SUP 11 Controllers and close links

Part XII of the Act (Control Over Authorised Persons) places an obligation on the controllers and proposed controllers of those UK domestic firms not listed in SUP 11.1.1 R (1) to SUP 11.1.1R(8) to notify the appropriate regulator of changes in control, including acquiring, increasing or reducing control or ceasing to have control over a firm. Furthermore, those persons are required to obtain the appropriate regulator's approval before becoming a controller or increasing their control over a firm. SUP 11.3 is intended to assist those persons in complying with their obligations under Part XII of the Act.

The rules in SUP 11.4 to SUP 11.6 are aimed at ensuring that theappropriate regulator receives the information that it needs to fulfil its responsibility to monitor and, in some cases, give prior approval to firms' controllers.

As the approval of the appropriate regulator is not required under the Act for a new controller of an overseas firm, the notification rules on such firms are less prescriptive than they are for UK domestic firms. Nevertheless, the appropriate regulator still needs to monitor such an overseas firm's continuing satisfaction of the threshold conditions, which normally includes consideration of a firm's connection with any person, including its controllers and parent undertakings (see the threshold conditions set out in paragraphs 3B, 4F and 5F of Schedule 6 to the Act). The appropriate regulator therefore needs to be notified of controllers and parent undertakings of overseas firms.

As part of the appropriate regulator's function of monitoring a firm's continuing satisfaction of the threshold conditions, the appropriate regulator needs to consider the impact of any significant change in the circumstances of one or more of its controllers, for example, in their financial standing and, in respect of corporate controllers, in their governing bodies. Consequently, the appropriate regulator needs to know if there are any such changes. SUP 11.8 therefore requires a firm to tell the appropriate regulator if it becomes aware of particular matters relating to a controller.

Similarly, the appropriate regulator needs to monitor a firm's continuing satisfaction of the threshold conditions set out in paragraphs 3B, 4F and 5F of Schedule 6 to the Act (as applicable) (in relation to threshold conditions for which the FCA is responsible, see COND 2.3), which requires that a firm's close links are not likely to prevent the appropriate regulator's effective supervision of that firm. Accordingly the appropriate regulator needs to be notified of any changes in a firm's close links. This requirement is contained in SUP 11.9.

Every firm, other than a firm listed in SUP 11.1.1 R (1) to SUP 11.1.1R(8) or a firm excluded from the operation of SUP 16.4 or SUP 16.5 by SUP 16.1.3 R, is required to submit an annual report on its controllers and close links as set out in SUP 16.4 and SUP 16.5.

The requirements in SUP 11 implemented certain provisions relating to changes in control and close links which were required under the Single Market Directives.

An event described in SUP 11.4.2R, SUP 11.4.2A R and SUP 11.4.4Ris referred to in this chapter as a "change in control".

The notification requirements are set out in sections 178, 179, 191D and 191E of the Act and holdings which may be disregarded are set out in section 184 of the Act.A summary of the notification requirements described in this section is given in SUP 11 Annex 1.

For the purposes of Part XII (Control over authorised persons) of the Act, and in particular, calculations relating to the holding of shares and/or voting power, the definitions of “shares” and “voting power” are set out in section 191G of the Act.

The FCA has issued non-Handbook guidance on the notification requirements for, and assessment of, controllers or proposed controllers under the Act. See www.fca.org.uk/publication/finalised-guidance/fg24-5.pdf. This includes guidance in relation to when one person’s holding of shares or voting power must be aggregated with that of another person for the purposes of determining whether an acquisition or increase of control will take place.

Sections 178(1) and 191D(1) of the Act require a person (whether or not he is an authorised person) to notify the appropriate regulator in writing if he decides to acquire, increase or reduce control or to cease to have control over a UK domestic firm. Failure to notify is an offence under section 191F of the Act (Offences under this Part).

