If you’re planning a corporate transaction or increasing your stake in a UK financial firm, understanding the rules on change in control in the Financial Services and Markets Act 2000 (‘FSMA’) is essential.
The change in control regime requires that any ‘significant’ changes in the ownership or control of firms regulated by the Financial Conduct Authority (‘FCA’) or the Prudential Regulation Authority (‘PRA’) need to be approved by these regulators before the change in ownership can go ahead.
Failing to notify the regulator before proceeding with an acquisition or increase in control is a criminal offence, so it’s crucial that you get this process right.
In this article, we’ll break down the change in control regulatory framework, guiding you through the key steps and considerations to help you successfully navigate this process, ensuring you’re compliant with the regulator every step of the way.
Contents:
What is the purpose of the regime?
The FCA and PRA need to know who owns or controls each of the firms that they oversee. This is because these controllers can greatly influence how these firms operate, so the regulators need to be sure that all firms are run by suitable people and can be properly supervised.
Part 12 of FSMA sets out that before anyone can start controlling, increase their control past certain thresholds, they must get approval from the FCA or PRA. They also need to inform these authorities if they are planning to reduce their control.
What is a controller?
First things first, not every single transaction needs approval. You’ll only need to apply for approval from the FCA or PRA if the transaction will make you a ‘controller’ of the firm (or changes your control band).
You'll become a controller if the transaction will result in you owning:
- 10% or more of the shares or voting power in firms such as an insurer, investment firm, bank, or payment/electronic money institution;
- 20% or more in a non-directive firm like a consumer credit lender or insurance intermediary;
- 25% or more in a registered cryptoasset firm; or
- 33% or more in a limited permission consumer credit firm.
When does the regime apply?
You’ll need to comply with the change in control regime when you’re acquiring an authorised by the FCA or the PRA, or increasing your stake in one, and this transaction will make you a controller. You can find out whether an entity is authorised by checking the Financial Services Register.
If you’re entering into a transaction with a group of entities, the regime will also apply if any of the companies in the group is authorised.
Section 178 change in control applications
When you decide to buy, or increase your stake in, an authorised firm, to the point that you would be deemed a controller, the onus is on you as the buyer to notify the regulators.
You can do this by submitting a notice, called a Section 178 notice.
The requirement to serve a notice is triggered once you make a clear decision to proceed but before you finalise your purchase.
Here’s the submission process you’ll need to follow for your Section 178 notice:
- Determine necessity: Check the Financial Services Register to make sure the firm is regulated, and then check whether your transaction makes you a ‘controller’ as defined by FCA or PRA rules.
- Fill out the appropriate form: Choose the correct form based on your status and the regulator you are notifying. You can find the FCA forms here, and the PRA forms here.
- Gather supporting documents: Collect all necessary supporting documents that you’ll need to accompany your notification form. In particular the post-completion structure chart and business plan.
- Submit notification: For FCA notifications, submit your notification using the designated portal provided on the FCA website. For PRA notifications, use the designated email address provided on the PRA website.
How long does the process take?
The regulator has 60 working days to consider request for consent to the change in control. The clock starts once the regulator acknowledges receipt of a ‘complete’ application.
However, if the regulator needs more information from you, it can pause the assessment period until it has received all the information it needs.
In the past, the FCA has struggled to meet the 60-day deadline. Although this problem now seems to have been mostly resolved, it’s worth checking the Financial Conduct Authority updates page if your application is taking longer than expected.
In terms of outcome, the regulator will:
- approve the acquisition without any conditions;
- approve it with certain conditions; or
- suggest rejecting the acquisition.
If your application is approved, you will receive an approval notice. If the regulator plans to either object, or approve the acquisition with conditions, they will notify you by issuing a Warning Notice.
This notice will also provide details on how you can appeal the decision.
2023 regulatory update
In 2023, the Financial Services and Markets Act 2023 granted the FCA and PRA more power to set specific conditions when approving new controllers, even if there's no major issue that would normally cause a rejection.
This new ability helps the FCA and PRA better protect the financial system, making sure that companies changing hands remain stable and safe.
As a potential new controller, be prepared for additional requirements and consider seeking expert advice to navigate these changes effectively.
Case studies
So, now that we know how the FCA change in control regime works in theory, let’s look at some examples of how the process works in practice:
Scenario 1: Acquiring a financial adviser firm
- Situation: Emma’s group decides to purchase a financial adviser firm.
- Action: After signing the share purchase agreement, which contains a requirement that completion is conditional on FCA consent, Emma submits a Section 178 notice, including the corporate controller forms and necessary supporting documents.
- Outcome: The FCA reviews the submission within 60 working days and grants approval with no conditions. Once that consent is received, the deal can complete.
Scenario 2: Increasing stake in an insurance firm
- Situation: John’s company currently holds a 15% share in an insurance firm and plans to purchase an additional 10%, which would constitute moving up a control band.
- Action: John notifies the PRA by submitting the individual controller form before signing the agreement to purchase the additional shares.
- Outcome: The PRA pauses the assessment to request more details about John’s finance background. After providing the required information, John receives approval, and the transaction proceeds.
Next steps
Here are some questions to consider ensuring you comply with the change in control regime before you proceed with an acquisition involving a firm authorised by the FCA or PRA:
- Will the transaction make you a controller (or change your current control band)?
- Is completion of the transaction subject to the relevant regulator’s approval of any change in control?
- Have you notified the regulator?
- Is your completion timeline aligned with the 60-day assessment period?
- Have you consulted legal experts?
Conclusion
Navigating the updated FCA and PRA regulations for change in control can be complex, especially with the introduction of new conditions and the need to adhere to strict timelines. Our team of financial services solicitors is ready to provide expert advice and assistance tailored to your specific needs.
