The following checklist highlights some of the key areas commonly considered by acquisition lawyers when conducting a due diligence on and acquiring and completing the acquisition of a financial services business in the United Kingdom.

Our firm FSREG provides specialist regulatory support to M&A lawyers and law firms undertaking corporate transactions. Among other things, we can assist you by dealing with the following workstreams:

  • Regulatory due diligence
  • FCA/PRA change in control approval
  • Regulatory capital analysis
  • Reviewing transaction documents from a regulatory perspective.

Please contact us to find out more.

Due Diligence Phase

  1. Is the target firm regulated?  Check the Financial Services Register (  Search by name (including a trading or brand name).  If receiving multiple results, identify the correct target firm.  If acquiring a large group of companies, ask the seller or the target group whether there are regulated firms in the group – large non-financial services groups may have regulated subsidiaries that provide ancillary regulated services.
  2. What type of authorisation or registration does the target firm have?  Pay attention in particular to the following matters:
    1. What is its status (e.g. authorised, no longer authorised, EEA authorised, appointed representative, authorised electronic money institution, small electronic money institution, authorised payment institution, small payment institution)?  Its status will determine the scope of due diligence required and which change in control regime (if any) applies to the target firm.
    2. Which regulators regulate the target firm (e.g. the FCA, the PRA, an EEA regulator, a non-EEA regulator)?  If the target firm is regulated by a non-UK regulator (e.g. it is the UK branch of a non-UK firm), assistance from a foreign lawyer is likely to be required.
  3. Scoping the due diligence.  Key concepts:
    1. There is generally insufficient time in the context of an M&A transaction to verify the compliance of the entirety of the target firm’s business with the full spectrum of financial services regulation.  Accordingly, an assessment of compliance is generally carried out only in relation to specific areas of the target firm’s business or regulation.  Topics that are typically covered are:
      1. Whether the target firm has the required permission to carry on its activities;
      2. Whether any individuals performing a controlled function for the target firm have been registered as approved persons; and
      3. Whether the target firm complies with applicable rules in areas that are currently the focus of attention by regulators (e.g. topics highlighted in recent FCA’s thematic reviews or Dear CEO letters).
    2. The due diligence also generally includes a review of:
      1. Any internal or external compliance reports produced by or in relation to the target firm in the past 5 years;
      2. Any material correspondence between the target firm and its regulators in the past 5 years;
      3. The minutes of any board or compliance or risk committee meetings that have taken place in the past 5 years;
      4. Any documentation relating to regulatory investigations, enforcement actions or inspections that have taken place in the past 5 years;
      5. The target firm’s complaints register; and
      6. The target firm’s breaches register.
    3. If the target firm is an, or has appointed any, appointed representative, it should be verified whether an appointed representative agreement is in place (it is surprising in how many cases there is none) and, if so, whether such agreement complies with all applicable regulatory requirements.
    4. Consideration should also be given to forthcoming regulatory changes that might impact the target firm.  If there are any such changes, the target firm should be asked to confirm how it is preparing for them and whether they are likely to have an adverse impact on its business.

Structuring Phase

  1. Regulatory capital.  If the target firm is subject to a regulatory capital regime that imposes group regulatory capital requirements on the holding company of the target firm (e.g. the target firm is an insurer or a bank), consider whether the post-completion holding company structure of the target firm would meet those requirements.  It may be the case, for example, that debt finance or non-CET 1 instruments are being used at a holding company level to finance the proposed acquisition.  In such cases, arranging for any relevant holding company to be incorporated outside the EEA could minimise the risk of any applicable regulatory capital requirements not being met following completion.
  2. Asset stripping.  Under the AIFMD, a number of private equity funds are prohibited from causing a portfolio company to make a distribution out of capital before the expiry of 2 years following completion of the acquisition (so called “asset stripping rules”).  If the buyer is subject to such rules and the intention is that a distribution out of capital would be made by the target firm shortly after completion, consider whether the transaction could be structured in a way that would minimise the impact of such rules.  For example, the existing indebtedness of the target firm could on completion be acquired by the buyer rather than being repaid and replaced with share capital instruments.
  3. Debt financing.  If the target firm is being acquired as part of a debt-financed acquisition of a group, the target firm should preferably not give any guarantee or security in relation to the group indebtedness.  This is to minimise the risk of the FCA refusing to grant change in control approval in relation to the transaction on the basis that the financial position of the target firm would be put at risk.  This is unlikely to be the case if the only security given to the lenders in relation to the target firm is a charge over its shares.

