Change in Control

As early as possible in a corporate transaction, you or one of your team should check the Financial Services Register (the "FCA Register"). The FCA Register will reveal whether or not the entity or one of the entities in the group you are purchasing is an Prudential Regulatory Authority ("PRA") and/or Financial Conduct Authority ("FCA") authorised firm, the Buyer (and to a certain extent the Seller) will need to consider the Change in Control Regime under Part 12 of the Financial Services and Markets Act 2000 ("FSMA"). 

What is the Change in Control Regime?

Part 12 of FSMA sets out that persons who decide to acquire or increase control (i.e. changes in shareholding or voting rights above a certain threshold) in an authorised firm are obligated to notify the appropriate regulator of the proposed changes in control in that business.  This notification must be sought prior to the change in control in order to seek the FCA's prior approval.  It is a criminal offence if such persons proceed with the acquisition or increase in control without notifying or receiving approval from the appropriate regulator.  The process of notifying is contained in section 178 of FSMA.  

In addition, any authorised firm that is subject to a change in control must notify the appropriate regulator about the change in control, and then also make a notification when the change of control has taken place. 

This means that in practice if there is a change in ownership contemplated as part of a group restructuring, public takeover or private acquisition, approval must be received from the regulator before completion can take place. 

When does the Change in Control Regime apply?

By way of reassurance, not all changes in control will need to be notified to the appropriate regulator.  Banks, insurers, payment/electronic money institutions and investment firms follow the approach taken in the EU qualifying holdings regime under the Acquisitions Directive, which means that a person with a 10% (20%; 30%; or 50% or more) holding will be considered a controller.  

For firms referred to as non-directive firms e.g. insurance intermediaries, consumer credit lenders the threshold for a controller is 20% or more. While limited permission consumer credit firms have a threshold of 33%. 

Since 11 August 2022, registered cryptoasset firms also fall within the change in control regime if 25% or more of the business is being acquired.  

Some authorised firms fall outside of the regime such as, open-ended investment companies, UCITS qualifiers and sole traders, and others benefit from an adapted version like fund managers. 

Which regulator is deemed to be the appropriate regulator?

The regulator who you will submit your section 178 notification to will depend on whether the authorised firm is authorised by the PRA or the FCA. If the firm is authorised by the PRA, the appropriate regulator is the PRA and for all other firms, the appropriate regulator will be the FCA. 

A section 178 change in control notification 

The obligation to complete and submit a change in control notification is on the Buyer, with the notification being made using the forms specified by the appropriate regulator.  The obligation is triggered once the Buyer "decides" to acquire or increase control over an authorised firm.  This generally means once a decision has been made. In the context of a share purchase sale, the FCA guidance states that notification will not usually be requires before the Buyer enters into an SPA, with the SPA including a condition to obtain change in control approval before the transaction completes.

The FCA's forms are on its notification forms webpage and the PRA forms on its change in control webpage.  There are specific forms depending on the Buyer's legal status e.g. corporate controller form for limited company and limited liability partnership.  In addition, the form will be supported by a number of supplemental documents.  Once completed, the section 178 notification should be sent to the appropriate regulator via email to the allocated email address set out on the PRA and FCA webpages.  

Assessment period

The date the appropriate regulator acknowledges receipt marks the start of the assessment period. The appropriate regulator has 60 working days but if can interrupt the assessment period should it require further information and extend the assessment period by a further 20 working days. This interruption will "stop the clock", meaning that the assessment period will not start to run again until the appropriate regulator has received the information it requires.     

Over the past few years, experience has shown that the regulators, particularly the FCA, have found it difficult to process notifications in a timely manner and some clients have found themselves waiting more than 6 months for approval.  The FCA has acknowledged this and provided updates to its own webpages relating to delays in allocating notifications. A December 2022 update to the FCA's website is now showing that notifications should be taking between 2 to 4 weeks to allocate to case officers. We are starting to see progress on this and will continue to monitor this issue.

Some Top Tips when it comes to change in control notifications

1. What if there is more than one prospective controller?  If there is more than one prospective controller a notification must be submitted for each but there is no need to duplicate information already provided in another form.  One controller form can be treated as the base document and then there is opportunity to indicate on the other forms that this information is contained in that base document.  
2. Is a business plan needed? This obligation applies to individual, partnership and corporate controllers.  In addition, not all thresholds will trigger a business plan so make sure that you review the form carefully to see whether or not you need to account for the drafting of a business plan.  If a business plan is needed, make sure that it covers all minimum requirements noted in the section 178 form and provides sufficient detail on these areas.  You will ideally want to compile some of this information in cooperation with the authorised firm or its parent.  
3. Allow for sufficient time in your transaction plan as there could be delays to your schedule if the application is deemed incomplete. You should also factor in the time it takes to complete, submit and wait for the appropriate regulator's assessment when agreeing the Long Stop Date in the Purchase Agreement.  
4. In the Purchase Agreement, ensure that it contains conditions that need to be satisfied which set out the change in control process, Seller/Buyer obligations, each parties roles and timing expectations.  Completion of the Purchase Agreement should be conditional on receipt of the appropriate regulator's approval. 
5. Can a section 178 notification be submitted before a Purchase Agreement is signed?  Yes, it is possible to submit a notification prior to signing the Purchase Agreement with the Buyer enclosing a copy of the draft agreement.  However, the appropriate regulator may consider that the notification is incomplete or require it to be furnished with the final form of the Purchase Agreement in order to conclude its assessment period to ensure it has the full measure of the transaction.
6. What happens if the appropriate regulator requests further information?  If you receive requests for further information from the appropriate regulator, make sure that you respond to these as quickly as possible within the deadline set by the regulator.