New power for UK regulators over change of control in financial services firms
Published on 12th Sep 2023
Legislation beefs up power to impose conditions on new controllers, putting lessons learned from Greensill into practice
New legislation gives the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) an expanded power to impose conditions on new controllers of financial services firms.
How does the change in control regime work?
When the FCA or PRA consider a change in control application submitted by anyone who wishes to acquire or increase control over a financial services firm, there are three possible outcomes:
- approval;
- approval with conditions; or
- rejection, which the regulator would signal in advance, allowing the potential controller the opportunity to withdraw the application.
Previously, the regulators could only impose conditions where they would otherwise refuse the application. Refusal (and conditions) would only occur if the application was incomplete, or if the regulator had reasonable grounds to be concerned about:
- the proposed controller's reputation;
- the reputation, knowledge, skills and experience of incoming directors and managers;
- the financial soundness of the proposed controller;
- the ongoing ability of the financial services firm to comply with its prudential requirements, including the threshold conditions;
- regulatory supervision of the financial services firm following the proposed acquisition; or
- money laundering and/or terrorist financing following the proposed acquisition.
Generally speaking, control cannot be acquired until the relevant regulator's approval has been received. This means a transaction involving change in control over a financial services firm will need to be conditional on regulatory approval.
What can the regulators do now?
Clause 61 of the Financial Services and Markets Act 2023 (FSMA 2023) has amended the change in control regime so that the regulators can impose conditions on a new controller where "it appears to that regulator that it is desirable to impose those conditions in order to advance any of that regulator's objectives" (section 187(2)(aa) Financial Services and Markets Act 2000, as amended), subject to the obligation to disregard the economic needs of the market.
This is the case even if the regulator would not have grounds to object to the application. This change applies to any change in control applications received by the regulators on or after 29 August 2023.
Where a regulator is minded to impose conditions, there are few constraints on the nature or scope of those conditions, although the regulators are not allowed to impose conditions requiring a potential controller to acquire a particular level of holding in a financial services firm.
The regulators' objectives
| FCA | PRA |
|---|---|
| Ensure the relevant markets function well (strategic objective) | Promote the safety and soundness of PRA-authorised firms |
| Secure an appropriate degree of protection for consumers (operational objective) | (In relation to insurance or insurers) contribute to the securing of an appropriate degree of protection for those who are or may become policyholders |
| Protect and enhance the integrity of the UK financial system (operational objective) | Facilitate effective competition in the markets for services provided by PRA-authorised firms (secondary objective) |
| Promote effective competition in the interests of consumers in the markets for regulated financial services (operational objective) | Facilitate, subject to aligning with relevant international standards, the international competitiveness of the UK economy (including in particular the financial services sector through the contribution of PRA-authorised persons) and its growth in the medium to long term (secondary objective) |
| Facilitate the UK economy’s international competitiveness and its growth over the medium to long term, subject to alignment with international standards (secondary objective) |
Why has this change been made?
Previously, the regulators could impose conditions for approval only in cases where the application would otherwise fail.
FSMA 2023 expanded this power by allowing the regulators to impose conditions where they may have significant concerns about the proposed controller, but the evidence does not reach the threshold to reject the application. For example, this could capture a scenario where an investigation is going on during the change in control process which might adversely affect the reputation or standing of the proposed controller; with the new power, the regulator would be able to impose conditions relating to the outcome of the investigation.
The change comes against the backdrop of the failure of Greensill Capital and the lessons learned for how the financial services sector is regulated. The Treasury Select Committee report stated that: "As a matter of urgency, there should be reform of the Change in Control process which regulates who can acquire the ownership of an already existing bank. This should ensure that the PRA has the powers necessary to ensure that existing banks do not fall into the hands of owners who would not be granted a banking licence in their own right".
In an early parliamentary debate on the Financial Services and Markets Bill 2022-2023, the new power is described as "fill[ing] a gap in the regime identified by the PRA and the Treasury Committee in its Greensill inquiry"; the intention is to "give the regulators more flexibility to manage changes of control in a way that they consider appropriate with reference to their statutory objectives". In light of this, FSMA 2023 has expanded the power of the regulators to impose conditions on changes of control.
Osborne Clarke comment
Historically, the regulators have used their power to impose conditions on changes in control sparingly.
This additional power may trigger an increase in the number of conditional approvals, and acquisition documents will need to address this possibility.
It will be important to strike a balance between, on one hand, allowing the parties to walk away if onerous conditions undermine the commerciality of the deal and on the other hand, inadvertently creating a "get-out" clause which could allow one party to exit even if the conditions imposed will have only a minor impact. Regulatory advice will be key to achieving that balance.
