The PRA/FCA consultation on assessment of changes in control: what you need to know

The PRA and the FCA have published a joint consultation paper on the prudential assessment of acquisitions and increases in control (CP25/23). In the CP, the UK regulators propose to replace the EU guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (3L3 Guidelines) with a new PRA supervisory statement (SS) and FCA guidance. Although the proposed new SS and FCA guidance largely replicate the 3L3 Guidelines and the existing UK aggregation of holdings regime, the proposal includes some interesting changes and clarifications.

The PRA and the FCA adopted the 3L3 Guidelines in 2017, except for the ‘multiplier approach’ relating to the identification of acquirers of indirect qualifying holdings, as this conflicted with the methodology set out in Part XII of the Financial Services and Markets Act 2000 (FSMA). The proposed new PRA SS and FCA guidance would set out the UK regulators’ expectations on:

• identifying qualifying holdings, including the concepts of significant influence, aggregated holdings (replacing SS33/15 and SUP 11 Annex 6G, which provide the current guidance with regard to the aggregation of holdings) and indirect controllers; 
• submitting the change in control notification, the additional information the PRA and the FCA may require, and the approach to completeness;
• the assessment criteria (in accordance with section 186 of FSMA) used to assess notifications to acquire or increase control in PRA and FCA authorised firms operating in the UK; and
• how the PRA and the FCA would use their statutory powers to impose conditions on an approval when it advances their objectives. 

The SS will be applicable to all PRA-authorised firms, and the FCA guidance will apply to FCA-authorised firms (with a few exceptions). With this exercise, the PRA and the FCA are proposing to bring all current related guidance into one SS and a single FCA guidance note, making their expectations clearer. 

The consultation closes on Friday 23 February 2024, and the PRA and FCA propose that the implementation date for the proposed SS and FCA guidance would be summer 2024.

We summarise below the key points of this new CP: 

Conditions on approvals 

Recent amendments introduced by the Financial Services and Markets Act 2023 (FSMA 2023) provide the PRA and FCA with a wider power to impose conditions on change in control approvals where doing so would advance any of that regulator's objectives. The PRA and the FCA propose guidance on when such conditions could be imposed; for example, the regulators may impose conditions where there are outstanding matters the effects of which are uncertain, such as proceedings against a proposed acquirer. 

Prior to FSMA 2023, the PRA and FCA could only impose conditions when they would otherwise object to the acquisition, or when they were required to do so by a direction from the other regulator. The broader power introduced by FSMA 2023 and the guidance in the CP raises the question of whether we will see more conditions imposed on proposed acquirers in the future. 

Aggregation of voting powers of persons acting in concert

The majority of the proposed SS and FCA guidance text on aggregation is not new, as it is taken directly from SS33/15 and SUP 11 Annex 6G, however the PRA and FCA have confirmed that the voting power of persons acting in concert should not be aggregated for the purposes of deeming them to be a parent of an undertaking and/or the undertaking to be a controlled undertaking for the purpose of FSMA s 422(5)(a)(v). This is a helpful confirmation.

Updates on the examples of when additional information may be required

The PRA and the FCA propose to update the examples of when they may require additional information from a proposed controller on top of what is already requested in the application forms. The main examples are:

• Private equity or hedge fund ownership at 20% or more: Although this example is already in the 3L3 Guidelines via an Annex, the 20% stake is not specifically set out in the 3L3 Guidelines. Setting out the percentages makes it clearer when these types of controllers should expect additional information to be required (the examples of the additional information include a detailed description of the performance of previous acquisitions, details of the investment policy and the acquirer’s decision-making framework for the investment decisions).
• Controlling two or more authorised firms: According to the new SS and FCA guidance, when the proposed acquisition would lead to the proposed controller controlling two or more authorised firms, the PRA and the FCA would be likely to request further information on conflicts of interest. As clarified in the “Overview” section of the CP, this is not a change in the PRA’s or the FCA’s approach, but a confirmation in writing of their expectations in such cases.
• The FCA, specifically, may also require additional information in relation to: 
  • firms that fall under the Investment Firms Prudential Regime, if an Investment Firm Group will be created, or added to, as a result of the transaction (further information is likely to include longer range group financial forecasts or management accounts); and
  • cryptoasset business models—due to their complexity, the FCA may require further information to assist with the assessment.
• Other examples have been included by the PRA under which additional information may be required, such as when the proposed acquirer will become a parent financial holding company or a parent mixed financial holding company, and in cases of linked Variations of Permissions.

Significant influence

The 3L3 Guidelines set out a non-exhaustive list of factors for the purpose of assessing whether a proposed acquirer may be able to exercise significant influence over the management of the target entity. The list proposed by the PRA and the FCA includes a number of differences from the factors in the 3L3 Guidelines. According to the regulators, the new list is more relevant to the UK, because it is based on real-world PRA and FCA specific examples. 

For example, one of the factors in the 3L3 Guidelines is the proposed acquirer’s ability to participate in the operating and financial strategy decisions of the target entity. The PRA and FCA propose to replace this factor with more specific criteria such as the existence of veto rights over material matters in relation to the running of the authorised firm, e.g. changes to the business plan, or making recommendations to the board of the authorised firm which are almost always followed, as demonstrated by board minutes. 

Factors currently contemplated in the 3L3 Guidelines that have not been included in the proposed SS and FCA guidance include the overall ownership structure of the target undertaking or of a parent undertaking of the target undertaking, having regard, in particular, as to whether shares or participating interests and voting rights are distributed across a large number of shareholders or members. It should be noted, however, that the list of factors is non-exhaustive, so factors that have not been carried across from the 3L3 Guidelines could still be taken into account by the PRA and FCA.

Reputation, knowledge, skills and experience 

The section of the proposed SS and FCA guidance related to the reputation, knowledge, skills and experience of those who will direct the business of the UK authorised person as a result of the proposed acquisition contains new text referencing the Senior Managers and Certification Regime (SMCR) regime, clarifying that the appropriate Senior Management Function (SMF) application should be submitted by the UK authorised person being acquired at the same time, or shortly after, the change in control notification is submitted. If the UK firm did not submit the SMF application in advance, the PRA or FCA may request draft SMF applications as part of its assessment.   

In the case of FCA-authorised firms only, the FCA proposes that where the individual is to be appointed in a non-executive capacity, the FCA will carry out a similar assessment of reputation, knowledge, skills and experience.

Anti-money laundering and terrorist financing

The PRA and FCA have also included specific scenarios that they will consider when assessing whether there are reasonable grounds to suspect that money laundering or terrorist financing is being or has been committed or attempted in connection with the proposed acquisition, or the risk of such activity could increase.

Conclusion

While there is much that is familiar in the new SS and FCA guidance, there are some important differences. How significant these differences will be in practice will depend very much on the approach the PRA and FCA take when considering applications for changes and increases in control.