CP25/23 – Supervisory statement – Prudential assessment of acquisitions and increases in control

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Responses are requested by 23 February 2024.

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Responses can be sent by email to: CP25_23@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:
John Cunningham (MG02)
Prudential Regulation Authority
20 Moorgate
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EC2R 6DA

1: Overview

1.1 This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA) and the Financial Conduct Authority’s (FCA) proposals to replace the EU guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (3L3 Guidelines) with a new PRA supervisory statement (SS) – Prudential assessment of acquisitions and increases in control, and new FCA guidance.

1.2 The PRA also proposes to delete SS33/15 – Aggregation of holdings for the purpose of prudential assessment of controllers, the content of which is proposed to be transferred to the new SS. The PRA also proposes to remove reference to the 3L3 Guidelines in its statement of policy (SoP) – Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU.

1.3 The policy proposals included in this CP are:

• a new SS – Prudential assessment of acquisitions and increases in control (Appendix 1);
• a new FCA guidance (Appendix 2);
• the deletion of SS33/15 – Aggregation of holdings for the purpose of prudential assessment of controllers, and the removal of the equivalent section from the FCA Handbook (Appendix 3); and
• the removal of 3L3 Guidelines references in SoP – Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU (Appendix 4), and equivalent from the FCA Handbook and website.

1.4 The PRA’s proposed SS and FCA’s guidance would set guidance and expectations on:

• identifying qualified holdings, including the concepts of significant influence, aggregated holdings (replacing SS33/15) and indirect controllers;
• submitting the change in control notification, the additional information the PRA and the FCA may require, and the approach to completeness;
• the assessment criteria (in accordance with section 186 of FSMA) used to assess notifications to acquire or increase control in PRA and FCA authorised firms operating in the UK; and
• how the PRA and the FCA would use their statutory powers to impose conditions on an approval when it advances their objectives.

1.5 The PRA’s primary objectives of firm safety and soundness, and policyholder protection would be advanced by setting out the PRA’s expectations in relation to the prudential assessment of acquisitions and increases in control and updating non-UK specific elements of the EU 3L3 Guidelines. It would also make the PRA’s expectations clearer by bringing all current related guidance into one SS (removing the link to the 3L3 Guidelines and SS33/15). The PRA’s secondary objectives to facilitate effective competition, and competitiveness and growth would be advanced by making the PRA’s expectations and requirements clearer and more transparent to persons proposing to acquire (or increase) control over PRA-authorised firms operating in the UK.

1.6 The FCA’s objectives of protecting consumers, enhancing market integrity and promoting competition would be advanced by providing clarity on the factors the FCA would consider when applying the assessment criteria and deciding when a proposed acquirer is suitable to control and/or direct a UK authorised firm.

1.7 The CP is relevant to all PRA and FCA authorised firms and all persons to which the Change in Control FSMA part applies. It is also relevant to firms seeking to apply for PRA authorisation in identifying who their controllers are.

1.8 The PRA has a statutory duty to consult when introducing new rules (FSMA s138J), or new standards instruments (FSMA s138S). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so. The PRA therefore considers that it is appropriate to consult on this new SS and consequential changes to a SoP.

1.9 In accordance with section 139A, the FCA may give guidance consisting of such information and advice as it considers appropriate with respect to the operation of specified parts of FSMA. Section 139A(5) imposes a statutory duty to consult when the FCA makes general guidance with respect to rules. Although the proposed guidance is not in relation to the FCA rules, the FCA considers it appropriate in the circumstances to consult in line with its general public law duty to act fairly in the exercise of its functions.

1.10 In carrying out its policymaking functions, the PRA is required to comply with several legal obligations. The analysis in this CP explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals. The PRA has not consulted any statutory panels as part of this CP.

1.11 ‘Have regard’ considerations which were significant in the PRA’s analysis included the principle that the PRA should exercise its functions as transparently as possible.

Background

1.12 FSMA Part XII Control over Authorised Persons established the legal framework for change in control assessments in the UK and implemented EU Directive 2007/44/EC (the acquisitions directive).