The Treasury have made the following exemptions from the obligations under section 178 of the Act:

1. (1)

   controllers and potential controllers of non-directive friendly societiesresult matched startresult matched endare exempt from the obligation to notify a change in control (The Financial Services and Markets Act 2000 (Controllers) (Exemption) Order 2009 (SI 2009/774));

2. (2)

   controllers and potential controllers of building societies are exempt from the obligation to notify a change in control unless the change involves the acquisition of a holding of a specified percentage of a building society's capital or the increase or reduction by a specified percentage of a holding of a building society's capital (The Financial Services and Markets Act 2000 (Controllers) (Exemption) Order 2009 (SI 2009/774.)). The "capital" of a building society for these purposes consists of:

   1. (a)

      any shares of a class defined as deferred shares for the purposes of section 119 of the Building Societies Act 1986 which have been issued by the society (in practice, likely to be permanent interest bearing shares (PIBS)); and

   2. (b)

      the general reserves of that building society:

3. (3)

   potential controllers of non-directive firms (other than, in the case of an FCA-authorised person, firms with only a limited permission) ("A") are exempt from the obligation to notify a change in control unless the change results in the potential controller holding:

   1. (a)

      20% or more of the shares in A or in a parent undertaking of A ("P");

   2. (b)

      20% or more of the voting power in A or P; or

   3. (c)

      shares or voting power in A or P as a result of which the controller is able to exercise significant influence over the management of A;

   or where the change in control over A would lead to the controller ceasing to fall into any of the cases (a), (b) or (c) above (The Financial Services and Markets Act 2000 (Controllers) (Exemption) Order 2009 (SI 2009/774)).

4. (4)

   (in the case of a change in control over an FCA-authorised person) potential controllers of firms with only a limited permission) ("A") are exempt from the obligation to notify a change in control, unless the change would result in the potential controller holding:

   1. (a)

      33% or more of the shares in A or in a parent undertaking of A ("P"); or

   2. (b)

      33% or more of the voting power in A or P; or

   3. (c)

      shares or voting power in A or P as a result of which the controller is able to exercise significant influence over the management of A;

   or where the change in control over A would lead to the controller ceasing to fall into any of the cases (a), (b) or (c) above (The Financial Services and Markets Act 2000 (Controllers) (Exemption) Order 2009 (SI 2009/774)).

If a person decides to acquire control or increase control over a UK domestic firm in a way described in SUP 11.4.2 Ror acquire control in a way described in SUP 11.4.2AR (1), he must obtain the appropriate regulator's approval before doing so. Making an acquisition before the appropriate regulator has approved of itis an offence under section 191F of the Act (Offences under this Part).

The appropriate regulator's approval is not required before a controller reduces control or ceases to have control over a UK domestic firm.

The appropriate regulator recognises that firms acting as investment managers may have difficulties in complying with the prior notification requirements in sections 178 and 191D of the Act as a result of acquiring or disposing of listed shares in the course of that fund management activity. To ameliorate these difficulties, the appropriate regulator may accept pre-notification of proposed changes in control, made in accordance with SUP D, and may grant approval of such changes for a period lasting up to a year.

Where the appropriate regulator approves changes in control proposed in a notice given under SUP 11.3.5B D:

1. (1)

   the controller remains subject to the requirement to notify the appropriate regulator when a change in control actually occurs; and

2. (2)

   the notification of change in control should be made no later than five business days after the end of each month and set out all changes in the controller's control position for each UK domestic firm for the month in question.

At that stage, the appropriate regulator may seek from the controller further information.

The controllers forms approved by the appropriate regulator may be found at the appropriate regulator's website www.fca.org.uk/firms/change-control

The appropriate regulator will inform a section 178 notice giver as soon as reasonably practicable if it considers the section 178 notice to be incomplete.

The appropriate regulator has power, under section 179(3) of the Act (Requirements for section 178 notices), to vary or waive these requirements in relation to a section 178 notice in particular cases if it considers it appropriate to do so.

Where a controller or proposed controller which is an authorised person is required to submit less information under SUP 11.3.7 D than other persons, the appropriate regulator may ask for confirmation of details already held by it or any additional information required under SUP 11.5.1R.

