Navigating the Change in Control process: Top tips from the PRA and FCA new guidance

The FCA and PRA are consulting on proposals to replace EU guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (3L3 Guidelines) – the UK equivalent of change in control assessments under section 178 of FSMA. The consultation closes on Friday 23 February 2024.

Persons who acquire or increase control in a UK authorised firm need to obtain pre-approval from the PRA and/or the FCA before they can complete the acquisition. ‘Control’ means shares or voting rights in the UK authorised person or their parent that crosses specified thresholds (there are different thresholds for different types of firms) or otherwise gives the acquirer “significant influence” over the management of the UK authorised firm. Failure to obtain pre-approval is a criminal offence and the regulators can apply to the court to force an unwinding of the transaction. This impacts completion timing – putting together a submission can be a time-consuming process and the regulators have 60 working days to assess the notification for approval from receipt of a complete application (plus any ‘stop-the clock’ additional time’).

The proposed guidance is primarily relevant to persons who are seeking to acquire a UK authorised firm, existing shareholders of a UK authorised firm who may be considering restructuring or increasing shareholdings or seeking additional to have additional rights or influence over a UK authorised firm.

The proposed guidance largely replicates 3L3 Guidelines and the PRA and FCA’s existing guidance, but includes additional guidance which has been re-worded to reflect the UK approach. The regulators have also added guidance on when they would impose a condition to an approval to reflect the new power given to them under FSMA 2023.

Top 10 Tips from the New Guidance

1. Examples of what amounts to “significant influence” which the regulators say are based on real-world UK examples. These include: the ability to direct or influence decisions made by the board, despite not being a member of the board; making recommendations to the board of the authorised firm which are “almost always” followed, as demonstrated by board minutes; and the existence of veto rights over material matters in relation to the running of the authorised firm such as changes to the business plan.
2. Guidance that the regulators will likely consider family members, those with close relationships, or those controlled by a common parent undertaking to be ‘acting in concert’ and therefore their shares/voting rights will likely need to be aggregated to determine the level of control held.
3. A renewed focus on early engagement prior to submission. While early engagement with the PRA is usual; it is less so with the FCA.
4. Clarification that groups who make several acquisitions over a 12-month period (for example, Private Equity firms) are encouraged to discuss information requirements with the FCA prior to formal submission.
5. Expectation that any linked SMCR applications (approvals for new directors or senior managers of the UK authorised firm) to be submitted at the same time, or shortly after, the change in control notification, where possible.
6. Guidance on the additional information they may require in different types of ‘complex cases’. For example, where the acquirer proposes to make material changes to the authorised firm’s business plan, governance arrangements or capital/liquidity position (a ‘transformative change in control’), the FCA may require additional information on the cost-benefit analysis undertaken to understand the rationale for the acquisition vs another regulatory application route.
7. The proposed guidance on approach to determining ‘completeness’ which triggers the 60 working day assessment period, broadly reflects the regulators’ current approach. However, the FCA has, interestingly, added guidance that information provided as part of the notification may still subsequently be assessed to be incomplete, especially if any new information comes to light or there are amendments to the specifics of the proposed acquisition.
8. Where the assessment of the reputation of the proposed controller indicates risks, the regulators may seek to mitigate those risks by imposing conditions; but may be asked to reconsider whether the contemplated proposed transaction remains appropriate. The regulators may also use conditions where there are outstanding matters, e.g., outstanding proceedings against a proposed controller.
9. Clarification that when assessing the financial soundness of the proposed controller, they may consider the likely influence and nature of the proposed controller (e.g., strategic investor v. private equity fund) and their capacity to provide further capital to the UK authorised firm in the short to medium term.
10. The regulators will object to the acquisition where there are reasonable grounds to suspect that money laundering or terrorist financing is being or has been committed or attempted or where the risk of such activity could increase.

Please see:

• CP25/23 – Supervisory statement – Prudential assessment of acquisitions and increases in control
• Draft supervisory statement – Prudential assessment of acquisitions and increases in control
• FCA Guidance – Prudential Assessment of Acquisitions and Increases in Control
• JC GL 2016 01 Joint Guidelines on prudential assessment of acquisition and increases of qualifying holdings – Final