1: Overview
1.1 This joint policy statement (PS) by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) provides feedback to responses received to consultation paper (CP) 25/23 – Supervisory statement – Prudential assessment of acquisitions and increases in control.footnote [1] It also contains the final policy, as follows:
- PRA supervisory statement (SS) 10/24 – Prudential assessment of acquisitions and increases in control (Appendix 2).
- FCA non-Handbook Guidance (FCA guidance) – Prudential assessment of acquisitions and increases in control (Appendix 3).
- Updated PRA statement of policy (SoP) – Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU (Appendix 4).
1.2 This PS is relevant to all PRA and FCA authorised firms and all persons to which Part XII ‘Control Over Authorised Persons’ of the Financial Services and Markets Act 2000 (FSMA) applies. It is also relevant to firms seeking to apply for UK authorisation in identifying who their controllers are.
Background
1.3 In CP25/23, the PRA and FCA proposed:
- a new PRA SS – Prudential assessment of acquisitions and increases in control;
- new FCA non-Handbook guidance – Prudential assessment of acquisitions and increases in control;
- 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; and
- the removal of references to the ‘Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (JC/GL/2016/01)’ 3L3 Guidelines in the PRA SoP – Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU, and equivalent references from the FCA Handbook and website.
In determining their policy, the PRA and FCA consider representations received in response to consultation, publishing an account of them and the PRA’s and FCA’s response (‘feedback’). The details of any significant changes are also published. In this PS, the ‘Summary of responses’ contains a general account of the representations made in response to CP25/23 and the ‘Feedback to responses’ chapter contains the PRA’s and FCA’s feedback.
In carrying out its policy making functions, the PRA and FCA are required to have regard to several matters. In CP25/23, the PRA and FCA explained how they had regard to the most relevant of these matters in relation to the proposed policy. The analysis, as presented in the CP, remains unchanged.
Summary of responses
1.4 The PRA and FCA received 3 responses to the CP. The names of respondents to the CP who consented to their names being published are set out in Appendix 1. The responses were primarily directed at the FCA’s guidance, but some were directed at both regulators and other comments are as equally applicable to the PRA’s SS as to the FCA’s guidance. Where responses were directed towards the FCA, but the regulators considered them to also be relevant to the PRA, then the PRA has also considered them in the context of the PRA SS. No particular themes were present in the comments, which were spread across different sections of the FCA’s guidance and the PRA SS.
Changes to draft policy
1.5 This PS takes account of how the policy advances the PRA’s and FCA’s objectives and of significant matters that the decision-makers had regard to. These are as set out in CP25/23 and are unchanged.
1.6 The PRA and FCA have made changes to the PRA’s SS and FCA’s guidance in response to comments received at the CP stage and minor changes to the language used in the PRA’s SS and FCA’s guidance to further enhance the clarity and readability of the documents. However, other than the differences between the two documents noted in the CP, no material differences arise between the documents as a result of the CP’s responses.
1.7 The PRA and FCA have added new paragraphs on limited partnership structures. These will help with the identification controllers within such structures and should address the responses received to the CP around controller identification within limited partnerships that are typically used by private equity firms and hedge funds. Ultimately, given that private equity structures and similar types of fund structures can vary in size, nature and complexity, the PRA and FCA would assess an authorised firm’s controllers analysis for such structures on a case by case basis.
1.8 The PRA and FCA have clarified what constitutes ‘significant influence’ to make it clearer that, when determining if there is significant influence, it is not just a case of being on the board of an authorised firm or its parent, but the ability to direct or influence decisions made by the authorised firm’s board. That direction or influence could be through a shareholder board appointment (to the UK authorised person or its parent) or other arrangement.
1.9 The PRA and FCA have also added a new paragraph in the PRA SS and FCA guidance explaining that as part of the PRA’s and FCA's assessment/due diligence process they may contact relevant UK authorities and non-UK regulators to understand the timelines of their process, and request any information relevant to the assessment against the s186 FSMA criteria.
1.10 The PRA and FCA expect these changes will help firms to better identify who their controllers are, including assisting with controller identification within limited partnerships. It should also be clearer when the PRA and FCA will contact other authorities and/or regulators.
Implementation
1.11 The PRA supervisory statement – Prudential assessment of acquisitions and increases in control and the FCA guidance – Prudential assessment of acquisitions and increases in control will take effect on publication of this PS on 1 November 2024.
2: Feedback to responses
2.1 The PRA and FCA must consider representations that are made to them in accordance with their duty to consult on their general policies and practices and must publish, in such manner as they think fit, responses to the representations.
2.2 The PRA and FCA have considered the representations received in response to the CP. This chapter sets out the PRA’s and FCA’s feedback to those responses, and their final decisions.