Acquisition Phase

  1. Is any regulatory notification or approval required in relation to the proposed acquisition?  This is an extensive topic but here are a few considerations:
    1. There are several change in control regimes and control thresholds that apply in the UK financial services sector.  Control thresholds start at 10%, 20% or 33% depending on the type of authorisation held by the target firm.  In certain cases, acquiring a 5% or more interest in a target firm accompanied by the right to appoint a director requires FCA change in control approval.
    2. In the following cases, no FCA change in control approval is generally required:
      1. acquisition of the business (as opposed to the shares) of a target firm.  In these cases, it is likely however that the buyer will have to apply to the FCA for the approval of any approved persons that will transfer to the buyer on completion.  In addition, the buyer may have to notify the FCA under Principle 11 that it has acquired the new business;
      2. acquisition of an appointed representative;
      3. acquisition of the UK branch of a non-UK firm (but the change in control approval of a foreign regulator may be required);
      4. acquisition of an authorised firm that appears on the Financial Services Register but is not a “UK authorised person” under FSMA (e.g. it is an IOM insurer or investment firm).
    3. It may be possible to implement part of a proposed transaction before FCA change in control approval has been given (e.g. by acquiring only a portion of the shares in the target firm or providing capital to the target firm by way of a debt instrument that converts into shares after FCA change in control approval has been given).
  2. Regulatory CP language.  The regulatory CP language in the SPA must:
    1. require that the buyer and each of its FSMA controllers has received change in control approval.  If the buyer is issuing shares to the seller as part of the consideration of the transaction and the buyer is an authorised firm (or the parent of an authorised firm), the seller itself will require change in control approval if, as a result of the share issuance, it will become a FSMA controller of the buyer;
    2. cover the case of approval and deemed approval under section 189(6) of FSMA (even though in practice deemed approvals rarely, if ever, occur);
    3. envisage that approval must be given unconditionally or on terms acceptable (or reasonably acceptable) to the buyer.  This is in order to protect the buyer should the FCA grant its change in control approval subject to conditions that make the transaction less attractive to the buyer, such as a condition that the target firm complies with more onerous regulatory capital requirements following completion;
    4. require that approval be granted within a specified long-stop date (which usually falls at least 3 months after signing); and
    5. require the seller to co-operate with the buyer to prepare the change in control filing and deal with any questions the FCA might have during the approval process.  It is customary for the buyer to also undertake to use its “reasonable” or “best” endeavours to obtain any required approval.
  3. Representations and warranties in SPA.  If the SPA contains an adequate warranty covering material compliance by the target firm with all applicable laws and regulations, there is arguably no need to include in the SPA additional warranties concerning regulatory compliance.  It is common practice however to include at least a few of such warranties, such as warranties covering specific areas of the regulation (e.g. compliance with regulatory capital, client money and conduct of business requirements) or topics that are currently the focus of attention by regulators.  Any material issues that have emerged during due diligence (e.g. instances of potential misselling or mishandling of customer complaints) could be addressed by way of an indemnity.
  4. Transitional services agreement.  If a transitional services agreement is entered into between the buyer and seller on completion (e.g. because the target firm is being bought out of a larger group), consider whether such agreement is likely to constitute an outsourcing agreement under the FCA rules.  If so, that agreement must comply with the FCA rules on outsourcing.

Completion Phase

  1. FCA change in control application.  This is, once again, an extensive topic but here are a few considerations:
    1. Timing.  It is common for a change in control application to be submitted to the FCA by the buyer as soon as possible after signing the SPA.  Such application, however, can be submitted also in advance of signing the SPA, as long as the main terms of the transaction have been agreed (at least in principle) between the parties and all corporate vehicles in the buyer’s structure have been incorporated.  Assuming no issues arise during the approval process, it generally takes six to eight weeks from submission of the application for change in control approval to be granted;
    2. Controllers.  Given that the FSMA definition of a controller is fairly broad, it is often the case that a change in control application must be prepared in relation to and signed by a number of individuals and entities, including indirect minority controllers of the buyer.  This is probably the most complained about aspect of the FSMA change in control regime.  To minimise any inconvenience caused to indirect minority controllers of the buyer (which could include passive investors if the buyer is a private equity fund), consider whether:
      1. the chain of control over the buyer could be broken by classifying an intermediate holding company as not being a parent undertaking of the buyer.  For example, the Companies Act 2006 definition of a parent undertaking focuses on voting control rather than economic control of a company and therefore a person who has economic but not voting control over a company is not necessarily a parent undertaking of that company; and
      2. the argument can be run that the indirect minority controllers of the buyer did not make a decision to acquire the target firm.  This is not the easiest of arguments to run with the FCA but it has been used successfully in the past – see the FCA guidance at
  2. FCA notice of approval.  It is not uncommon for the FCA notice of approval to contain errors or omissions.  The relevant document should therefore be reviewed carefully and the FCA asked to make any necessary amendments.  After the transaction has completed, the FCA should be informed by email.  If it becomes apparent that the transaction is unlikely to complete within the period specified in the approval notice (typically 3 months), the FCA should be asked to extend that period.  Extensions are easy to obtain and, if necessary, can be requested more than once.
  3. Completion before approval has been granted.  Under no circumstances should the parties knowingly complete a transaction that requires FCA change in control approval before such approval has been granted.  If the parties inadvertently complete a transaction without having obtained the required change in control approval, a change in control application should be submitted to the FCA as soon as possible.
  4. Notification by the sellers.  After completion has taken place, the sellers should notify the FCA by email that they have ceased to control or reduced their control over the target firm.
  5. AIFMD notifications by the buyer.  If the buyer is a private equity fund that is subject to the AIFMD, it may be required to make certain notifications to the FCA and the target firm shortly after completion under the so called “portfolio company disclosure rules”.  Under such rules, the private equity fund will be required to notify the FCA and the target firm of the voting rights it has acquired in the target firm and provide to the target firm additional information in respect of matters such as the fund’s intentions with regard to the future business of the target firm and the likely repercussions on employment.

Disclaimer:  This article provides general information only.  It is not comprehensive and does not constitute the provision of legal, investment or regulatory advice.  FS REG is not responsible for any action taken or omitted to be taken on the basis of the information contained in this article.  © 2019 FS REG Limited (  All rights reserved.