A Change in Control Is More than Just a Standard Notification
July 12, 2021 by Clare Curtis
The Financial Conduct Authority (“FCA”) recently released a Final Notice opposing the Change in Control (“CiC”) and therefore acquisition of Kimberly Forex UK Limited (“Kimberly Forex”) and the details within the FCA Final Notice were a good reminder that the CiC process is more than just a standard notification.
The CiC process requires the FCA to review and approve the CiC in advance of it happening by receiving a Section 178 Notice (“s178”) from the firms and / or individuals involved. Most importantly, failure to request FCA approval prior to executing the CiC is a criminal offence, regardless of any mitigating circumstances that led to the procedure not being correctly followed.
FCA Final Notice Ms Sherrie Jean Thackray of Kimberly Forex (now Transfer Gurus Limited)
The FCA published their Final Notice for the Kimberly Forex decision on the 11th May 2021 and it can be found here: Final Notice 2021: Ms Sherrie Jean Thackray (fca.org.uk).
To summarise, Ms Sherrie Jean Thackray acquired 100% ownership of Transfer Gurus Limited on September 1, 2019. This information was confirmed via Companies House records.
However, the FCA notes that Ms Thackray submitted the s178 Notice on the 25th August 2020, almost a year after the acquisition. In her email dated 11 September 2020 Ms Thackray clarified that she “became 100% shareholder before receiving FCA approval”, therefore admitting to the breach. Also, the information provided within the s178 was incomplete with only the first three pages completed and the rest left blank, meaning the FCA could not make a determination on the application.
On 16 September 2020, the FCA explained the post notification implications to Ms Thackray, including that it is a criminal offence to acquire control without the FCA’s approval. Ms Thackray did not respond to this email or to the subsequent two emails sent on 29th September and 13th October 2020. The Final Notice stated that as of the date of publication no response had been forthcoming.
It is clear from reviewing the Final Notice that Ms Thackray undertook a CiC without making any consideration of the process, or attempting to work with the FCA on reaching a conclusion. Had the s178 been submitted in advance of the CiC occurring and had Ms Thackray worked with the FCA to meet their requirements, it is likely this outcome could have been avoided.
Effecta has noted that some firms within the industry are only raising the requirement to make a s178 notification to the FCA post event and are therefore committing a criminal offence without realising the magnitude of this oversight. It is Effecta’s opinion that this issue can be avoided with pre-planning and an increased awareness of the rules.
What is a Change in Control
Part XII of the Financial Services and Markets Act 2000 (“FSMA”), requires controllers to seek approval via a s178 Notice from the FCA before gaining or increasing control over a firm or becoming a parent undertaking of a firm, that is authorised by the FCA and/or PRA.
Thresholds for control are divided into the following threshold:
- 10% or more but less than 20%
- 20% or more but less than 30%
- 30% or more but less than 50%
- 50% or more
These bands apply to Directive firms, which are classed as:
- a credit institution as defined in the Banking Consolidation Directive
- a Markets in Financial Instruments Directive (MiFID) investment firm
- an insurance firm under the Consolidated Life Directive or the First Non-Life Directive
- a firm carrying on reinsurance under the Reinsurance Directive
These thresholds are also relevant to Payment Institutions and Electronic Money Institutions
The FCA have produced a quick reference guide for a Change in Control that can be found here: Controllers Quick Reference Guide for Case Officers (fca.org.uk)
Section 78 Notices
Applicants should send the FCA a notification for a CiC as soon as they have made the decision to acquire a control in an authorised firm. Making a decision to acquire control includes circumstances where a proposed controller acquiring control will move their control through one of the threshold bands.
The FCA have up to 60 working days (excluding any interruption period) to assess a change in control case. This period begins on the day the FCA acknowledge receipt of a complete Section 178 notice.
For non-Directive firms (e.g. non-MiFID investment firms, general insurance intermediaries, full permission consumer credit firms and home finance providers and Alternative Investment Fund Managers) there is only one threshold and one band of ‘20% or more’.