1.13 In 2008 the three former EU Committees (Committee of European Banking Supervisors, Committee of European Securities Regulators and Committee of European Insurance and Occupational Pensions Supervisors) developed non-binding guidelines for the prudential assessment of acquisitions of a qualifying holding ie change in control (the 3L3 Guidelines).

1.14 The European Banking Authority (the EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA and, together with EBA and EIOPA, the ESAs) jointly reviewed and updated these 3L3 Guidelines. These updated guidelines applied from 1 October 2017.

1.15 The 3L3 Guidelines established an EU-wide common understanding of the five assessment criteria to be applied by the competent authorities^{footnote [1]} in the assessment process and what should be taken into account under each criteria; the procedure for the assessment of the proposed acquisition by the competent authority; and a list of the information that proposed acquirers should include in their notifications to the competent supervisory authorities.

1.16 The PRA and FCA jointly confirmed partial compliance with these guidelines. The PRA and FCA confirmed it will comply with all the 3L3 Guidelines with the exception of the sections relating to the aggregation of indirect holdings (ie the test for identifying certain controllers) as it is inconsistent with FSMA.^{footnote [2]}

1.17 The 3L3 Guidelines are listed within the Bank of England and PRA’s SoP – Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU. The FCA has set out its approach to non-legislative material produced by the EU in its non-handbook guidance ‘Brexit: our approach to EU non-legislative materials’, and specific reference to the 3L3 Guidelines remain in the FCA Handbook and website contain references to the 3L3 Guidelines. Therefore, they have continued to be relevant to UK Change in Control (CIC) transactions since the UK’s withdrawal from the EU.

Implementation

1.18 The PRA and the FCA propose that the implementation date for the PRA SS and the FCA guidance proposed in this CP would be summer 2024.

Responses and next steps

1.19 This consultation closes on Friday 23 February 2024. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP25_23@bankofengland.co.uk. Please indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

1.20 References related to the UK’s membership of the EU in the SS covered by this CP have been updated as part of these proposals to reflect the UK’s withdrawal from the EU. Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law.^{footnote [3]}

2: The PRA’s proposals

Proposal

2.1 We propose a new SS – Prudential assessment of acquisitions and increases in control and new FCA guidance to replace the EU’s 3L3 Guidelines.

2.2 The proposed new SS and FCA guidance would largely replicate the 3L3 Guidelines. However, there would be some re-phrasing, simplification and changes to align with the UK approach and to reflect the modified condition power under FSMA 2023.^{footnote [4]} The new SS would also replace SS33/15 which we propose is deleted. SS33/15 – Aggregation of holdings for the purpose of prudential assessment of controllers sets out the expectations of the PRA in relation to how one person’s holding of shares or voting power should be aggregated with that of another person for the purpose of determining whether those persons have decided to acquire or increase control over a UK-authorised person. We propose the text from SS33/15 be moved to the new SS largely unchanged but with some minor amendments for clarity and to the structure of the information. The PRA considers that it would be clearer and more transparent to include the material from SS33/15 in the new SS rather than maintaining two separate statements.

2.3 The FCA’s Handbook contains text relating to the aggregation of shares and voting rights which would be replicated in the FCA’s proposed non-handbook guidance with some minor changes. The FCA proposes to remove the text from the Handbook in due course to avoid duplication.

2.4 The approach to the aggregation of holdings is an important element of the PRA’s and FCA’s expectations as to when a CIC notification is required and should be available in the same location as the PRA’s and FCA’s other expectations on this topic. The material in SS33/15 was originally necessary because the PRA did not comply with the aggregation of indirect qualifying holdings element of the 3L3 guidelines.

2.5 Consequential to these proposals the PRA also proposes to remove references to the 3L3 Guidelines in the SoP – Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU by striking through - Joint Guidelines for the prudential assessment of acquisitions of qualifying holdings. This SoP sets out the Bank’s and PRA’s approach to EU Guidelines and Recommendations in light of the UK’s withdrawal from the EU and the end of the transition period. The FCA proposes to remove references to the 3L3 Guidelines from its Handbook and website. If the proposed new SS and FCA guidance is published, the PRA and the FCA would no longer expect firms to comply with the 3L3 Guidelines.