2.3 The sections below have been structured broadly along the same lines as the chapters of the PRA SS and FCA guidance.
Introduction
2.4 The PRA and FCA have decided to add a new paragraph to the introduction of the PRA SS and FCA guidance to emphasise that the illustrative diagrams in Annex 1 of the two documents provide some indication of how the regulators may expect firms and those acquiring or increasing control in UK authorised persons to identify ‘controllers’ for the purposes of FSMA. However, the illustrative guidance offered is not exhaustive and there may be cases where it is necessary for the FCA and PRA to take an approach that is not described in this guidance.
Decision to acquire
2.5 In response to the decision to acquire section, one respondent requested clarification that persons investing in private equity or venture capital funds will not be regarded as having taken a decision to acquire or to increase control and therefore would not need to notify.
2.6 Having considered the responses, the PRA and FCA have decided to add a new paragraph at 2.4 of the PRA SS and clarify paragraphs 2.5–2.6 of the FCA guidance to acknowledge that in certain circumstances a person may not be aware in advance of investments made nor have the ability to influence, object to or prevent the proposed acquisition or increase in control. In those scenarios the s178 notice giver will need to provide information to the regulator(s) regarding those investors (whom the notice giver considers not to have made the decision to acquire).
Significant influence
2.7 In response to the significant influence section, one respondent requested clarification that a single directorship on an authorised firm’s board, or its parent’s board, would not amount to significant influence. One respondent requested further explanation of factor (g) of paragraph 2.7 of the PRA SS on the existence of veto rights over ‘material matters’ in relation to the running of the business. One respondent identified that the FCA guidance on the meaning of significant influence differs from the existing FCA Handbook guidance on significant influence in MIFIDPRU 2.4.11G and requested for these sets of guidance to be aligned.
2.8 Having considered the responses, the PRA and FCA have decided to amend paragraph 2.8 of the PRA SS and paragraph 2.10.1 of the FCA guidance so it’s clear that, when considering significant influence, it is the ability to direct or influence decisions made by the board – which could be through a shareholder board appointment (to the UK authorised person or its parent) or other arrangement – that is crucial. The PRA and FCA have also decided to make a small addition to the wording of paragraph 2.8(f) of the PRA SS and paragraph 2.10.6 of the FCA guidance to expand the examples of what might constitute material matters to include changes to the firm's strategy as well as its business plan.
2.9 In regard to the feedback received around the different definitions of significant influence in MIFIDPRU 2.4.11G, the definitions given in the FCA non-Handbook guidance relate to the provisions contained in Part XII of FSMA and the examples seek to replicate the European Supervisory Authorities guidance but with further examples based on the FCA’s experience of firms/individuals who may be able to exercise significant influence over the management of the authorised firm. The examples set out in MIFIDPRU 2.4.11G relate to guidance for the interpretation of rules in the FCA Handbook. Both sets of examples are designed to be most helpful in the context in which they sit, but they are non-exhaustive and will often overlap. It is for firms and individuals to consider all relevant facts and circumstances in making the determination of significant influence. For this reason, the FCA does not intend to align the definitions but would encourage prospective controllers to discuss any areas of doubt with the FCA during pre-notification conversations.
Submitting the notification (including pre-notification engagement)
2.10 In response to the submitting the notification sections of the PRA SS and FCA guidance, one respondent noted that the draft FCA guidance and PRA SS goes beyond the 3L3 guidelines by expanding scenarios where pre-notification engagement is ‘encouraged’; they suggested aligning with the 3L3 guidelines. One respondent requested confirmation that pre-notification engagement is neither an expectation nor a requirement. One respondent was concerned that an increase in the volume of pre-notification engagement would be difficult for the FCA to process and requested a commitment to respond to pre-notification engagements within a (reasonable) pre-defined time period. One respondent requested more clarity in the FCA guidance over which types of transaction are considered to be lower risk and less likely to require additional information. They also sought clarification as to whether the PRA and FCA intend to amend their notification templates to collect additional information.
2.11 Having considered these responses, the PRA and FCA have decided to maintain the list of examples where additional information might be required. This is because, given the potentially complex and/or high risk nature of some transactions, we consider it helpful to set out, in advance, non-exhaustive examples where further information be may be required by the PRA and FCA to assist with their assessments. Therefore, prior engagement is encouraged so that the PRA and FCA may explain to notice givers any specific information requirements in advance of submission of the notification. The PRA and FCA have decided to remove the example in paragraph 3.4(g) of the draft PRA SS and equivalent section of the draft FCA guidance, relating to controlling two or more authorised firms, as this on its own would not merit a pre-notification discussion. However, the FCA non-Handbook guidance has instead, in paragraph 3.5.2, re-worded this example to include where a larger firm/group with significant market share would be created. The FCA believes that this better explains the rationale for including the former example. Furthermore, for simplicity, the FCA has amalgamated the last two examples from the draft FCA guidance into one, now shown as paragraph 3.5.8 of the FCA non-Handbook guidance.
