In recent years, the process of obtaining authorisation from the Financial Conduct Authority (FCA) has become increasingly stringent. The FCA’s Transformation Programme, initiated back in 2022, aimed to establish a more robust gateway for financial firms seeking authorisation. As a result, approval rates have been notably low, particularly in the payments sector where rates were as low as 8%. However, there has been some improvement, with a reported approval rate of 15% in 2023. Despite this, many prospective applicants are exploring alternative routes to market due to the high likelihood of being unsuccessful.
Alternative routes to market
Given the challenging landscape, some firms are opting to operate as an agent under another firm’s permission or are considering redomiciling to seek authorisation within the EU. However, an increasingly popular alternative is the Change in Control (CiC) process.
Understanding Change in Control (CiC)
A CiC, or Section 178 notice, involves acquiring control of an already authorised firm. This process is often seen as a back-door approach to obtaining authorisation because it involves a shorter statutory processing time compared to a new firm authorisation—60 days versus up to 12 months. A CiC takes place when a person or entity acquires more than 10% of a regulated firm, with 50% or more acquisition making one a ‘parent undertaking’ and a true controller of the firm.
While technically straightforward, the CiC process involves significant scrutiny from the FCA. The regulator is keen to ensure that this route is not used to bypass the rigorous checks involved in new firm authorisation. As such, the FCA evaluates both the acquirer and the target firm comprehensively.
Key considerations for a successful CiC
- Due Diligence: Prior to pursuing a CiC, thorough due diligence is essential. This involves:
- Financial services register: Checking the target firm’s regulatory status.
- Companies House filings: Reviewing the firm’s legal and financial history.
- Regulatory due diligence: Ensuring the firm’s compliance with FCA regulations, including up-to-date regulatory reporting, capital and liquidity requirements, and the existence of an operable wind-down plan.
- Permission profile: Ensure that the target firm’s permissions align with your business objectives. For example, if you intend to offer e-money services, purchasing a firm with only payment institution permissions would necessitate a subsequent variation of permission (VoP), which carries its own risks and approval uncertainties.
- Regulatory compliance: Assess the target firm’s regulatory history. This includes:
- Regulatory reporting: Confirming that the firm has consistently met its reporting obligations.
- Capital and liquidity requirements: Verifying the firm’s financial health and its adherence to required financial standards.
- Consumer Duty policies: Ensuring the firm’s consumer protection policies are robust and up-to-date.
- Pricing: Determine a fair price for the acquisition. Unlike tangible assets, there is no standard price for FCA-regulated firms. The cost should reflect both the time and money saved by potentially bypassing the lengthy new authorisation process and the value of the firm’s existing permissions and operations.
Risks and regulatory scrutiny
The FCA is vigilant about CiCs being used as a shortcut to authorisation and does not favour regulatory arbitrage—where firms exploit loopholes to circumvent regulations. Transactions involving firms with dormant permissions or no active operations are particularly scrutinised. The FCA’s stance is to encourage direct authorisation applications for such cases, emphasising transparency and regulatory integrity.
Additionally, the FCA assesses whether the business operations post-acquisition will remain largely the same. Significant changes in business operations or models post-acquisition could trigger further regulatory scrutiny and potential rejections.
Conclusion: buy or build?
While a CiC is a legitimate route defined in legislation, it is not necessarily an easier path compared to establishing a new firm and seeking direct authorisation. The FCA’s risk appetite and scrutiny levels remain consistent across both routes. Prospective acquirers must present a compelling case to the FCA, backed by thorough due diligence and clear, evidence-based rationale.
At Neopay, we understand the complexities of navigating FCA authorisations and the various routes to market. Whether you’re considering a CiC or a new firm authorisation, our expert team is here to guide you through the process, ensuring compliance and maximising your chances of success.
For more information and tailored advice on FCA authorisations, contact Neopay today.