Key differences between 3L3 Guidelines and the PRA SS / FCA guidance

2.6 This section highlights what the PRA and the FCA consider to be the key differences between the proposed new SS and the FCA guidance with the 3L3 Guidelines.

2.7 The PRA and the FCA proposes to introduce a new section ‘PRA approach to the use of conditional approvals to advance its objectives’ that is not present in the 3L3 Guidelines. This new section is intended to offer guidance as to when the PRA or the FCA may use conditional approvals where doing so would advance their objectives, while not restricting the PRA’s or the FCA’s use of such conditions. This is following a recent amendment to FSMA (ie FSMA 2023) which gives the PRA and the FCA the power to grant conditional approvals if it is desirable to advance the PRA's and the FCA’s objectives.^{footnote [5]}

2.8 The ‘Significant influence’ section provides examples that may indicate whether a person is able to exercise significant influence over a target firm; these examples are different from the ones currently in the 3L3 Guidelines. The PRA and the FCA consider that the proposed examples are more relevant to the UK than those in the 3L3 Guidelines, being based on real-world PRA and FCA specific examples.

2.9 The ‘Aggregation of holdings’ section differs from its equivalent in the 3L3 Guidelines because the PRA and the FCA did not comply with 3L3 Guidelines on the basis that the approach to the aggregation of indirect holdings in the 3L3 Guidelines is inconsistent with the requirements in FSMA. However, the majority of the proposed SS text is not new, it is taken directly from SS33/15; the PRA have added a clarification around the identification of a parent of an undertaking and an undertaking to be a controlled undertaking for the purpose of FSMA s.422(5)(a)(v).

2.10 The ‘Submitting the notification’ section contains new and revised content explaining how applicants can make notifications specifically to the PRA and the FCA. For example, pointing to the Bank of England’s (the Bank) website for the notification requirements, rather than detailing the requirements in an annex as is done in the EU 3L3 Guidelines. The content does not represent new PRA or FCA policy and is operational in nature.

2.11 The ‘Submitting the notification’ section also includes information on when the PRA and the FCA may require additional information on top of that requested in the application forms in some more complex cases. Most of the examples provided are not in or are different from the 3L3 Guidelines, the main changes are set out below:

2.12 The ‘Completeness of the notification’ section sets out some administrative approaches, including for example that receipt of the CIC notification would be deemed as being received the next working day if it is received after 4pm and that the day of receipt is considered to be day zero. While these were not part of the 3L3 Guidelines much of the content has previously been published on the PRA website and none of it represents a change in approach.

2.13 ‘The reputation, knowledge, skills and experience of those who will direct the business of the UK authorised person as a result of the proposed acquisition’ section contains new text referencing the Senior Managers and Certification Regime (SM&CR) and how the PRA approach the submission of senior management function (SMF) applications.

2.14 The section titled ‘Whether there are reasonable grounds to suspect that in connection with the proposed acquisition: (i) money laundering or terrorist financing is being or has been committed or attempted; or (ii) the risk of such activity could increase’ includes new text in relation to the scenarios the PRA and the FCA would consider when assessing this criterion.

Key differences between the FCA guidance and PRA SS

2.15 The ‘Cases where additional information might be required’ section also contains specific examples where the FCA may need additional information in relation to its authorised firms. These examples are not in 3L3 Guidelines:

• ‘Firms that fall under the Investment Firms Prudential Regime’. The FCA may require further financial information if an Investment Firm Group will be created, or added to, as a result of the transaction; and
• ‘Cryptoasset business models’. The FCA would engage with relevant stakeholders during the assessment period and may require further information to assist with the assessment.

2.16 ‘The financial soundness of the proposed acquirer’ section includes specific reference to the FCA’s assessment of intangible assets and liabilities held, and to be held, by the proposed acquirer.