2.12 The PRA and FCA have also decided to emphasise at the start of paragraph 3.4 of the PRA SS and paragraph 3.5 of the FCA guidance that pre-notification engagement for complex or high-risk transactions is a recommendation rather than a requirement. The PRA and FCA nevertheless encourage pre-notification engagement in such circumstances due to the benefits prior engagement brings.
2.13 The FCA has considered the concern raised around the volume of pre-notification engagements and is confident of its ability to engage appropriately. The FCA considers that prior engagement has the benefit of enabling the FCA to start its assessment period sooner. The FCA data shows that, on average, notifications become complete more quickly when notice givers engage in pre-notification discussions.
2.14 The PRA and FCA note that the PRA SS and FCA guidance provide examples of higher risk transactions that are likely to require additional information, but not lower risk transactions that are not. The PRA’s and FCA’s view is that it is not practical or useful to also provide examples of lower risk transactions that are less likely to require additional information. The PRA and FCA confirm that there is no intention to amend the notification templates as a result of this publication. While there are no plans currently to amend the controller forms as an outcome of this consultation, the PRA and FCA will consider if controller forms could be made more efficient and clearer over the longer term.
2.15 In general, respondents were supportive of the approach set out in the FCA guidance and the PRA SS that the intensity of the assessment and the type of information required by the FCA and PRA may vary on a case-by-case basis. However, one respondent thought the regulators should go further and offer time limited approvals where persons have previously been approved as a controller. Our understanding of this response is that the respondent is referring to a discretionary streamlined approach to information requirements for groups who make several acquisitions over a 12-month period.
2.16 The PRA and FCA do not intend to change their approach to assessing the notifications of existing controllers, which are considered on a case-by-case basis. It is important that the circumstances of each notification are considered on their own merits which would not be possible if the suggested approach was adopted.
2.17 One respondent thought private equity and hedge fund ownership should be split out in the PRA SS and FCA guidance, with a better calibrated ownership threshold for private equity.
2.18 The controller thresholds are set out within FSMA; therefore, the PRA and FCA are not in a position to amend them. The PRA and FCA have decided not to split guidance relating to private equity and hedge fund ownership as suggested. Whilst the PRA and FCA accept that the funding methods utilised by private equity and hedge funds are different, their behaviour in how they exercise control is similar; therefore, it is appropriate they are linked together for the purposes of the regulators’ approach to where further information might be required.
2.19 One respondent challenged the relevance to private equity firms, which are FCA authorised and regulated firms, of some of the additional information set out in the PRA SS and FCA guidance, including the need for the investment policy and anti-money laundering (AML) procedures. They thought that as private equity firms are authorised and regulated by the FCA and so considered suitable for authorisation, they should also be suitable controllers.
2.20 The PRA and FCA have considered this response. The request for controllers’ AML procedures and for the legal frameworks in the PRA SS is aimed at non FCA authorised private equity firms/hedge funds. Therefore, the PRA and FCA have amended paragraph 3.4(e)(iv) of the PRA SS and paragraph 3.5.5.4 of the FCA guidance so that it is clear that this bullet relates to circumstances where the private equity firm or hedge fund is not authorised by the FCA.
2.21 The purpose of the PRA assessment of FCA authorised private equity firms/hedge funds is to determine their professional competence to be a controller of a UK authorised bank, insurer or designated investment firm. The additional information that may be required helps the PRA to understand how the prospective controller might interact and influence PRA regulated firms; the assessment will be proportionate to the level of investment and influence proposed.
2.22 One respondent also noted that ‘substantial debt financing’ is not defined and requested confirmation whether a controller forming part of a private equity or venture capital group means that it would fall within the ‘transactions involving the use of substantial debt financing’ example.
2.23 The PRA and FCA will judge whether it deems debt financing to be substantial on a case-by-case basis and in doing so will take into account any relevant publications, for example the PRA dear CRO letter issued on 23 April 2024 by Rebecca Jackson.footnote [2]
Completeness of the notification
2.24 One respondent said that there is a long-standing issue around a lack of clarity regarding the basis on which the regulator decides whether a notification is complete for the purposes of starting the statutory assessment period. To address this issue, the respondent suggested that the regulators’ confirmation of receipt of a notification should also be deemed as confirmation that the notification is complete.
2.25 The PRA and FCA have decided not to adopt the suggestion. A significant proportion of the notifications received by the regulators, particularly those submitted by notice givers that have not engaged in pre-notification engagement, does not contain the information necessary for the PRA and FCA to assess the case and; therefore, it would not be appropriate to deem such notifications complete on receipt of the notification. Additionally, the suggestion would not be in line with s179 and s180 of FSMA which contemplate the ability of the regulator to impose different information requirements on a case-by-case basis and to consider notifications as either complete or incomplete.
