The UK financial services landscape continues to evolve, meaning businesses engaging in cross-border transactions involving firms that undertake regulated financial services activities – like those in the international fintech industry – have to navigate a complex environment. Clear and timely financial regulatory advice can be critical to ensure deals run smoothly.
This insight sets out the key points, including considerations and trends seen for firms entering the UK market, through new firm authorisation and investment or acquisition.
The UK regulators
- Firms operating in the UK financial services space are usually overseen by two key regulators – the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
- The PRA and FCA work to effectively supervise firms. Each have distinct roles and responsibilities, whilst rules and guidance apply to firms differently, depending on specific financial services offered.
- Generally, the PRA focuses on prudential regulation relevant to banks, insurers and some investment firms, whilst the FCA supervises a broader range of entities – including consumer credit firms, insurance market participants, asset managers, wealth and investment firms, e-money and payment service providers.
Market Entry Trends
It’s clear the UK remains a pivotal hub for FinTech and the financial services sector, post-Brexit, even after challenges with loss of passporting rights to firms.
Overseas firms now face different choices in terms of UK market entry, for example:
- New regulatory authorisation – via setting up a local entity or navigating the UK’s third country branch regime. This can typically take in excess of c. 6 – 12 months, with firms having to demonstrate they are ready, willing and organised to launch, with necessary UK substance and presence.
- Acquisition or investment – a common approach for overseas firms, as opposed to pursuing new regulatory authorisations, this may also allow firms to benefit from the existing knowledge, resources and relationships of the firm. However, this isn’t without hurdles, such as navigating regulatory change in control processes.
- Commercial partnerships and brand use – international firms may increasing leverage partnerships, using UK based service providers to assist in offering products to customers in the market.
- Appointed representative arrangements – historically, overseas firms had sought to maintain appointed representative arrangements with locally regulated firms, to carry on regulated activities on an exempt basis. The FCA has recently enhanced the UK appointed representative regime and its supervisory expectations, making this model more challenging to execute.
Cross-border deals – key regulatory applications
In the UK, the FCA and PRA take a robust approach to application assessment, so those investing in or acquiring UK regulated firms should expect engagement – more so than some other overseas regulators.
As part of the acquisition (or investment) process of a UK regulated firm, it’s therefore important to understand regulatory approval processes; for example:
- UK change in control applications
- If a party is acquiring control of a UK regulated firm subject to the change in control regime, it must notify the FCA and obtain approval before a deal can complete. Failure to secure approval is a criminal offence – risking criminal and civil penalties, bad publicity and damaging relationships with regulators.
- The meaning of control is complex, encompassing direct and indirect control, via shares, voting rights and other factors. All is then subject to specific control thresholds, depending on the nature of the target’s activities and authorisation.
- So, it’s important to:
- Take initial steps – Buyers should identify the controller structure and gather information to draft change in control applications. The target firm should also notify the relevant regulators of the transaction.
- Be mindful of timeframes – the regulators have c. 60 working days to assess change in control applications, but may pause this if further information is needed. It’s important to manage expectations of parties in relation to this, generally – a deal cannot complete (or control be acquired) without the approval.
- Prepare key documents well – this includes relevant FCA forms for controllers, supporting deal documents like Share Purchase Agreements , structure charts, financial statements, CVs, and Regulatory Business Plans.
- Individual Applications
- Buyers will need to collaborate with target firms to submit applications for new directors and senior personnel, as part of the UK’s Senior Managers and Certification Regime, this is a key step for determining operation of roles and responsibilities post-completion.
- In terms of timeframes – the Regulators generally have c. 90 days to determine individual applications, with an ability to stop the clock if additional information is required. A buyer could complete a transaction without this approval, but the individual shouldn’t be appointed to the role until approval is granted by the FCA/PRA (as relevant).
- Key documents for individual applications include: relevant regulatory forms and Statement of Responsibilities linked to the specific role; CVs; and documents relevant to the appointment – such as role descriptions; induction arrangements; learning and development plans; skill gap analysis; and handover plans (as relevant). Criminal record checks in relevant jurisdictions must also be undertaken, and supporting information linked to any civil, criminal or regulatory disclosures should be provided.
Key SPA Considerations
In addition, it’s critical that Share Purchase Agreements (or similar deal documents) for acquisition or investment in UK regulated firms are appropriate. For example, considering:
- Split exchange and completion process – to manage the change in control application submission and approval process, with completion occurring in an agreed manner following Regulator approval of the transaction.
- Customer Treatment – has the target notified the FCA of the transaction and are customer notifications or assignments required (and if so, how will it be managed).
- Warranties – it’s common to see tailored warranties focused on the nature of the firm’s activities – including status of regulatory authorisation and historic activities, overall compliance record and relationships with regulators, Senior Managers and Certification Regime and change in control compliance.
- Indemnities – equally, careful consideration should be given to indemnities and protections sought for historic activities and liabilities – for example: linked to potential losses from poor advice or practice by a target firm, which are more common place in certain markets.
- Regulator communications – have parties settled on an approach to managing individual applications and Senior Managers and Certification Regime appointments? Collaboration is often key to ensuring smooth submission and outcome with the regulators.
Final remarks
Navigating the complexities of financial regulation and how this impacts cross-border deals requires careful planning and consideration. Local jurisdiction expertise is critical and businesses seeking to invest in or acquire a UK regulated firm must be prepared!
For practical financial regulatory advice and tailored support, please contact Oliver Woodhouse, Senior Associate.
This article is based on a presentation given at international law firm network ADVOC’s European M&A conference in London.