Notifications to the appropriate regulator by proposed controllers and controllers under Part XII of the Act may be made on a joint basis outlined in SUP 11.5.8 G to SUP 11.5.10 G.

A summary of the notification requirements in this section is given in SUP 11 Annex 1.

Principle 11 requires firms to be open and cooperative with the appropriate regulator. A firm should discuss with the appropriate regulator, at the earliest opportunity, any prospective changes of which it is aware, in a controller's or proposed controller's shareholdings or voting power (if the change is material). These discussions may take place before the formal notification requirement in SUP 11.4.2 R or SUP 11.4.4 R arises. (See also SUP 11.3.2 G). As a minimum, the appropriate regulator considers that such discussions should take place before a person:

1. (1)

   enters into any formal agreement in respect of the purchase of shares or a proposed acquisition or merger which would result in a change in control (whether or not the agreement is conditional upon any matter, including the appropriate regulator's approval); or

2. (2)

   purchases any share options, warrants or other financial instruments, the exercise of which would result in the person acquiring control or any other change in control.

The obligations in SUP 11.4.2 R andSUP 11.4.2A R apply whether or not the controller himself has given or intends to give a notification, in accordance with his obligations under the Act.

The steps that the appropriate regulator expects a firm to take to comply with SUP 11.4.10 R include, if applicable:

1. (1)

   monitoring its register of shareholders (or equivalent);

2. (2)

   monitoring notifications to the firm in accordance with Part 22 of the Companies Act 2006;

3. (3)

   monitoring public announcements made under the relevant disclosure provisions of the Takeover Code or other rules made by the Takeover Panel;

4. (4)

   monitoring the entitlement of delegates, or persons with voting rights in respect of group insurance contracts, to exercise or control voting power at general meetings.

Firms are reminded that a change in control may give rise to a change in the group companies to which the appropriate regulator's consolidated financial supervision requirements apply. Also, the firm may for the first time become subject to the appropriate regulator's requirements on consolidated financial supervision. This may apply, for example, if the controller is itself an authorised undertaking. The appropriate regulator may therefore request such a firm, controller or proposed controller to provide evidence that, following the change in control, the firm will meet the requirements of these rules, if appropriate.

Firms are also reminded that a change in control may give rise to a notification as a financial conglomerate or a change in the supplementary supervision of a financial conglomerate (see GENPRU 3.1(Cross sector groups) and GENPRU 3.2(Third country groups)).

A firm and its controller or proposed controller may discharge an obligation to notify the appropriate regulator by submitting a single joint section 178 notice containing the information required from the firm and the controller or proposed controller. In this case, the section 178 notice may be used on behalf of both the firm and the controller or proposed controller.

If a person is proposing a change in control over more than one firm within a group, then the controller or proposed controller may submit a single section 178 notice to the PRA in respect of all those firms which are PRA-authorised persons and a single section 178 notice to the FCA in respect of all those firms which are not PRA-authorised persons. The section 178 notice should contain all the required information as if separate notifications had been made, but information and documentation need not be duplicated within the set of information sent to each regulator.

When an event occurs (for example, a group restructuring or a merger) as a result of which:

1. (1)

   more than one firm in a group would undergo a change in control; or

2. (2)

   a single firm would experience more than one change in control;

then, to avoid duplication of documentation, all the firms and their controllers or proposed controllers may discharge their respective obligations to notify the appropriate regulator by submitting a single section 178 notice to the PRA containing one set of information in relation to all the firms which are PRA-authorised persons and a single section 178 notice to the FCA containing one set of information in relation to all the firms which are not PRA-authorised persons.

Firms are reminded that SUP 15.6.4 R requires them to notify the appropriate regulator if information notified under SUP 11.4.2 R, SUP 11.4.2A R or SUP 11.4.4 R was false, misleading, inaccurate, incomplete, or changes, in a material particular. This would include a firm becoming aware of information that it would have been required to provide under SUP 11.5.1 R if it had been aware of it.