Proportionality principle
2.26 One respondent thought that the FCA guidance and PRA SS should include language similar to that in the 'Proportionality principle' chapter in the 3L3 guidelines.
2.27 The PRA and FCA have decided not to adopt this suggestion. Proportionality is woven throughout the PRA SS and FCA guidance, for example on different types of notification which might require additional information. As such, the PRA and FCA do not consider it necessary to include a separate standalone chapter on proportionality.
Managed on a unified basis
2.28 One respondent requested the FCA guidance and PRA SS include information about the approach to assessing the concept of ‘managed on a unified basis’ under s422(5)(a)(v) of FSMA in the context private equity limited partnerships investing in parallel.
2.29 The PRA and FCA have decided to include new paragraphs on limited partnership structures which are expected to help address this response. These new paragraphs are explained in more detail in paragraph 2.34 below.
Annex 1 – practical examples of the determination of controllers
2.30 One respondent requested that Annex 1 'Practical examples of the determination of controllers' of the FCA guidance and PRA SS include examples involving private equity and suggested another scenario that could be included as an example in Annex 1 involving a person that is a controller because it is acting in concert with other shareholders.
2.31 The PRA and FCA have decided not to include additional examples to those consulted on because the regulators receive a lot of varied structures, especially where private equity is involved and it’s not possible to provide an exhaustive list of examples. However, the PRA and FCA have decided to include new paragraphs for limited partnership structures which are explained in more detail in paragraph 2.34 below. Given that the majority of private equity transactions are typically executed through limited partnership structures these new paragraphs will help to address the comments raised. However, as pointed out in the new limited partnership section, paragraph 2.28 of the PRA SS and paragraph 2.30 of the FCA guidance, this analysis can be complex and notice givers may need to seek legal advice in determining the controlling persons within an acquiring structure. The PRA and FCA have also made amendments to structure diagrams B and E to reflect comments received at CP stage.
Working with other UK-based regulators
2.32 One respondent said they would welcome greater collaboration between the FCA and other UK-based regulators to help improve efficiency and reduce duplication across similar change in control processes. While this comment was directed at the FCA, the PRA has also considered it as relevant to its SS.
2.33 The PRA and FCA have decided to include a new paragraph 4.5 in the PRA SS and 4.6 FCA guidance explaining when other authorities and/or regulators will be contacted, which is usually when approvals are required from those authorities or regulators for the acquisition to proceed.
Limited partner and general partner structures
2.34 One respondent thought there was not enough attention given to limited partner and general partner structures in the PRA SS and FCA guidance, to help notice givers identify controllers in private equity style acquisition structures. Another respondent thought that the FCA guidance should include explicit detail as to how controller assessments are applied to limited partnership structures in which there is a general partner and one or more limited partners, with regards to proposed acquisitions of regulated firms by private equity firms (or that feature a similar investment fund-style structuring).
2.35 The PRA and FCA have added new paragraphs to the PRA SS and FCA guidance for limited partnership structures. These paragraphs are intended to help notice givers identify controllers in these types of structures. Given that private equity structures and similar types of fund structures can vary in size, nature and complexity, the PRA would look to determine these on a case-by-case basis. Acquirers must consider the controller definition (including the definition of shares and voting power) along with the guidance set out in the PRA SS and FCA guidance. Potential controllers need to read these guidelines along with the relevant sections of FSMA to determine whether these entities are captured as a controller or not. Notice givers may need to seek legal advice in determining the controlling persons within an acquiring structure.
Indirect controllers
2.36 One respondent requested confirmation in the FCA guidance that the FCA and PRA do not comply with the sections of the 3L3 guidance relating to the aggregation of indirect holdings (ie the test for identifying certain controllers).
2.37 It is not necessary for the FCA or the PRA to specifically confirm whether or not they comply with EU guidelines. In the introduction chapter of the PRA SS and FCA guidance, we set out that these replace the EU guidelines in their entirety.
Deletion of PRA SS33/15 and the equivalent section from the FCA Handbook
2.38 There were no comments regarding the proposals to delete SS33/15 – Aggregation of holdings for the purpose of prudential assessment of controllers and the removal of the equivalent section from the FCA Handbook. Therefore, the PRA and FCA have made no changes to the initial proposals consulted upon and have deleted SS33/15 and equivalent section from the FCA Handbook.
Amendment of PRA SoP – Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU
2.39 There were no comments regarding the proposal to amend PRA statement of policy (SoP) – Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU to remove the reference to the 3L3 guidelines and to remove references to the 3L3 Guidelines from the FCA’s Handbook and website. Therefore, the PRA and FCA have made no changes to the initial proposal consulted upon and have removed references to the 3L3 guidelines.