The requirements for non-Directive firms come from the FSMA (Controllers) (Exemption) Order 2009, which says that firms should notify the FCA when a person has decided to acquire, increase, or cease control in a non-Directive firm. This includes acquiring:
- 20% or more of the shares or voting power of the non-Directive firm
- 20% or more of the share or voting power of the parent undertaking of the non-Directive firm
- shares or voting power in the directive firm or its parent undertaking so that the person will be able to exercise significant influence in the non-Directive firm
A single threshold of 33% applies to limited permission consumer credit firms.
No changes and decreases in control
If a firm are increasing or decreasing control within the same control band you do not need to notify the FCA, unless it is regarding a controller of a Directive firm and the increase will mean that the firm becomes a new parent undertaking of the authorised firm.
If the firm or individual changes the level of control and moves into a lower control band and no firm or individual moves into a higher band, a firm should still tell the FCA about the change beforehand via your supervisory contact (likely to be the FCA Contact Centre), but a s178 notice is not required to be submitted.
Procedures to follow when changing control
If a firm is only regulated by the FCA, it can submit notifications for changes in control using the FCA Connect system.
If the firm is regulated by both the FCA and PRA, you should send notifications for changes in control to both regulators via post or email. Alternatively, you can use Connect to submit the forms to the FCA and send the forms separately via post or email to the PRA.
Please note that the guidance below is not an exhaustive list and there may be additional factors that need to be considered on a case-by-case basis.
Preparing your notification
A firm must identify all controllers of the authorised firm subject to the change in control, and submit section 178 notification forms for each of them.
A firm will also need to:
- produce detailed ownership charts, explaining any close links and regulated entities
- Produce a business plan, including any risks associated with the CiC and how these will be mitigated
- identify current and potential conflicts of interest, and how these will be managed
- provide evidence of any funding secured
The business plan should cover all key areas, for example:
Business to be undertaken: This should include how a firm intends to run the business going forward and any planned changes to the regulated activities and strategy of the target firm(s) post CiC.
The FCA would also expect to see complete projected financials that explain how a firm will maintain your minimum capital requirements.
Governance: Provide an overview of the firm’s governance arrangements, including Board composition and any Board sub-committees.
Staff: Include an organisation chart that shows your current controllers and close links, including what business they conduct and whether they are regulated entities.
Outsourcing: Are any areas of the business going to be outsourced and if so how will this be overseen.
Systems and controls / Risk Management: Consider how the firm will identify and manage any conduct risks. Provide an overview of the firm’s financial crime controls, anti-money laundering procedures and due diligence processes.
*This is a non-exhaustive list and business plans should be considered on a case by case basis
Practical examples of where a change in control has been missed:
- Changes to entities within the group structure made by a top level entity, which indirectly means a CiC occurs at the FCA authorised firm level, without the firm being aware;
- An Individual buys or sells a relatively minor equity stake in a company but goes through a threshold – up or down (see above) e.g. 9% control increases to 11%;
- Structure charts become outdated and it is only when reviewed internally by Compliance is it noted that CiC has occurred; and
- Firms are aware of the CiC occurring but due to a lack of training believe a post notification event is the correct procedure when it is actually a criminal offence
How Effecta can help:
- Review proposed structure changes at corporate or individual level to advise whether a CiC application should be submitted to the FCA;
- Assist your firm to produce a business plan that covers all of the required areas and supports the full CiC application;
- Work alongside your firm to prepare, submit and manage the entire CiC until the FCA decision is made;
- If a post notification CiC does need to be submitted, we can work alongside your firm to address this issue to ensure it is has minimal impact rather than considered a criminal offence;
- Provide training to staff on Change of Control rules and process and other areas of regulatory compliance; and
- Provide a full Healthcheck of your firms structure and governance to ensure procedures are in place to allow for s178 notices to be submitted in good time and / or highlight s178 issues to be addressed.