The assessment process and the assessment criteria are set out in sections 185 to 191 of the Act.

Section 191A deals with the procedure the appropriate regulator must follow where the appropriate regulator reasonably believes that:

1. (1)

   there has been a failure to give notice under section 178(1) of the Act in circumstances where notice was required;

2. (2)

   there has been a breach of a condition imposed under section 187 of the Act; or

3. (3)

   there are grounds for objecting to control on the basis of the matters in section 186 of the Act.

The appropriate regulator may serve restriction notices in certain circumstances in accordance with section 191B of the Act.

The appropriate regulator may apply to the court for an order for the sale of shares in accordance with section 191C of the Act.

Before making a determination under section 185 or giving a warning notice under section 191A, the appropriate regulator must comply with the requirements as to consultation with the other regulator set out in sections 187A, 187B and 191A of the Act, as applicable.

In assessing whether a matter should be notified to the appropriate regulator under SUP 11.8.1 R (1), SUP 11.8.1 R (2) or SUP 11.8.1 R (3), a firm should have regard to the guidance on satisfying the threshold conditions set out in paragraphs 2E and 3D of Schedule 6 to the Act contained in COND 2.5.

In respect of SUP 11.8.1 R (3), the appropriate regulator considers that, in particular, the removal or replacement of a majority of the members of a governing body (in a single event or a series of connected events) is a substantial change and should be notified.

If a matter has already been notified to the appropriate regulator (for example, as part of the firm's application for a Part 4A permission), the firm need only inform the appropriate regulator of any significant developments.

The level of a firm's awareness of its controller's circumstances will depend on its relationship with that controller. The appropriate regulator does not expect firms to implement systems or procedures so as to be certain of any changes in its controllers' circumstances. However, the appropriate regulator does expect firms to notify it of such matters if the firm becomes aware of them, and it expects firms to make enquiries of its controllers if it becomes aware that one of the events in SUP 11.8.1 R may occur or has occurred.

The appropriate regulator may ask the firm for additional information following a notification under SUP 11.8.1 R in order to satisfy itself that the controller continues to be suitable (see SUP 2: Information gathering by the FCA or PRA on its own initiative).

Guidance on what constitutes a close link is provided in COND 2.3.

A firm may elect not to include the following close links in the notification submitted under SUP 11.9.1A R, SUP 11.9.1B R, SUP 11.9.5A R, SUP 11.9.5B R or SUP 16.5:

1. (1)

   shares held in its capacity as custodian provided it can only exercise any voting rights attached to such shares under instructions given in writing or by electronic means;

2. (2)

   shares held in its capacity as collateral taker under a collateral transaction which involves the outright transfer of securities provided it does not declare any intention of exercising (and does not exercise) the voting rights attaching to such shares.

The FCA may ask the firm for additional information following a notification under SUP 11.9.1A R in order to satisfy itself that the firm continues to satisfy the threshold conditions (see SUP 2: Information gathering by the FCA and PRA on their own initiative).

The Close Links Notification Form approved by the FCA for notifications under SUP 11.9.1A R, SUP 11.9.5A R may be found at the FCA website.The Close Links Notification Form approved by the FCA for notifications under SUP 11.9.1AR (1)(b) may be found at the FCA website.

1. (1)

   The notification in SUP 11.9.1AR (1)(b) and SUP 11.9.1BR (1)(b) should contain a list of all persons with whom the firm is aware that it has close links, at the time the notification is made, and, for each such person, state:

   1. (a)

      its name;

   2. (b)

      the nature of the close links;

   3. (c)

      if the close links are with a body corporate, its country of incorporation, address and registered number; and

   4. (d)

      if the close links are with an individual, their date and place of birth.

2. (2)

   The firm must also submit a group organisation chart.

The FCA considers that monthly reporting of changes in close links will ordinarily only be appropriate for firms forming part of large groups.

SUP 11 Annex 1G