With the FCA's consolidation review proceeding at pace, boards of regulated firms as well as buyers and sellers need to review their regulatory capital structures, prior to filing change in control applications with the regulator or indeed undertaking any significant engagement with the FCA on their group structures.
In announcing its review, the FCA was clear in October 2024 that it would be prepared to exercise its broad power under section 143(J) and 55L(3) of Financial Services and Markets Act 2000 to require an overseas parent undertaking to be swapped for a UK parent company instead, with potentially material consequences for the size and scope of the regulatory consolidation group, where there are UK MiFID investment firms in the buyer and/or target group. The review should be considered not just when applying for authorisation and variation of permission, but also more generally when designing new group structures, seeking permission to apply the group capital test, and filing for change in control (as well as drafting change in control clauses) in M&A transactions in connection with these groups.
Where previously buyers might have carried out limited regulatory due diligence on their targets and perhaps not assessed in detail client (and specifically consumer) harms in the target group, the risks of taking this type of light touch approach, are now more acute. Prior to undertaking M&A, there needs to be a clear understanding of how the FCA perceives regulatory risk in both the buyer and seller groups.
Since these considerations are tightly intertwined with the FCA's objectives for the Consumer Duty, those groups which demonstrate poor Consumer Duty compliance, for example those which have high numbers of FOS complaints, negative social media or press commentary or whose filings to the FCA on the Consumer Duty were rather superficial, will also be more exposed under this review. Care needs to be applied when responding to the new Consumer Duty questions, as well as the group regulatory capital questions in the FCA's change in control forms.
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