FCA CHANGE IN CONTROL APPLICATIONS AND FREEDOM OF INFORMATION REQUEST: WHAT WE HAVE LEARNED

In September 2017, FS REG (www.fsreg.com) submitted to the Financial Conduct Authority (“FCA”) a freedom of information request to obtain certain data and information about the change in control approval process that proposed controllers must go through before they can acquire or increase their control over FCA authorised firms.

FS REG received from the FCA a very comprehensive response, a copy of which is available in the Appendix to the PDF version of this article (available here).

In a nutshell, this is what we have learned:

1.     “Complete” versus “Incomplete” Notifications

On average, 51% of change in control notifications received by the FCA are deemed to be incomplete upon submission. The data shows that the percentage of incomplete notifications has not increased over the past few years.

Accordingly, lawyers can advise their clients that, especially when a complex or significant change in control application is submitted to the FCA (e.g. in the context of a large M&A transaction), there is more than a 50% probability that the FCA will deem the application to be incomplete upon submission.

See Table 1 below.

TABLE 1 – NUMBER OF “COMPLETE” V. “INCOMPLETE” NOTIFICATIONS

2.     Number of Working Days to Acknowledge Receipt

On average, the FCA takes 1.5 working days to acknowledge receipt of a “complete” notification and 3 working days to acknowledge receipt of an “incomplete” notification.

This means that, if the FCA has not acknowledged receipt of a change in control application after one and a half working days since the submission of the application, it is likely that the FCA will deem that application to be incomplete.

See Table 2 below.

TABLE 2 – NUMBER OF WORKING DAYS TO ACKNOWLEDGE RECEIPT

The FCA was unable to confirm:

(1)     how many proposed controllers received upon submission an acknowledgement of receipt of an incomplete notification that did not specify what additional information the FCA required in order to deem their notification as complete; or

(2)     where such an acknowledgement had been given, how many working days the FCA took on average to specify what additional information it required.

The FCA has explained however that its usual expectation is that, where a case is acknowledged as incomplete on receipt, a case officer will request the missing information within a maximum of 10 or 15 working days.

This is consistent with the experience of FS REG, including in complex or substantial change in control cases.

3.     Start of Assessment Period

The service standards published by the FCA in May 2017 show that, during the period from April 2016 to March 2017, the FCA determined 100% of Non-Consumer Credit change in control notifications within 60 working days of acknowledgment of receipt of a “complete” notification as required by section 189(1) of the Financial Services and Markets Act 2000 (“FSMA”).

We pointed out to the FCA that section 189(1) of FSMA does not actually refer to the acknowledgement of receipt of a “complete” notification but only to the acknowledgement of receipt of a “section 178 notice” (whether complete or incomplete) and asked the FCA to explain on what basis it takes the view that the statutory assessment period begins on the date the FCA acknowledges receipt of a “complete” notification.

The FCA told us that it takes that view because, under section 179(1) of FSMA, a “section 178 notice” must “be in such form, include such information and be accompanied by such documents as the appropriate regulator may reasonably require” and therefore a notice must be deemed by the FCA to be complete before the change in control assessment period can start.

The FCA referred also to paragraphs 9.1 and 9.2 of the “Joint Guidelines on the Prudential Assessment of Acquisitions and Increases of Qualifying Holdings in the Financial Sector” published by the European Supervisory Authorities on 20 December 2016, which seem to support the FCA’s interpretation.

While we are not entirely persuaded of the correctness of such interpretation, our freedom of information request has revealed that on average 91% of Non-Consumer Credit change in control notifications are in any case determined by the FCA within 60 working days of the acknowledgement of receipt (whether of a complete or incomplete notification). See Table 3 below.

This is consistent with the experience of FS REG, which shows that the FCA is able to determine even the most complex and substantial change in control cases within 6 to 8 weeks from submission of the relevant notification.

In our experience, even where it has taken several weeks to obtain from the FCA the acknowledgement of receipt of a complete notification, the FCA is able to grant its change in control approval within that 6 to 8 weeks’ timeframe.

TABLE 3 – CASES DETERMINED WITHIN 60 WORKING DAYS OF ACKNOWLEDGEMENT OF RECEIPT

4.     Unconditional Approvals, Conditional Approvals and Rejections of Approval

Our freedom of information request has revealed that conditional approvals and rejections of approval are extremely rare. During the period from 1 April 2013 to 30 June 2017, the FCA issued only:

(1)     one decision notice to approve a proposed acquisition of control subject to conditions;

(2)     six warning notices of a proposal to object to an acquisition of control; and

(3)     one decision notice to object to an acquisition of control.

The FCA has stated however that, even though only a small number of cases result in the issue of a formal notice using the above powers, there is a “substantially larger” number of cases where a proposed controller voluntarily withdraws its change in control application and such withdrawals are frequently seen in response to concerns raised by the FCA.

The FCA has explained that:

(1)     generally, before issuing a formal warning notice, it issues a letter to the notice-giver advising that it is minded to object to the transaction if the notification is not withdrawn;

(2)     having early discussions with notice-givers ahead of a formal objection allows the FCA to influence proposed controllers to take steps to address any issues identified;

(3)     where issues are not, or cannot be, addressed to the FCA’s satisfaction, withdrawal of a notification is likely to represent a quicker and most cost-effective outcome both on the part of the FCA and the notice-giver.

The above means that the old debate as to whether the condition precedent in a share purchase agreement (“SPA”) should refer to the purchaser having received from the FCA an “unconditional” approval (as opposed to “any” approval, which would include also a conditional approval) is, to a certain extent, superfluous.

It will be far more important to describe in the SPA the steps that a purchaser must be prepared to take in order to address any concerns raised by the FCA during the change in control approval process in order to obtain the required approval.

We did not ask the FCA to confirm the number of change in control applications that have been voluntarily withdrawn by applicants over the past few years but the data provided by the FCA in response to our question concerning conditional approvals and rejections of approval suggests that the number of applications that have been voluntarily withdrawn is as set out in Table 4 below.

TABLE 4 – VOLUNTARY WITHDRAWALS OF CHANGE IN CONTROL APPLICATIONS

5.     Objections to a Person’s Control, Restriction Notices and Court Applications

Our freedom of information request has revealed that, during the period from 1 April 2013 to 30 June 2017, the FCA has not:

(1)     issued any decision notice objecting, or any warning notice of a proposal to object, to a person’s control over an FCA authorised firm under section 191A of FSMA;

(2)     issued any restriction notice under section 191B of FMSA imposing restrictions on the holding of shares or exercise of voting power by any person; or

(3)     made any application to the court under section 191C of FSMA for an order requiring the sale of shares or disposition of voting power by any person.

The above shows that the powers given to the FCA under sections 191A, 191B and 191C of FSMA are rarely (if ever) used.

Disclaimer: This article provides general information only. It is not intended to be comprehensive and does not constitute the provision of legal or regulatory advice. FS REG is not responsible for any action taken or omitted to be taken on the basis of the information contained in this article. © 2017 FS REG Limited (www.fsreg.com). All rights reserved.