2.17 The ‘reputation of the proposed controller’ section contains new text indicating that the FCA would consider, in its assessment, any history of insolvencies resulting in significant unpaid customer liabilities, where the proposed acquirer was a senior director, or involved within one year of its dissolution.

2.18 ‘The reputation, knowledge, skills and experience of those who will direct the business of the UK authorised person as a result of the proposed acquisition’ section provides clarity on the assessment of individuals to be appointed in a non-executive capacity.

2.19 The FCA specifies in its introduction that the new FCA guidance is to be equally applied to directive, non-directive and limited permissions consumer credit firms (with a few exceptions).

PRA and FCA objectives analysis

2.20 The proposed new SS would advance the PRA’s primary objectives by providing guidance for natural and legal persons proposing to acquire (or increase) control over PRA-authorised firms operating in the UK and updating non-UK specific elements of the EU 3L3 Guidelines. This would help firms and persons to better understand the PRA’s approach and expectations by bringing all related guidance together into one SS (removing the references to the 3L3 Guidelines and SS33/15) and improving transparency.

2.21 The PRA considers the proposals in this CP would facilitate effective competition, and competitiveness and growth. This is because the proposed SS in this CP makes the PRA’s expectations and requirements clearer and more transparent to persons proposing to acquire (or increase) control over PRA-authorised firms operating in the UK. Additionally, the proposed SS does not significantly diverge from the 3L3 Guidelines.

2.22 The proposed FCA guidance would advance the FCA’s objectives of protecting consumers, enhancing market integrity and promoting competition by providing clarity on the factors the FCA would consider when applying the assessment criteria and deciding when a proposed acquirer is suitable to control and/or direct a UK authorised firm.

Cost benefit analysis (CBA)

2.23 The proposed new SS does not represent substantially new policy or risk appetite but is a replacement of the EU 3L3 Guidelines with some updates as reflected in this CP. As such the PRA and the FCA do not expect it to increase costs to firms or persons making acquisitions of the PRA and the FCA authorised firms. The SS should make the PRA’s and the FCA’s expectations and requirements clearer which could potentially reduce administrative costs.

‘Have regards’ analysis

2.24 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, the aspects of the Government’s economic policy set out in the HMT recommendation letter from 2022, and to the principles in the Legislative and Regulatory Reform Act 2006 and the Regulators’ Compliance Code. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

• The principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction (FSMA regulatory principles): The PRA and the FCA considered whether the proposed new SS imposes new restrictions or increases the burden on acquirers or firms. The SS does not propose any substantial policy changes. By setting out more UK specific guidance (as described in the CP) the SS would be aligned with the UK’s approach thus removing discrepancies between the 3L3 and the UK approach, this improves the transparency of the PRA’s and the FCA’s CIC assessments and expectations and brings benefits in excess of the burdens.
• The principle that the PRA and the FCA should exercise their functions as transparently as possible (FSMA regulatory principles): The proposed SS helps to facilitate the transparency of the PRA and the FCA’s approach and expectations by making those approaches and expectations in relation to control of PRA and FCA authorised firms public.
• Promoting the government’s strategy to promote competitiveness and its priorities (HMT recommendation letter): The PRA and the FCA consider that the improved transparency gained from the proposed SS and FCA guidance would facilitate inward investment into the UK and the UK attractiveness for international financial services by making CIC applications easier to navigate.
• The need to use the resources of the PRA and the FCA in the most efficient and economic way (FSMA regulatory principles): The proposed SS could help to use PRA and the FCA resources more efficiently, by providing examples and guidance that are more accurate to the UK. Thereby helping natural and legal persons to submit complete notifications which will help minimise follow up work for the PRA and FCA.

2.25 The PRA and the FCA have had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this proposal, it is because the PRA considers that ‘have regard’ to not be a significant factor for this proposal.

Impact on mutuals

2.26 The proposals do not impact mutuals.

Equality and diversity

2.27 The PRA considers that the proposals do not give rise to equality and diversity implications.