FCA- Acquiring a Regulated Broker Is Not a Shortcut to Regulation

The UK watchdog’s unfavorable view of regulatory arbitrage, a common strategy in the retail FX industry, will make it a

The Financial Conduct Authority (FCA) has recently provided clarity regarding when a change in control may in fact be treated as a new authorisation. This may have a significant impact on the growing ‘secondary market’ in regulated firms- this is where market participants look to buy an existing firm in order to avoid the lengthy queues that have formed to authorise certain types of firm, including wholesale and payments firms.

FCA regulatory approval is required before firms or individuals can conduct certain activities. For example, firms must obtain the FCA’s authorisation under Part 4A of the Financial Services and Markets Act 2000 wherein they propose to establish a new firm that conducts regulated activities (the “Authorisation Process”).

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Any perception that the change in control route is a faster and less intrusive process through the gateway is not necessarily accurate

In contrast, when an entity/ person proposes to acquire control in an existing authorised entity then the ‘change in control’ regime in Part XII FSMA is triggered (the “Change in Control Process”).

Revisiting Control Process

The FCA has now stated that when an entity/person acquires control in an authorised entity intending to set up what is effectively a new business, then it is more appropriate to apply under the Authorisation Process instead of looking to use the Change in Control Process. The Authorisation Process allows the FCA to better satisfy itself (in accordance with s55B of FSMA) than its authorised firms are able to fulfill the threshold conditions on an ongoing basis and are willing and organised to do so. The threshold conditions are the minimum standards that the firms that we regulate are expected to meet; when a firm does not meet those standards, the FCA can then intervene in order to advance its operational objectives.

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If notice-givers are advised that the change in control route is not appropriate but choose to proceed regardless, compliance advisors such as ourselves have been asked to make their clients aware that their applications will remain incomplete until information that is similar to that which would be required for an application for authorisation is submitted. Indeed, given the change in control assessment criteria, said information may in fact be in excess of that which would be required for a new authorisation, given the additional criteria that have to be satisfied in cases of a change in control. If the required information is not provided, this may be grounds for the FCA to object to the acquisition.

 

Additionally, the FCA may also object to the change in control if there are other concerns relating to the assessment criteria set out in the FSMA. In such circumstances, a recommendation would be made to a senior decision making committee, the Regulatory Transactions Committee (RTC), to issue a Warning Notice object to the intended acquisition. This may ultimately result in a Decision Notice that would most likely be published leading to negative publicity across media channels. The notice-givers would also have expended significant time and resources by this stage.

So, any perception that the change in control route is a faster and less intrusive process through the gateway is not necessarily accurate and should not be used to circumvent the new authorisation process. The FCA has stated that they consider such applications to be regulatory arbitrage and will attract appropriate scrutiny at the gateway and beyond.

 

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