee) who decides to acquire or increase “control” in a UK authorised person (the “proposed controller”) to notify, and obtain prior approval from, the appropriate UK regulator(s), before control is obtained or increased. The appropriate UK regulator(s) assessing the application will be concerned with the suitability of a proposed controller to “control” a UK authorised person. Failure to comply with these requirements is a criminal offence in the UK.
From January 2018, the FSMA change in control regime also applies to “authorised payment institutions” under the revised Payment Services Directive (PSD2).
Will You Be a Controller?
The definition of “controller” under FSMA is broad and, indeed, broader than one might expect or have previously come across. Any person looking to acquire, directly or indirectly, “control” in an UK authorised person will need to carefully evaluate whether they will become a “controller” within the meaning of applicable regulatory rules.
Under FSMA, a “controller” is someone who holds:
The definitions of “shares” includes non-voting shares in a company as well as interests in legal vehicles, such as a partnership, and of a “parent undertaking”, which can include individuals in addition to corporate entities.
The last limb of the definition means that the shareholding or voting power need not be 10%, as the test will be met as long as a holding would enable a proposed controller to exercise significant influence over a UK regulated firm, regardless of whether such influence is actually exercised or not.
The holding of shares or voting power by A includes any shares or voting power held by another (“B”), if A and B are acting in concert. The inclusion of “acting in concert” in the definition is designed to ensure that any legal or natural persons who decide to acquire or increase control in accordance with an explicit or implicit agreement between them will be captured. Parties to a share purchase agreement may be deemed to be acting in concert if the agreement contains provisions governing or otherwise regulating the exercise of the rights attaching to certain of the shares.
Parent undertakings of minority shareholders are also considered to be controllers due to the extended definition of “voting power” under FSMA.
A proposed controller will have to notify the appropriate regulator(s) if the percentage of its shares or voting power increases so as to move into a different control band.
For the “directive firms”, the control bands are:
These thresholds are also relevant to e-money firms.
A “directive firm” is one of the following:
A single threshold of 10% applies to authorised payment institutions authorised under PSD2.
For “non-directive firms”, i.e., UK authorised persons other than a “directive firm”, a single notification threshold of 20% applies.
A single notification threshold of 33% applies to limited permission consumer credit firms.
The Application Process & Additional Documents
A proposed controller will most likely notify, and seek approval from, the appropriate regulator(s) by submitting an application form referred to in FSMA as a “section 178 notice” (the “section 178 notice”). Where there are numerous controllers, a section 178 notice form for each controller should be submitted. The regulators also require additional information to be provided, including appropriate structure charts, CVs for proposed individual controllers and directors of the proposed corporate controllers, financial statements, a proof of funding and in certain instances, a regulatory business plan.
When assessing the application, the criteria that the appropriate regulator(s) must consider include the reputation of the proposed controller; the reputation and experience of any person who will direct the relevant UK regulated firm’s business post-completion; the financial soundness of the proposed controller and particularly how this relates to the intended regulatory business plan of the relevant UK authorised person; whether the UK authorised person will be able to comply with the applicable prudential requirements to all of the regulated activities for which it has or will have permission; and whether there are reasonable grounds to suspect that any money laundering or terrorist financing is being committed (or attempted) or the risk that such activity could increase.
The appropriate regulator(s) will either:
It is a criminal offence to proceed with an acquisition or increase in control in contravention of a warning notice.
The FCA must consult the PRA before making the decision on the application if the UK authorised person to which the section 178 notice relates has as a member of its immediate group a PRA-authorised person, or the section 178 notice-giver is a PRA-authorised person.
Points to Consider
The FCA reported that, in the period from April 2017 to May 2018, it made its decision within the 60-day assessment period for 100% of “complete” section 178 notices. It is therefore recommended that a proposed controller take full advantage of the pre-submission period to ensure that the correct and relevant information is gathered and the appropriate regulator(s) is/are contacted to resolve any potential gaps or issues before submission.
Close attention will need to be paid to the definition of “controller”, as even if the target entity itself is not a UK authorised person, the proposed controller could still be caught by the broad definition under FSMA.
The proposed controller should be aware that preparing certain information such as business plans and structure charts could be time consuming, especially if the group structure is large and complex.
Acquiring relevant information will almost certainly require contact with and some reliance on the relevant UK authorised person, who may consider certain information to be sensitive or confidential.
Transaction documentation will need to take into account the delay between signing and closing and be carefully drafted to ensure that the proposed controller does not accidentally obtain control prior to approval.
Sampaquita Tarrant, a trainee solicitor in the firm’s London office, contributed to the writing of this alert.