Change in Control – FCA licences are not for sale

As part of our review of the FCA’s ‘Transformation Programme’ back in 2022, we analysed the increasingly challenging authorisations process, and why the FCA was creating a ‘more robust gateway’. Indeed, in the payments space, there were approval rates as low as 8%. Whilst that figure has improved recently (at Pay360 in March, FCA Director of Authorisations, Laura Dawes, confirmed the overall rate for 2023 to be 15%), it is our experience that some prospective payments applicants are being put off by the likelihood of being unsuccessful and looking at alternative routes to market. This might include operating as an ‘Agent’ under another firm’s permission, or perhaps abandoning the UK altogether, redomiciling and seeking authorisation in the EU.

There is still, though, a further increasingly popular (if the enquiries we receive at Cosegic are anything to go by) alternative: our old friend the Change in Control (CiC). On this basis, it is worth revisiting my previous article on the subject, where we considered the different statutory deadlines that might also influence the decision to pursue a CiC rather than a new firm authorisation (i.e. 60 days versus 12 months), and focussing more on some of the more qualitative factors that should be considered.

Authorisation through the back door?

It is important to again recognise that, whereas a firm applying for FCA authorisation might be seen as seeking authorisation through the front door, a CiC notification, or ‘Section 178 notice’, has long been seen as a means of obtaining authorisation through the back door, given the shorter statutory clock which the FCA has to process them. Whilst technically a change in control will take place when a person acquires more than 10% of a regulated firm, or crosses one of the various share bands, it is the acquiring of 50% of a regulated firm that makes a person a ‘parent undertaking’ and a true controller of a firm. Often though we receive enquiries from persons looking to acquire 100% of a regulated firm. Given the notification requirements for the ‘50% or more’ share band, it is such transactions that are the main focus of this article.

If I had a penny for every time I’ve been asked if I know of any licences for sale… well, you know the line. Indeed, if you’ve been one of those asking me that question, you may have been treated to one of my favourite responses: “there is no ebay for FCA licences”. Indeed, having previously worked in the CiC team at the Regulator myself, I always recall the mantra “UK licences are not for sale”, despite the fact that the legislation does at least allow for that possibility.

However, whilst the licence may not be for sale, the firm is the asset up for grabs and here is where prospective buyers really need to pay attention. Whilst the CiC process is couched in terms of being a notification, it is very much an application to pass through the gateway. The FCA has long-been wise to the CiC being seen as a shortcut route to authorisation and does not look favourably at regulatory arbitrage. According to Investopedia, “regulatory arbitrage is a practice whereby firms capitalise on loopholes in regulatory systems in order to circumvent unfavourable regulations.” Need I say more? Well, probably not, but I’m going to anyway.

Whilst the focus of the CiC assessment is primarily on the acquirer(s) (corporate, trust or individuals), the level of scrutiny may also be increased depending on the situation of the target firm. By virtue of it being a regulated firm, the FCA will already know something about it that may influence the assessment. Perhaps the most extreme example might where a firm has a permission but is not actively using it e.g. it may not have any staff or customers and has, essentially, an empty permission. Now, the likelihood of such a firm is constantly reducing, as the FCA continues with its ‘use it or lose it’ campaign to cancel such firms, but often it is these firms that are up ‘for sale’. Such acquisitions are likely to be seen by the FCA as what they are, a shortcut to gaining an FCA licence through regular arbitrage and to testify to that we have recently seen examples of prospective acquirers being politely directed to the front door and encouraged to submit a new firm authorisation application.

What is at the core of a successful s178 notice?

So, assuming a going concern, with real staff, real systems and real customers, it should be a successful CiC, right? Not entirely, the CiC notifications with the best chance of approval are where the business to be carried on post-acquisition is the same as is being undertaken today. But before you start filling in your s178 notice, you need to do your due diligence. It is unlikely to be sufficient simply to check the Financial Services Register and Companies House filings for the target firm. It is certainly a start, but firms must also carry out the following:

Permission profile: You must make sure that the target firm has the correct scope of permission to enable you to carry on the business and services you plan to offer. There is no point buying a payment institution if you want to issue e-money. However, you may wish to consider a firm that doesn’t have the full scope of permission that you will need. Bearing in mind what we just said about the business being largely ‘the same’ post-acquisition, it may nevertheless be possible to subsequently vary the permission of the firm (VoP). If so, you should allow for the possibility of the VoP not being approved.

Regulatory due diligence:  Notwithstanding that the FCA will ask for sight of the due diligence you have undertaken, it is important to really check out the regulatory position and history of the firm. For example: is the firm up to date with its regulatory reporting; is it meeting its capital and liquidity requirements; is there an operable Wind down Plan in place; and is the Consumer Duty policy up to date?

Price: Another question the FCA will ask you is how you agreed a price with the seller. Here, I have little to offer. Price was explained to me back at school as being the amount someone is willing to pay. Often, that will be initiated by the seller quoting a figure i.e. the asking price. In the same way as there is no ebay for licence sales, so there is no price comparison website for licences. Given that this is often the route taken instead of applying for direct authorisation, you need, therefore, to consider the comparative costs (both in time and money) and whether the CiC is likely to offer better value.

Oh, and don’t forget the standard health warning to accompany CiCs: it is a criminal offence to acquire or increase control of a FCA regulated firm without prior FCA approval.

In summary, whilst a CiC is a legitimate regulatory transaction, defined in legislation and with much supporting guidance from the FCA, firms should be wary of viewing this as an easier route to a licence than establishing a new firm and seeking authorisation: buy or build. The FCA’s risk appetite will be the same whichever route is taken. As with any regulatory transaction, you need to show your working out; if it makes sense to you, can you then convince the FCA, with evidence to back it up?

If you want to find out more about the timings and process for CiC, please do refer back to our earlier article. If you want to find out how Cosegic might assist you with a change in control – whether it is undertaking regulatory due diligence on the target firm, or helping complete the s178 notices – please do get in touch.